My finances, my projects, my life
August 17, 2022

Transferring a business: the main reasons for failure

You’re thinking of transferring your business in order to retire, develop new projects or increase your wealth. Whatever the reason, parting with what is sometimes a lifelong project is a complex process that requires careful preparation. myLIFE reviews the main pitfalls to avoid so that your business can be transferred as smoothly as possible.

Pitfall 1: questioning the transfer

Transferring a business is an important step in the life of an entrepreneur. Before even thinking about how the transfer might go, you need to be sure you want to go ahead with it. There’s an emotional side to it, especially when you’ve put all your energy into the business and dedicated your career to it.

You should be fully at ease with your decision. Otherwise, you may pull out at the last minute, try to impose unrealistic conditions or take too long to take the plunge.

→ Think about your real motivations beforehand and prepare yourself psychologically for detaching yourself from the business. To do this, think about why you want to transfer the business. Don’t wait till it’s too late to make up your mind. The process takes time.

Pitfall 2: not thinking ahead

Once you’ve made your decision, organise yourself carefully. A business transfer takes place in several stages: defining the terms of the transfer (sale of the business, shares or certain assets), preparing the business, valuation, finding a buyer, negotiations, etc. Depending on the circumstances, these can take several years. Five years is a typical rule of thumb.

It’s also worth studying the financial, wealth and tax impact of your decision: how will the capital gains on the sale be taxed? How will the transfer affect your estate?

Lastly, don’t forget to think about your life afterwards: what will be your future sources of income, your new activities? What plans do you have? If you’re going to retire, consider preparing for this too.

By not being well informed and/or failing to prepare sufficiently for the transfer process, you may miss out on financial optimisation or even jeopardise the success of the project.

→  A successful transfer requires thinking ahead and, above all, informing yourself carefully about the steps to take and the consequences of your decisions. This will help you avoid unpleasant surprises caused by hasty decisions.

Consult experts to get a clear idea of the implications of transferring your business and for support throughout the process.

Pitfall 3: ignoring expert advice

Even if you’ve always run your business with a steady hand and want to keep costs down, it’s important to get professional help throughout the various stages of the transfer. This is especially so if it’s your first time.

They can advise you on how to appraise and present your company, on valuation methods or even on how to optimise your finances, taking into account the tax, social and wealth aspects specific to the business.

By neglecting this stage, you could miss out on important legal aspects, lack credibility in the eyes of potential buyers or even jeopardise confidentiality in the transaction.

→ Get in touch with your banker, notary, lawyer, accountant, tax advisor and/or specialists in business transfers to get a clear idea of the implications of transferring your business and for support throughout the process. The expertise of a full banking service is a plus here, since it can also help you with the private financial aspects of the business transfer.

Pitfall 4: failing to prepare for the transfer

Before transferring your business, you should be sure that it’s ready to be transferred: is it sufficiently autonomous to continue operating without your supervision? Are there any legal or accounting issues that need to be addressed? Shouldn’t you close that big deal before starting talks? Are you complying with the regulations concerning your activity? Are you aware of any disputes with your employees?

You should present your business in the best possible light. The potential buyer mustn’t discover any serious shortcomings during (or after) the transfer process. This could reduce the sale price or even cause the transaction to fail.

→ Transferring a business requires an objective assessment of the business’s strengths and weaknesses. You can make adjustments to make sure your business is absolutely ready: train your employees and delegate key tasks, update your contracts, replace certain production tools, etc. You should identify and correct any problems before the transaction or be honest with the buyer about existing shortcomings.

Throughout the negotiations, you should continue to run your business as if you had no plans to sell it. Your business must remain successful.

Useful info: throughout the negotiations, you should continue to run your business as if you had no plans to sell it. Your business must remain successful: new customers, improving results, etc. The future is uncertain and a buyer may pull out at the last minute.

Pitfall 5: overestimating the value of the business

The sale of a business involves estimating its financial value. To value a business, its key figures (revenue, debt, orders, investment plans, human resources, etc.) and the environment (market climate, competition, brand reputation, etc.) should be taken into account. Several complementary valuation methods exist: the market, asset-based and income approaches.

This complex exercise requires a high degree of objectivity, something which is not always possible given the financial and human investments you’ve made in your company. By being greedy, you risk scaring off interested buyers.

→ Get an expert, such as a banker or accountant, to assess the value of your company. Also bear in mind that the amount determined is a starting point for discussion. There will almost certainly be a negotiation phase regarding the sale price.

Pitfall 6: focusing on a single buyer

Choosing a successor for your business can be tricky. It may be tempting to commit to the first offer received, or, alternatively, to hold out for the “ideal” profile. In the former case, you may lose precious time if the buyer pulls out or miss out on more interesting candidates. In the latter case, you risk never finding the right match.

→ Take the time to look for a buyer through company exchanges, specialised websites, your professional network, your personal connections, and so on. Study the offers made and avoid focusing on a single profile for a successor. Keep an open mind. Lastly, stay cool and don’t cancel all your appointments at the first interesting contact.

The support of those close to you is important and colleagues can be of great help during the transition phase.

Pitfall 7: keeping people out of the loop

Although the transfer will require a certain degree of confidentiality, it would be a mistake not to inform those around you of your decision to sell the company. A family member, friend or employee might be interested in taking over the business. By holding back, you risk missing a potential buyer and causing tension or even conflict within your family.

→ Inform family and friends of your decision, even if you think none of them will be interested in taking over. The support of those close to you is important and colleagues can be of great help during the transition phase. However, be careful to choose the right moment to discuss your decision so as not to jeopardise the success of the project.

Pitfall 8: lack of transparency

Potential buyers will have to carry out a full audit of your company: legal documents, accounting, human resources, etc. To measure your company’s health, they’ll ask about its operations, clientèle and suppliers. If you’re too vague or conceal information, they may doubt your sincerity or the soundness of the project they’re considering.

→ Be transparent with your successor. Provide them with any information or documents they require over the course of the negotiations. Build a relationship based on trust. However, this information is sensitive and must be protected. It is common to have potential buyers sign a confidentiality agreement.

Useful info: once the deal is closed, you can implement a transition period to help the buyer in the first few months after the takeover.

Transferring a business is a long-term process that requires thinking ahead, preparation and support to succeed. For assistance, contact the experts at your bank or visit businesstransfer.lu, a site created by the Luxembourg General Directorate for the Middle Classes, the Luxembourg Chamber of Commerce and the Luxembourg Chamber of Trades which provides advice and puts sellers and buyers in Luxembourg in contact.