Steinbeis helps metalworking company sell its business
Every year in Germany, as many as 80,000 family-owned businesses face succession issues. If the owners’ children have different career aspirations, internal succession may no longer be possible. Usually, the only remaining option is to look outside the company; the family and the business enterprise simply have to go different ways, and the company’s management and capital are transferred to a third party. Thankfully, help with this process can be provided by the Steinbeis Transfer Center for Production and Quality in Furtwangen.
Finding someone suitable to take over a small or medium-sized business (SME) is an extremely complex process. Succession planning should therefore not be started too late and must be carried out professionally. For a potential buyer, acquiring a company that already has a reputation in the market is a useful alternative to setting up a new company or expanding existing operations. It also makes it easier to achieve turnover and revenue goals.
This was a familiar situation for HEGO, a metalworking company based in Gosheim. Last year, HEGO approached the director of the Steinbeis Transfer Center for Production and Quality, Prof. Dr.-Ing. Jürgen Schmidt, in its search for a potential buyer. HEGO produces precision-lathed parts for use in a variety of industries, and has 12 employees. The starting point of the transaction process for Schmidt was to determine a reasonable market value for the company. It’s quite normal for there to be big differences between the expectations of the seller and the buyer when it comes to market value. Nonetheless, one thing always holds true: A company is only worth what somebody is willing to pay for it.
Different company valuation methods provide ways to determine a business’s value. One approach that is particularly well suited to SMEs is the “multiples” method. This starts with the earnings before interest and tax (EBIT) of the last few years. Then, extraordinary revenues and expenditures are removed. What is left is a value that can be factored up by so-called finance multiples. For the process to work properly, you have to use multiples that are specific to the sector of industry, and these multiples are regularly updated and published on the internet. As HEGO has a turnover of less than 50 million, it is classed as a “small cap” company, and its field is mechanical engineering. The corresponding multipliers for July/August 2016 lay between 6.7 and 8.3. This resulted in a top-level value for the company which had to be recalculated to allow for net financial liabilities by subtracting interest-bearing liabilities from surplus liquidity.
The resulting final value is generally the maximum acquisition price. The next step was to take this company value as a starting point and draft a meaningful profile of the business enterprise. This is used to identify, approach, and select potential buyers. Jürgen Schmidt set about getting in touch with buyers, who in this case ultimately ended up being Viktor and Alice Lepp. He then provided support to both the buyers and the sellers with the sales negotiations. In coordination with HEGO, the Steinbeis Transfer Center helped the Lepp family draft a business plan that would allow them to apply for a loan. To finance a company acquisition, it is generally good to fund around 15% of the transaction through personal equity. The remaining 85% of the required capital can by topped up by public funding programs backed by the state or government, or it can be provided by a “high-street” bank. In this case, the family’s bank submitted a proposal to a state funding bank, which in Germany is often a bank like KfW (or in Baden-Wuerttemberg, L-Bank). Depending on the specific program, a certain percentage of the loan is underwritten by a special guarantee bank. As the Lepps were from the metalworking industry, they could point to many years of experience at a similar company. As well as a realistic business plan, this was an important prerequisite for gaining financing from the banks for the acquisition. From start to finish, the project took around a year until everyone involved finally reached their goal. The HEGO metalworking business was acquired by Viktor and Alice Lepp on January 1, 2017.
Contact
Prof. Dr.-Ing. Jürgen Schmidt
Steinbeis Transfer Center Production and Quality (Furtwangen)
HEGO Machining Technology Metalworking Factory Hermle Bros. GmbH (Gosheim)