You have spent years working hard each day to make your business a success. Now you want to secure its future. To give your business every chance of surviving and growing when you take well deserved retirement, you need to make plans for transferring your business.
Most business owners feel sure that their company will not collapse the day they decide to leave. They are right, provided that they take the time and right approach to find a buyer and ensure a smooth handover. Especially given that such a process can take several years. Here is a quick insight into what lies ahead.
Prepare yourself psychologically
Preparation is essential when it comes to handing over a business. Don’t wait until it’s too late to consider the issue properly.
Before you do anything, though, the first question to ask yourself is whether you really want to sell up. Hesitating on this point could mean that your heart rules your head in the sale process, especially when it comes to the buyer’s expectations and decisions.
You then need to ensure that you have the right people around you: experts and your banker to value your business and answer financial questions; other entrepreneurs for advice and feedback. Your job is to focus on the basics. That means getting involved in the process only to make decisions and settle debate.
The last part is to set a timetable and stick to it without cutting corners and to ensure the process remains confidential.
Value your business
It is during this stage that you must keep a clear head and consider whether your business is sellable in its current state. Draw up a realistic review of your business (business assets, facilities, order book, staff turnover, etc.). Put yourself in a potential buyer’s shoes and prepare answers to any questions… as the buyer is sure to ask if they are serious.
Put yourself in a potential buyer’s shoes and prepare answers to any questions… as the buyer is sure to ask if they are serious.
To assess the value of your business, you not only have to consider key figures but also economic conditions. To do this, get help from your accountant or banker. Based on a reliable, objective analysis of the situation, your banker can value your business independently and call on all of the expert support that you need, especially through networks of consultants. Your bank also has the advantage of being able to arrange takeover finance – which may reassure sellers – and manage investment of the sale proceeds.
(…) a successful handover nearly always means passing on your business’s intangible assets – the values that guide it.
During this stage you should also consider tax matters, which may be complicated. Indeed, unlike the sale of shares or equity in a capital stock company, where the seller will be taxed on any capital gain, the disposal of an individual business or partnership will create a personal income tax liability. This tax is calculated on the basis of taxable income (operating profit and sale proceeds). Capital gains on buildings included in the sale must also be taken into account.
Then you have to consider your business culture, its DNA. Nobody can do this better than you! For SMEs in particular, a successful handover nearly always means passing on your business’s intangible assets – the values that guide it. Buyers must always use these as a starting point if they want to give themselves every chance of succeeding.
Find a buyer
Who is the ideal buyer? A family member, a current employee, a seasoned professional from your industry, a promising young entrepreneur? Each option has its pros and cons. For example, being able to pass a business on to one of your children may be considered a godsend, but it often raises the question of how assets will be divided between other heirs. A professional with a proven track record may guarantee success but could significantly change the business’s culture, which you have spent years developing. Basically, choosing the right buyer will always depend on your business’s situation and your wishes.
If you do not have any potential candidates, you could always turn to a companies exchange, such as the one offered by the Chamber of Trades. Leading Luxembourg financial institutions can also help you to find potential buyers who meet your criteria. They have the advantage of being able to arrange meetings with a future buyer on their premises, or on neutral ground, in complete confidentiality. This is a real plus on a small market in which news travels fast and rivals may be tempted to poach your brightest talent if they catch wind of your plans.
Negotiations can often be tricky for all parties. Here again, being surrounded by experts who do the groundwork can be of great help and avoid things dragging out. Whatever your expectations, there are two key principles to bear in mind. Firstly, market rules apply: ultimately, your business is only worth what the buyer is willing to pay, hence why it is important to have several bidders. Secondly, the decision is yours and yours alone. If you remember this, you can negotiate with peace of mind.
Negotiations will have to be based on objective (balance sheet, turnover, gross operating income, property, ongoing projects, order book, etc.) and subjective (business culture, brand strength and credibility, soft skills of employees, etc.) factors.
There are two possibilities for taking over a company: a share deal and an asset deal. The option chosen will not only have consequences on sale formalities, but will also have considerable tax implications. Whereas an asset deal consists of buying a portion of the company’s (tangible and intangible) assets, a share deal means taking over the whole of the company, i.e. all assets and liabilities, and means the business continues in its current form. Take the time to read up on both of these options before making a choice.
Whatever you decide, negotiations will not just be over the purchase price. They will also be the time for reaching an agreement on managerial succession, on whether or not current staff will be retained, etc. A joint management period and gradual withdrawal by the seller is one option. The buyer will eventually have a management team to whom he or she can feel comfortable giving direct orders.
There are two possibilities for taking over a company: a share deal and an asset deal.
Once an agreement has been reached, it just has to be put in writing. Indeed, legalese is a language of its own and it is better to understand and speak it fluently before signing anything. Here again, professional help is definitely worthwhile.
Once the contract has been signed, all that remains is to crack open the champagne. Congratulations!