Transfer: The right roadmap

The entrepreneurial world is the vocation of Bernard Eresch, Head of Large Corporates at BIL. An economist by training, he has worked in the financial sector for the last 12 years and, in his own words, “thinks like an entrepreneur”. You notice this when he talks about the Luxembourg economy and the preoccupations of companies. As an experienced banker he provides passionate day-to-day support and advice for companies – including on the issue of business transfers.

Luxembourg offers an attractive economic environment that has enabled many family-run businesses to flourish and that continues to be the case today. When the time comes to transfer a business, it’s crucial to be able to rely on a trusted partner, capable of working in the interests of a long-term vision and not restricted to purely financial issues. This support contributes to the success of transactions, as well as to the capacity for innovation and competitive situation of the country.

For Bernard Eresch, Head of Large Corporates at BIL, “without a clear vision of what you want to achieve, and a suitable roadmap of how to get there, a successful takeover or business transfer is difficult to accomplish”. He claims that, in his experience, being well prepared  and as objective as possible helps to substantially reduce the risk of failure. He believes that it is wrong to follow your emotions and prefers, “a well-thought-out, objective and precise strategy, together with advice from seasoned professionals”.

What is the key issue when preparing a business transfer?

The most important thing is to be clear about what you want and to have a very precise idea of your ultimate goal. You must define your own strategy on this basis. Is the aim to dispose of the company in full? Do you want to rely on a financial partner so that you can withdraw gradually? Are you planning a takeover by a family member or some of the company’s existing employees? You must consider and provide satisfactory answers to all of these potential issues. Once this is done, the next key stage in the process begins: valuation of the company.

Once you have defined your goal and the company’s value has been correctly estimated, it’s time to establish a detailed roadmap.

Once you have defined your goal and the company’s value has been correctly estimated, it’s time to establish a detailed roadmap. This will form the basis for a successful transfer, which tends to be a long and trying process.

What issues need consideration when it comes to choosing your successor or buyer?

When making this choice, it’s key to ensure that the ideas and convictions of the buyer or successor are properly aligned with the goals of the vendor or transferor. A successful takeover requires agreement on the corporate culture and the future role of the former owner. The issue of capital dilution is key, as the rights of each individual are influenced by the stake they hold. Such issues must also form part of frank and transparent negotiations. A successful transfer process depends on avoiding an emotional response, remaining objective and proceeding step by step through your well-thought-out strategy.

A certain degree of self-restraint is required?

An emotional response can lead to hasty decisions and self-restraint is indeed important during negotiations. But self-restraint is not the same thing as passivity, far from it. An entrepreneur must be able to formulate precise expectations and express clear ideas, particularly regarding the choice of successor or buyer. Diplomacy and determination are the ideal combination.

Based on your experience, what are the most common mistakes?

Any business transfer involves risk, especially if you don’t have a clear strategy and roadmap. Unfortunately, this is a very frequent mistake. Meticulous planning and clarification of the relevant issues upfront are the key to overcoming any subsequent obstacles. One other element is crucial: you must have a holistic view of the company rather than an approach based on an Excel spreadsheet. A business transfer is so much more than a financial transaction. The role of the vendor, cultural issues, and an understanding of the overall situation of the company are all issues that cannot be ignored.

A business transfer is so much more than a financial transaction.

What are the key factors when valuing a company?

Valuing a company is a complex process that requires a differentiated analysis of financial, strategic and legal factors. Central elements include an analysis of financial performance, an in-depth risk assessment taking into account volatility parameters, growth potential based on market forecasts and competitive analyses, an assessment of the quality of current management including leadership skills and decision-making structures, voting rights ratios, corporate governance practices, as well as compliance with relevant legal frameworks.

In addition, ESG criteria, including specific environmental aspects, are coming under increasing scrutiny, and this is also the case in Luxembourg. Their importance for the valuation of a company is mainly manifested in the need to adjust turnover forecasts by taking into account the current and anticipated ESG impacts of business activity. This requires an integrated consideration of direct and indirect environmental influences, social responsibility and governance structures. Beyond the company-specific dynamics, it is essential to assess the ESG image of the economic sector as a whole to prevent risks such as loss of reputation. With the growing importance of these criteria, the need for increased capital investment to promote a more sustainable value chain is also increasing, having a lasting impact on both revenues and cost structures.

For family-owned companies there are other complications to consider. For example, if voting rights are concentrated within the family, this can influence management of the company. Earn-out clauses may reduce the financial risks and some disagreements on pricing. In addition, such clauses incentivise the vendor to improve performance at the company. They may also reduce risks related to key employees leaving the company. It’s also worth pointing out that family agreements may influence the legal structure and debt of the company.

Ultimately, the valuation must be made on a clear contractual basis, the results of objective analysis and detailed negotiations. Involving independent experts at an early stage ensures that the valuation of the company appears balanced and non-partisan. This often helps to avoid potential conflicts. At BIL, we offer family companies support with generational changes and always find that non-partisan expertise is beneficial in such matters.

Involving independent experts at an early stage ensures that the valuation of the company appears balanced and non-partisan.

On what other issues is it important to seek external support?

External support is essential in many areas of a business takeover or transfer. These transitions are often far-reaching projects that are company specific and psychologically testing. Even if a founder decides to leave their company, letting go can be very difficult. Support may make things much easier.

A bank like BIL offers an overall approach and takes a long-term view, playing a truly central role and adding unique value in comparison to other players who will only consider the transfer or one particular aspect of it. BIL guides companies through every stage of their development, from creation to transfer. It can also provide company owners with customised responses to their private wealth management issues and help them to manage the proceeds of the sale in an optimal way.

Are there any specific issues that family businesses should consider?

There are indeed some specific considerations in addition to purely financial issues. In particular, there are emotional and interpersonal issues to consider. Harmonious cooperation is often only possible after open discussions to clarify the roles and responsibilities of everyone involved. Family dynamics and the expectations of the different individuals can have a significant influence on the process. On top of this, emotions such as pride, fear and a reluctance to let go may interfere with the process. Professional external support can help overcome these challenges. For family companies, the right balance must be struck between economic and family interests to achieve a successful transfer.

For family companies, the right balance must be struck between economic and family interests to achieve a successful transfer.