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SUCCESSFULLY MANAGING CORPORATE SUCCESSION AT SMES

Steinbeis experts help with the planning of a successful succession process

Businesses are an important source of earnings and wealth, especially if you’re the owner of an SME. If you built up a successful business, you want to ensure it stays in safe hands when you decide to move on. But if there is no obvious candidate in your family to take over the business, you will have to motivate somebody from outside to succeed you. Finding the right person is not as easy as it sounds, and often professional support is required. This is where the experts at the Steinbeis Transfer Center for Rehabilitation and Financing come in with their specialist knowledge. The center recently helped Dill, a medium-sized tooling and mold-making firm from Karlsbad, with its business succession process.

Founded by Harald Dill in 1991, the firm makes simple and complex, advanced tools and molds for the plastic injection molding industry and the production of pressed parts, pressure die-casting parts, and powder injection molding parts. Dill asked the Steinbeis Transfer Center for Rehabilitation and Financing to support him in finding a successor. To help him, he also turned to a European Social Fund (ESF) program that offers business coaching to SMEs, and his company was awarded a €6,000 subsidy for the project.

KEY SUCCESS FACTOR NUMBER 1: EARLY PREPARATION

At small, owner-managed companies there are often large overlaps between the everyday business and the personal affairs of the owner. For example, these can affect real estate rented out to the company or decisions regarding the salary of the owner, etc. It can often take a long time to separate out such factors when it comes to selling the company, and it can be a while before the business is prepared for a planned sale in financial terms. With such companies, it makes sense to start making preparations for a sale three to five years before the planned takeover. One advantage with this is that the owner is well prepared if a potential buyer comes along and expresses an interest in the business. It also removes time pressures if a company does not suddenly have to be sold in the next six months.

Dill was 59 when he embarked on his project with Steinbeis, and his goal was to sell the business within three years and hand it over to a suitably qualified successor. This meant there would be sufficient time to find somebody interested in the company. In addition, Dill’s strategy had always been to delegate as many tasks as possible to people working for his company. This makes things a lot easier for the next person in line when they enter the door as a successor.

KEY SUCCESS FACTOR NUMBER 2: THE CONCEPT, THE STRATEGY, PROCESSES

As a first step, it is important to capture the goals of the company succession process with the seller. Is the sale of the firm about making the maximum amount of money, or are there any other factors that might be relevant? For example, the owner might want the name of the company to stay the same, the business to stay in the same location, job guarantees for workers, as much time as possible before the selling agreement is signed, no changes in rental arrangements (especially if buildings are owned by the previous owner or their family), a consulting contract, continued employment at the business for a defined period after it is sold, or various other wishes. Only when all of the goals have been captured can the process of planning the strategy for the company succession begin. This involves drafting a business plan spanning several years, conducting an assessment on the company, identifying potential buyers, clarifying legal and taxation issues, and writing a company exposé. The next task is to approach potential buyers, use any intermediaries that offer networking services, or both. When approaching a potential buyer for the first time, it is recommended asking an external consultant to contact the buyer anonymously. The name of the company should only be divulged after signing a confidentiality agreement, after which the potential buyer may also be shown the company exposé. Next, the potential buyer is usually taken through a due diligence process. This involves vetting the potential buyer from head to toe. It is then time to start contract negotiations, sign the business acquisition agreement, and complete the sale. If the buyer is an ongoing business, the next stage is to embark on the so-called post-merger integration process. The aim at this point is to dovetail the purchased business with the existing operations of the company (or group of companies) owned by the buyer, so that the buyer can derive maximum possible benefit from acquiring the business. One important aspect is that any workers that are taken on are made to feel welcome at the company. At this point, they are often the most crucial asset of the business.

KEY SUCCESS FACTOR NUMBER 3: EXTERNAL SUPPORT

For a business owner, the succession process has a fundamental impact on their role as an entrepreneur. Most owners only ever sell a business once in their lives, so many of the challenges they face when handing the business over to a buyer can be quite daunting. Often, they are also strongly attached to the company on an emotional level, especially if they set up and grew the business themselves. It can therefore be useful to the business to draw on the opinions of a neutral and objective adviser, who can play an important role in successful company succession processes. Consultants also offer specialist knowledge and experience in ensuring the process runs as smoothly as possible. One area for which this is perhaps most important is when it comes to estimating a realistic value for the company. Ultimately, the value of a company revolves around the potential revenue the buyer of the firm can generate through future business. Different buyers are often willing to pay a different price for an ongoing business. For example, a strategic buyer who considers a firm the optimal complement to their existing business will typically pay a higher price than an entrepreneur hoping to acquire the company to become self-employed.

THE RESULT: SUCCESSFUL SUCCESSION

Once all his goals were clarified, Dill, his company accountant, and Thomas Täge from the Steinbeis Transfer Center for Rehabilitation and Financing sat down together to work out the value of the business being sold. They then drafted a company exposé for potential buyers. The Steinbeis expert then approached prospective buyers anonymously by going through his “list of contacts” and placed an anonymous ad in a public market place featuring businesses for sale. This attracted the attention of Timucin Okullu. At the time, Okullu was working as a development and sales engineer for a major automotive supplier. Following an intensive period of negotiation, including a due diligence process, Dill and Okullu came to an agreement and subsequently signed a company purchase contract with the support of a specialized attorney’s office. In parallel to this, Okullu had to secure funding from his bank manager, who also visited the company in person to gain a first-hand impression of the business. The company exposé also proved extremely useful in this respect, since it contained all the necessary information for making decisions regarding credit arrangements, quickly paving the way for approvals. After the ink had dried on the contracts, Dill accompanied Okullu on visits to key clients of the company to ensure the handover went as smoothly as possible. The workforce was informed about planned succession arrangements as early as possible to ensure they also had an opportunity to get to know the new owner in advance. Harald Dill still works for the business as a consultant, and this also allows Timucin Okullu to draw on his personal experience. The overall succession process only lasted nine months. It should be noted, however, that it is becoming increasingly difficult for SMEs to find suitable buyers, especially in more technical areas, and as a result successful company takeovers can take several years.