Business transfer: Make concrete and structured plans

Most entrepreneurs don’t expect their business to simply close its doors the day that they stop working. Yet a smooth handover requires careful upfront preparation, which should start as early as possible. But before taking any steps to hand over the business, the first thing to do is to make sure that you really want the company to carry on under a different management, and that you are sure you no longer wish to play an active role in the business.

A key stage is the analysis of the current situation. Take a step back and draw up an unbiased inventory of the company: its actual value, the state of its assets, its order backlog, level of employee fluctuation, etc. To do this, you need to put yourself in the position of a potential buyer and prepare the answers to any questions that may surface, especially critical ones.

The right choice

Who is the ideal successor? A family member, an employee, an experienced sector specialist or a promising young entrepreneur? There are advantages and disadvantages to each option. Transferring the business to your own children is usually the ideal solution if it is possible. But it raises other questions, such as the split of assets between all of your heirs. A specialist who has proven their worth in the business may appear to offer a potentially successful option, but this approach is not without risks.

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.

As an entrepreneur you should be clear about one thing from the start – you’ll never find a successor exactly like you!

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.

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.

… a company is ultimately only worth what a potential buyer is prepared to pay.

Successful negotiations

Sales negotiations are often a tricky and a difficult time for both sides. Once again, the support of experts can prove crucial, as they can prepare the ground and save both sides from a stressful marathon. Whatever the expectations, there are two main things to bear in mind: firstly, the market dictates the price and a company is ultimately only worth what a potential buyer is prepared to pay. And secondly, the decision lies with the seller, who should be under no pressure.

Rather than an exact price, a range is defined for the valuation, which serves as a basis for negotiations. There are numerous different methods to estimate the economic value of a company – each with its own characteristics, advantages and disadvantages – and these are applied based on the company’s profile. It is therefore worth combining a number of methods to arrive at the most appropriate valuation.

When estimating the financial value of a company, both tangible and intangible parameters must be taken into account. As well as accounting information, asset values and future earnings streams for the company, other elements that are sometimes more difficult to quantify require consideration. An analysis is required of the way the company operates (its relationship with employees, sales network, dependency on its management, etc.) and of the specifics of the business (skills levels of its teams, patents or in-house technology, client base, reputation, etc.). These intangible elements are grouped under the heading of goodwill. When a company is sold, goodwill is the excess of the price over the net asset value of the business.

What role will the exiting CEO play?

It is key to clearly define what role the exiting CEO will play in the future. Will they take a purely advisory role or handle concrete tasks? This must be clarified. Confining themselves to cooperation in the areas of technology and strategic planning – as Jeff Bezos has done at Amazon – is one solution, which offers a company’s founder a meaningful way of contributing their talent and creativity. However, they should not be involved in the day-to-day business procedures. As already mentioned, defining clear boundaries is paramount and everyone must know what they are responsible for.

If those taking over the business do not have a real opportunity to change things, the most likely outcome is often failure.

It’s always important to accept or support a new form of governance. New leaders necessarily bring a different approach when it comes to the management and structure of the company. If those taking over the business do not have a real opportunity to change things, the most likely outcome is often failure. Strong characters, in particular, should be aware of this when dealing with their successors.