All steps need careful planning to ensure a successful business transfer. One of the main challenges is choosing the right successor. How do you go about finding a successor who is both willing to pay a fair price for the company and capable of running a business that has been built up over years or even decades? This is the key question.
The past versus the future
As an entrepreneur you should be clear about one thing from the start – you’ll never find a successor exactly like you! A successor will bring their own personal experience, history, ambition and vision for the future of the company. In other words, while it is quite legitimate to consider the issue and wait for the ideal candidate, your successor will never be your double. And one other thing – entrepreneurs leaving a business are, in a manner of speaking, selling their past achievements, while their successors are investing in their own futures. A company can only be transferred if these two very different perspectives can be successfully bridged.
Entrepreneurs leaving a business are, in a manner of speaking, selling their past achievements, while their successors are investing in their own futures.
When we look at business succession planning, there are two main categories of buyers, who are characterised by extremely different expectations and motives: strategic buyers and financial buyers.
A strategic or a financial buyer?
A strategic buyer is primarily interested in the company’s activities, i.e. the products and services it offers, and the potential to develop these. A company will offer a perfect fit with this type of buyer’s development plans if: it results in their personal fulfilment (e.g. takeover by a family member); it complements or supports their existing business (e.g. takeover by a competitor); or it opens up new markets and opportunities (e.g. takeover by a foreign group, a client or supplier). A strategic buyer will mostly already have information on the takeover candidate, and is generally prepared to pay more than a financial buyer.
A financial buyer focuses mainly on financial issues. A financial buyer may be an individual investor looking to benefit from the dividends paid by a well-managed and stable company, without having to worry about the day-to-day business. It may also be an investor looking to restructure the business after purchase and to sell it on later for a large profit.
So, let’s take a look at the groups of people who are generally considered potential successors, and there are many alternatives. Handing the business over to a family member is often the preferred solution when this option is available. However, care must be taken not to disadvantage any of your other heirs. It’s best to seek specialist advice on this issue.
Four in five companies in the EU (82%) believe that they have invested about the right amount in the last three years despite difficult conditions – this is around the same as in the US. These are some of the most important results of the current European Investment Bank (EIB) Investment Survey published at the end of 2021.
Friends and acquaintances are also potential candidates to take over your company. One advantage in handing over a company to this type of person is that the discussions and negotiations required can be carried out in an environment of trust. Yet it is also worth bearing in mind that in such cases any differences of opinion or failure of the talks will have repercussions for interpersonal relationships. Friendships may be seriously damaged – failed negotiations are not good for a relationship.
A supplier may also be interested in integrating a company into their production chain, thus expanding their range of products and services. The same is true for competitors. The aim of competitors in a corporate takeover is often to achieve a certain market size or a presence in a particular region.
An employee or a group of employees acting together may also wish to take over the company. If this is the case, the transfer will follow the same procedure as for an external successor. The advantage with this situation, is that negotiations take place with people who are familiar with the company’s operations.
Individual investors or private equity companies may also be potential successors. If you are dealing with an experienced investor or well-known company, you should always take a look at their previous takeovers before you get into more detailed negotiations.
Sometimes the ideal successor may approach you spontaneously.
Finding the ideal candidate
There is of course always a chance that the ideal successor may approach you spontaneously. The more people you know, the greater the chance of finding your ideal successor among them. If you are looking to sell, it is sensible to inform those around you. It’s also advisable to speak about this with selected business contacts or to make your intention public via the media or dedicated platforms. The specific purpose of the national Business Transfer platform run by the Chambre des Métiers, Chamber of Commerce and Ministry of the Economy is to match offers for business disposals and takeovers in Luxembourg. In some cases, acting publicly may scare off clients and employees.
It is generally advisable to get a business lawyer or notary, and your personal bank adviser or auditor involved – they may be able to put you in touch with potential buyers. For example, your bank adviser may be able to help with the candidate search and pre-selection, particularly from a financial perspective. Such an intermediary is a good option as they can provide support with the transaction, represent your interests on all wealth management issues and consider any tax issues.
Discretion is not merely desirable when conducting confidential negotiations, but essential when you are required to disclose certain information. A potential successor will understandably want a comprehensive assessment of the company before taking a decision to buy. This means that you will have to disclose a good deal of information, including data on the company’s operations, financial situation, operating earnings, clients and suppliers.
Trickling out incomplete or distorted information is totally counterproductive.
This is a matter of sensitive data that must be handled confidentially. You must therefore ensure that potential buyers sign a non-disclosure agreement covering all discussions and any documentation that is provided. You can also set up a virtual data room – a protected digital room where all key corporate documents can be deposited and consulted. If necessary, you can set up such a data room with different security settings. The advantage with this type of room is that you can make certain data accessible while at the same time reserving access to some documents to users with a specific profile. You can also see exactly which information has been accessed, by whom and at what times.
One final piece of advice: always insist on confidentiality and discretion. Business succession planning is a lengthy and complicated process as it is. Additional disruption from trickling out incomplete or distorted information is totally counterproductive.