It is considered to be one of the most important decisions in an entrepreneur's life: The company succession planning and execution.
There are basically four different forms* for SME business owners to solve their business succession:
- Family Succession (FS): family-internal succession solution by means of business takeover by the next generation
- Management Buy-out (MBO): company-internal solution through takeover by an existing management team
buy-in (MBI): external solution through takeover by an external management team
- Sale to a
third party, usually a strategic buyer or financial investor (M&A)
For several years, a trend towards fewer FS & MBO solutions and more MBI & M&A transactions has been observed in Switzerland, especially among medium-sized and larger SMEs. There are a number of reasons which in our view are responsible for this:
- In contrast to the past, entrepreneurs are nowadays more frequently faced with the fact that their children are not interested in taking over the family business. The reason for this is probably to be sought in other attractive career opportunities and a fundamentally greater desire for self-fulfillment.
- The MBO as a form of succession is primarily limited by the lack of financial resources of the existing management team. Often, entrepreneurs are not willing to make significant concessions on the purchase price or the transaction structure in a transaction with a buyer from outside the family. Furthermore, due to the generally increasing complexity (market, competition, development, etc.), it is becoming more and more challenging for internal management teams to further develop a company successfully.
- The succession forms M&A and MBI enable an entrepreneur to search for the optimal succession solution on the open market. With these two succession types, there tend to be fewer restrictions (no limitation to family or to the existing management team) and more options (broad search for buyers, strategic buyers vs. financial investors) than with the FS and MBO succession forms.
Depending on the choice or preference of the above-mentioned succession forms by the entrepreneur, there are different preparations required. If several forms of succession are to be considered and examined (if necessary in sequential order), the preparation is typically more complex and requires considerably more time.
In general, and taking into account the trends described above, every entrepreneur should consider the following recommendations with regard to his or her own succession:
- Clarify early which forms of succession are possible and which one is preferred by the entrepreneur
- Evaluate which is the best succession form not only for the entrepreneur but also for the company and its stakeholders
- Select the most suitable succession form by applying a systematic procedure based on the exclusion principle (FS -> MBO -> MBI / M&A)
- Address and prepare the succession process early enough, as the full completion can easily take 3 to 5 years or more
- Timely identify and initiate preparatory measures for the preferred form of succession
The trends, implications and recommendations presented in this article show the high level of complexity when it comes to company succession. It is an issue that involves family, company-specific, market, financial, legal, social and other aspects, each to a different extent and with varying intensity. Thus, there is no "right" or "wrong", as every succession situation is unique and requires an individual and tailor-made approach.
* The additional two variants of initial public offering (IPO) and liquidation are not examined here, as they are rarely an option from an SME perspective (IPO) or are hardly ever sought / desired (liquidation).
Posted by CFAW Zurich Team