Generation change – how to properly prepare the sale of a company

Selling a company in the SME sector is usually a well-considered decision, which often also contains an extremely emotional component, since it is not uncommon for an entire life time achievement to be transferred to a new owner; in some cases it is even a matter of several life time achievements from different generations of entrepreneurs. For understandable reasons, you want to know that your company is in good hands. Not only for personal reasons, but above all in order to be able to guarantee its employees a consistently stable employment relationship as before.

However, it can often be observed that although the core business of a company is performing very well, a company succession is only tackled far too late or is postponed more and more until it is sometimes unavoidable. Operational challenges within the company often distract from strategic decisions such as the sale of the company. The following 11 points describe To-Do's that lead to a smooth process before and during a company sale and represent the perfect conditions for potential interested parties to continue your business.

1. Early decision

The sale of a company takes time and is difficult to complete in just 2 months. A deal with the succession planning for your company at an early stage, perhaps the right successor can be found in your family. However, if your junior generation has developed a stronger interest in other activities, now is the time to think about how your company should continue in the future, once your well-deserved retirement comes along. However, an external company succession cannot be realized overnight. Consider it a marathon rather than a sprint, and it is best to clarify eventual disagreements within the shareholder group early on so that an optimal succession can be guaranteed.

2. Autonomy of the company from the shareholder

As an entrepreneur, you have built up considerable amount of know-how and certainly also have many tasks in the company that no one else can take over from one moment to the next. But should your company really be completely dependent on you? Especially if you are planning to arrange the succession externally, it is important that your company can also be managed by people from the second management level. So invest early in training your managers and don't be afraid to give them more responsibility and slowly introduce them to potential new tasks. Here too, the maxim that a company sale should be planned long in advance applies, since you cannot train your key personnel within 3 days in such a way that they could manage the whole company autonomously the next day.

3. Full transparency

You are looking for a company successor who will continue your life time achievement conscientiously and successfully. This person, too, deserves to be treated with complete transparency and to receive the requested documents for analysis and review. If your interest in selling is serious, a prospective buyer will notice at the latest during a critical examination in the due diligence process whether the figures you have provided and your previous verbal information correspond with reality. At this time, both you and the prospective buyer have invested a lot of time and money. A transparent presentation of your company's key figures strengthens the relationship of trust with the future investor and increases the probability of a successful contract signing.

4. Going-concern-principle

You already know that you want to sell your company and plan to sell it in about 3 years. Very well, congratulations on this early decision. At the same time you realize that the preliminary company value is often calculated based on the free cash flow of the last periods. These assumptions usually lead to the fact that in the years after the decision to sell is made, up to the actual sale of the company, hardly any investments are made and the company's figures are consistently positive. This is, however, a fallacy and an investment backlog is created which the future owner will have to clear. After receiving the first data, interested parties often have a very positive impression, but on closer inspection they stop negotiations or adjust their originally intended purchase price within the framework of a serious reconciliation calculation. A solid continuation of your business in the preliminary phase of your intention to sell thus leads to a higher purchase price. 

5. Realistic expectations

From our experience in the field of corporate succession and communication with shareholders of medium-sized companies, we see a phenomenon very often: A company with relatively constant sales or profits plans in the years following the sale with a considerable disproportionate growth in sales and/or profits, which then stands out particularly in the graphic representation. This so-called hockey stick effect, however, lacks any financial mathematical basis after exact analysis. In justified cases with provable large orders a planning may look however very gladly in such a way, but it should always be realistic - prospective customers react finally very sensitively to possible misinformation.

6. No fear of financial investors

"I'm not going to sell to one of these financial investors, after 3 years they're going to pull out anyway, dismember my life's work into 5 different areas and sell it on in different directions just to maximize their profit! - We often hear such statements, but most of them are not true. Especially in the area of small and medium-sized companies it is not always possible to split a company into so many different small divisions. At the same time, most financial investors regard your company as independent and, unlike some strategic investors in the industry, would not integrate it into a larger corporation.

7. Realistic purchase price expectations

Your company is your life time achievement, your baby, your last 20 years - of course, handing over your company to an external successor is an emotional matter, and of course you would like to be compensated for that. However, a potential buyer is not as closely connected to your company as you are, and will assess the value of your company on the basis of financial, structural and economic aspects and check whether there are links to existing portfolio companies. We understand that some entrepreneurs sell a company only once in their lifetime and seek to reward it with additional emotional value - but this is often not enforceable in the market.

8. Change-of-control clauses

In the case of a change of control clause in important contracts, it is possible for an external managing director, customer or even supplier to terminate the cooperation prematurely on fixed terms in the event of a change of control (change of majority). This is a contractual agreement under the law of obligations, and it is imperative to avoid it and, if necessary, eliminate it as far as possible before selling the company, as it is not advantageous for the potential buyer of your company and in the end will rather discourage him from taking over your company.

9. Separation of private and company ownership

Even before the sale of your company, prepare yourself to keep private and company property as separate as possible and to segregate them clearly. It is particularly important to eliminate liabilities or claims against shareholders, but also to transfer patents to the company, as these are partly the criteria why interested parties are prepared to pay considerably more for your company.

10. Hire a consultant specialized in M&A

You have been looking after the management of your company for years, an M&A consultant has been dealing with company transactions for years. Assign someone who has gained experience in this field and exchange ideas with him or her on an equal footing. Above all, look for someone discrete, with whom you can establish a relationship of trust and who can advise you in this sensitive matter. Often entrepreneurs mention that they already have a potential buyer who would like to buy the company. However, this is usually not the optimal solution, because after signing a confidentiality agreement, an experienced advisor will very discretely draw the attention of significantly more interested parties to your intention to sell after signing a confidentiality agreement, and in this case higher sales prices will be achieved due to the competition. This is a longer-term process that lasts between 9-24 months. It is better to use your resources for what you have already mastered excellently for years: Focussing on your core business!

11. Being able to let go

You are in the final stages of negotiations and the economic transition of the company is imminent - now it is time to let go and hand over the company to the future owner in the best possible condition. This often includes being available to your successor for a certain transitional period and possibly acting as an advisory board member for the company in the future. By doing this, you don't let go of your company completely, but you no longer have any operational responsibility and can devote yourself to new tasks or enjoy your well-deserved retirement.