To want to complete the sales process, including the search for a buyer, within six months is a very sporting idea. It is more realistic to estimate one year Depending on the size of the company and the complexity of the transaction, it may take even longer. Take two years as a precaution.
How much experience in business sales do you bring to the table? In all likelihood, the sale of your own business is a unique matter, a situation in which you have not found yourself before and for which you have no experience or expertise. Mistakes can cost you dearly, and not just financially. There are also tax and legal aspects that need to be considered.
How much time can you spare for the sales process? As a company owner, you are usually already busy with the day-to-day business. There is not enough time to prepare and carry out the demanding and time-consuming sales process, which can last from several months to years and can suddenly become intensive at any time. Neglecting day-to-day operations during the sale process can significantly damage the company, its value, and its salability.
How great is the need for discretion? An external advisor can search for potential buyers and clarify their interests without having to disclose the identity of the seller. The higher the benefit for the buyer, the higher the achievable purchase price will be. Finding that buyer is not always easy. A well-connected advisor is therefore worth his money.
As an absolute minimum, the purchase agreement should be reviewed by a lawyer experienced in this field, unless you are an expert in the field of commercial contracts. For companies above a certain size (roughly from EUR 1 million turnover), the benefits of comprehensive consulting, i.e. the increase in value through optimal process management, increase in sales opportunities and minimisation of risks, are in good proportion to the costs of a consultant. For smaller companies, it may make sense to agree on leaner consulting models.
The tax aspects of the transaction should also be assessed and optimised by an expert in advance. Tax consultants with the additional qualification “Specialist consultant for business succession” in Germany can be found on the website steuerberater.de. Enter your postcode and select “Business succession” under “Specialist adviser”.
The successor can be internal to the family, internal to the company or external to the company.
Roughly speaking, succession can be divided into three forms:
– the gift (anticipated succession)
– a transfer against multi-year or recurring benefits (annuities, instalments, permanent charges)
– lump sum purchase
When selling to a family member, we observe discounts from the market price of 30% or more.
1. someone actively approaches you and makes you an offer.
Here you have a comfortable negotiating position, especially if you are not in a hurry with a sale.
2. you systematically consider who might be a potential buyer, approach them all at the same time and then conduct negotiations in parallel with all interested parties.
Competition stimulates business and drives up the price.
From the initial thoughts of selling a company to the closing (final transfer of ownership in a specified manner), there are numerous steps to complete.
The most important questions to ask at the beginning: is the company ready to sell? Are the asking prices realistic? Is it the right time to sell, both from a business and a private perspective? Is there anything else in the company that should be urgently improved before entering the sales process? Is the company’s documentation up to a professional standard? Are all business relationships contractually regulated in a comprehensible manner? Are the processes fully formalized and documented?
The preparation of a company valuation and sales documentation:
Based on the one hand on the financial figures – both for past and future periods – but on the other hand also taking into account numerous qualitative factors such as strategy, management, organization, but also the product, market, supplier and customer structure, the current state of the company is determined. The goal is a company evaluation and realistic company presentation in an exposé (also called information memorandum), which truthfully depicts the company, but also highlights its strengths and potentials. This exposé serves as information for verified and credible prospective buyers who have signed a confidentiality agreement and is the basis for the sales negotiations. The better the documentation anticipates the questions of potential buyers, the more efficient and resource-efficient the buyer search will be.
An anonymous summary, a so-called teaser is written to address potential buyers. It should contain enough information to arouse the interest of potential buyers without revealing the identity of the company.
Are the numbers not so good right now for various reasons?
It is then important to be able to credibly show why this is the case and that the current figures do not reflect the “true” earning power and potential of the company. Whenever possible, you already initiate positive changes yourself so that an upward trend can be seen.
In addition, there may be ways and measures to improve the figures in the short term, for example by reducing costs.
Consideration in advance: Who comes into question as a buyer?
A financial investor or a strategic investor? Is there a potential buyer within your own management or within the family? Does it make sense to address a wide range of people or is it better to address specific individuals?
What synergies are conceivable, either along the value chain or in related or complementary areas? The outside view of a consultant can be very helpful here, because he may see possibilities that have not been considered before.
In consultation with the seller, the consultant discreetly searches for potential buyers, either on the basis of a specific proposal from the seller (e.g. from the competition), in his own network or by researching possible interested parties.
The approach is always made exclusively with the consent of the seller. Generally, the identity of the seller is not yet disclosed at this stage. If there is interest, the potential buyer learns after signing a confidentiality agreement about whom it is concretely about and gets the detailed exposé handed out.
If the consultant is well connected both in the industry and in the region in question, this increases the chances of a successful sale.
Screening and selection of prospective buyers
In the best case scenario, there are several interested parties at the same negotiation stage in the process. This improves the negotiating position and thus the likelihood of achieving a higher price and finding the optimal buyer who will carry on the owner’s philosophy.
After the prospective buyer has had time to look through the detailed exposé (Information Memorandum), a meeting to get to know each other is arranged. If desired, the consultant can take part in the meeting or play an active role, for example by moderating the discussion.
Once the management meetings with all interested parties have been completed, the next step is to invite them to submit a non-binding purchase offer. If you receive several offers, the uninteresting ones will be eliminated and only the best ones will advance to the next round.
Time and again, company sales fail due to financing issues. It is important to check in good time whether the potential buyer has the necessary financial means available or will be able to obtain appropriate financing.
Negotiations and the performance of due diligence
The negotiation process is influenced by economic, but also tactical factors, as both sides try to achieve a result that is as favourable as possible for them. This should not bring the process to a halt.
Situational arguing has nothing to do with professional negotiation tactics. As a first step, it is important to clearly define your own concrete interests, expectations and fears and those of your negotiating partner. A consultant can do a lot as a mediator to lay the foundation for a constructive discussion.
The most common reasons that lead to the failure of negotiations are different ideas about price, warranties and the assumption of risks. Creativity and openness to alternative transaction models are important here. For example, deferred payments that are contingent on the future performance of the firm can be a means of building a bridge between the different price expectations. The role of an advisor in this process is to introduce appropriate ideas into the negotiations.
If so-called deal breakers emerge late in the negotiation process, this is particularly annoying for all parties involved, as a lot of time and money has already been invested. Dealbreakers may arise for understandable business or legal reasons, but they may also arise out of a misunderstanding.
This is where the consultant plays an important role. On the one hand, by raising possible critical points in advance and putting them up for discussion, on the other hand, by listening carefully during the negotiations to make sure that both parties say and mean the same thing.
If it becomes concrete, the consultant drafts a preliminary contract and supports a due diligence (audit) by setting up a data room and advising the company owner on the selection of documents to be placed there.
If the due diligence is satisfactory and agreement has been reached on all points, the buyer submits a binding offer, which forms the basis for the purchase contract.
Conclusion of contract
There is a need for clarification and structuring in financial, business management, legal and tax terms. The consultant knows for which case a specialist is required.
The contract of sale is always drawn up by a lawyer.
If shares are transferred, notarial certification is required by law in many countries.
Normally, each party bears its own counsel and legal fees. If a notary is required, these costs are generally shared.
The serious prospective buyers usually examine the company for sale carefully after submitting a non-binding offer to ensure that all information and data ultimately relevant to the purchase price have been accurately presented by the seller.
In the past, files and papers were examined in a room, but today the relevant documents are usually uploaded to a virtual data room with password protection and can be viewed there via the Internet. The amount of work involved is also always related to the size and complexity of a company.
Classically, the audit focuses on three areas:
Finances and taxes
This is about
– the current and future earnings situation
– the composition of sales and the extent to which future sales can be regarded as assured
– the customer and supplier structure
– maturing liabilities and recoverable amounts
– the price structure and whether the current price level will be sustainable in the future.
– past investments and foreseeable future investment needs
– correct taxation and the results of possible tax or social security audits
This is about
- Rights and patents held by the company
- Contracts concluded by the company with third parties
- legal disputes that have not yet been concluded
- other possible risks (e.g. contaminated sites on the property, etc.)
- possible liabilities and warranties
And if applicable, the technical and organizational area
This is about
- the condition of the machinery and equipment, which may have to be inspected separately by experts on site
- the IT area
- technical processes
- organizational processes
- cyber risk
- Environmental risks
As a seller, are you primarily interested in the highest possible sales price or is the future of your company and its employees most important to you?
What’s the next move? Is it the buyer’s plan to continue the business as before? Is there investment in growth? Is your company to be merged with another?
Culture matters! Is the buyer a good fit for your company?
Critical factors can be the management style, decision-making processes, communication, transparency and possible integration into an existing, possibly larger organisation.
If there are discrepancies, the top performers often leave the company after a short time. This can lead to massive drops in productivity and a deterioration of the bottom line.
If possible, the management or the top performers should be involved in the sales process. If you succeed in creating a “we” feeling with the new owner, employees will remain motivated, focused and supportive.
There are three different options for succession within the family: a gift (anticipated succession), a transfer in return for recurring benefits (pensions, dividends, etc.) or a purchase. In the case of a sale to a family member, we observe discounts compared to the market price of 30% on average.
The tax office increasingly questions the amount of the purchase price when a company is sold within the family or between a company member and the shareholder.
The Valuation Act (BewG) specifies how a company valuation for tax purposes is to be carried out. The main issue here is the collection of gift and inheritance taxes.
In the tax valuation of a company, only the figures for the last three financial years are taken into account; future earnings power is not taken into account. In the case of small and medium-sized enterprises, the tax valuation is usually significantly higher than the sales prices achievable on the market. The tax office assumes about nine times EBIT. If the family member or manager pays a lower purchase price, gift tax is due on the difference. However, the buyer has the right to prove that the valuation does not reflect the market value and thus reduce his tax burden.
In this case, a professional valuation according to the standard of the Institut der Wirtschaftsprüfer (IDW S1) is recommended. However, the business valuation must be prepared prior to the transaction.