Planning the sale or handover of your business

Proper preparations ensure the continued existence of a company.

Most entrepreneurs don’t expect their business to simply close its doors the day that they stop working. Yet a smooth handover requires careful preparation. Generally speaking, an entrepreneur must commit the necessary time and effort to choose a successor and provide the support required to ensure a successful transition. This process can take years.

Clear objectives

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. If you’re not sure about this, you risk an emotional crisis. It’s also important to get proper support. Experts can offer valuable help and advice based on their experience. The entrepreneur should be able to focus on what is key. It’s also a good idea to draw up a timetable early on, and then stick to it. This helps avoid quick fixes and decisions that are not properly thought out.

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.

Turnover should not be the only criteria used to establish the value of the company. You need to look at the overall economic picture. An auditor or your bank can provide valuable assistance with this, and create an independent valuation based on a reliable and objective analysis of the situation.

It’s a good idea to consider the tax issues at this early stage, as these are often complex. Unlike the sale of a business interest or shares in a stock corporation, the applicable personal income tax must be paid on the sale of a sole proprietorship or partnership. The tax is based on the taxable profit, i.e. the operating profit plus the profit on the sale/transfer of the company.

You must consider more than just the selling price in negotiations with a potential takeover candidate.

Ultimately, you must consider the culture of the company and what makes it tick. You are the best person to assess that. A successful handover practically always requires a transfer of the goodwill in the business.

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 guarantee of success, but this option is not without risks. In short, choosing the right successor depends on the situation of the company and the preference of the existing owner.

If there are no potential candidates, there is the option of turning to a business exchange platform such as the one offered by the Luxembourg House of Entrepreneurship. First-class Luxembourg financial institutions can also help you find potential buyers.

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 buyer is prepared to pay; and secondly, the decision lies with the seller, who should be under no pressure.

Negotiations should be based on objective data (balance sheets, turnover, gross operating profit, assets, ongoing projects, order backlog, etc.) and subjective factors (corporate culture, strength and credibility of the brand, soft skills of the existing team, etc.).

You must be clear about the future that you want for your business.

There are two types of company takeover: a share deal (acquisition of the shares in the business/ownership), and an asset deal (acquisition of certain assets). The option you choose will have an impact on the form of the transaction and its tax implications. With an asset deal, some of the company’s assets (fixed and intangible assets) are purchased, whereas in a share deal, the whole company, i.e. all of the assets and liabilities, are purchased and the company continues in its existing form.

You should also consider more than just the selling price in negotiations. During this phase, you should also agree on issues such as who will take over the management of the company, and whether the existing team will remain in place. One option is a period of joint management of the company with a gradual withdrawal of the seller. Maybe the buyer has a management team available to instruct directly.

This article is a part of the folder Special feature: “Transferring a business”