A team of Steinbeis experts increasingly solves succession issues by pulling together teams from inside and outside companies
According to the 2022 KfW Succession Monitoring Report, there is an “increasing shortage of succession candidates.” The authors of the report cite demographic structures as the reason for this, as well as a waning interest in startups. The picture painted by Steinbeis Entrepreneurs Tino Schulz and Professor Edmund Haupenthal from the Steinbeis Consulting Center for Participation & Succession highlights a variety of factors fueling this. The next generation is interested in entrepreneurship – not out of a “self” or “employment” motivation, but because they like solving problems in teams. There is a discernible trend in the succession projects worked on by the two Steinbeisers toward teams of shareholders comprising entrepreneurs from inside and outside the company.
The experts at the Steinbeis Consulting Center for Participation & Succession are finding that the vast majority of business owners seeking to hand over their company want both a “traditional successor” (someone who will continue the work of a lifetime) and “due rewards” when it comes to the purchase price – in appreciation of that work. The generational “bridge-bearer” often faces a dilemma: Follow the money, or a gut feeling? For example, compared to traditional successors, competitors generally offer a higher price because they recognize potential synergies and have more equity coverage.
In recent years, Tino Schulz and Edmund Haupenthal have observed a trend going in the opposite direction, however, especially among companies impacted by the coronavirus pandemic and geopolitical factors. The offers these firms receive from strategic and financial investors often fall significantly short of expectations and this rekindles their interest in alternative scenarios. Currently, around 75% of the succession projects worked on at the Steinbeis Consulting Center for Participation & Succession revolve around solutions within the company. What advantages do such arrangements offer? If both parties pull in the same direction, they can find a mutually agreeable selling price, safeguard jobs on site, arrange a smoother handover, and retain key stakeholders. Also, the current business owner can hand over their “life’s work” to capable individuals they know well.
The challenges of seeking a successor
The biggest challenge is to identify and approach suitable candidates. “Bridge-bearers” seeking a successor often experience the so-called clone effect, in which they intuitively look for candidates that remind them of themselves. This makes it much more difficult to identify suitable candidates. There is also a tendency for bosses to want to shield key employees from the additional workload and responsibility of heading up a business. Bridge-bearers also want to resolve succession issues discreetly so as not to unsettle the workforce.
Another challenge, in this case faced by their successors, is the issue of capital. The age of suitable succession candidates typically falls between 25 and 45, at which point individuals are often at a stage in life where they are either still accumulating capital or require capital to finance their own homes. “If the concept is coherent and it’s a strong team, there are alternative ways to provide the security required by the bank to finance the purchase,” explains Schulz.
How to make a success of the handover
The Steinbeis Consulting Center for Participation & Succession has been involved in a variety of business transitions and, based on this experience, knows which steps to go through and which key factors to consider. The most important prerequisite is a strong and motivated team of entrepreneurs equipped with skills that complement one another. In addition, it’s important to identify and approach suitable candidates internally, for example by organizing a workshop with staff, which can be run by Technology – Organization – Human Resources (TOP, the Steinbeis Transfer Center). If the required competencies are not available internally, the Steinbeis experts can conduct a search of their own talent pool or tap into their extensive network to identify external candidates, who will not only match the company in terms of personality, but also offer the right professional experience. The younger generation has a particular preference for team solutions and the advantages of collaboration, involvement, and a work-life balance.
Another important factor is company revenues and liquidity, both of which are dictated by the business strategy. The pandemic and geopolitical risks may be a factor in exacerbating what’s already a difficult situation, but often the causes lie further in the past and are of a structural nature – such as an organization failing to adapt (despite rapid growth), outdated business models, a sluggish response to structural shifts in industry, or difficulties attracting and retaining skilled workers.
Business handovers are an opportunity to put business models to the test and gear organizations to future developments. The team succeeding the business owner brings along its own ideas and as the strategic process unfolds, it can be moderated by the experts at Steinbeis, since aside from the actual team members and available financial collateral, further important decision-making criteria for the bank providing funding are a sustainable business model and a credible strategy.
The succession transaction touches on aspects such as price negotiation, due diligence (comprehensive assessments by the buyer), financing, tax planning, corporate legal structuring, and the legal transition of business operations. One special aspect of this kind of succession arrangement is that succession advisors, certified public accountants, attorneys, and banks represent the parties of both buyers and sellers in order to find the optimal solution for both sides. To establish a relationship of trust and ensure things get off to a good start, it’s crucial that the process is open and transparent. One particularly sensitive area is price negotiation. On the one hand, the retiring owner wants to achieve a high price; on the other hand, the solution must be feasible in financial terms. The Steinbeis Consulting Center for Acquisition & Succession helps both parties find a viable and mutually satisfactory solution. Ideally, the current owner is part of the new solution and remains available to offer support to the company after the transition – as an employee or consultant.
After successful completion of the transaction, the focus shifts to profitability and liquidity. Payments must be generated from business operations. To do this, it will be necessary to implement measures identified in the strategy. This demands human and financial resources, placing additional burdens on the new team of entrepreneurs. For this reason, after the transaction the experts from Steinbeis continue to support the next generation with implementation of the strategy, if necessary bringing in other experts in marketing, sales, human resources, process optimization, production streamlining, lean management, and management accounting.
Prof. Edmund Haupenthal (author)
Steinbeis Consulting Center Acquisition & Succession (Engen)
Tino Schulz (author)
Steinbeis Consulting Center Acquisition & Succession (Engen)