Every year, many thousands of business owners are looking for a successor for their businesses. Business succession is a complex issue and often a process that quickly takes more than six months.
Business succession within the family usually goes a lot faster than when an external successor must be recruited. Also, when a competitor from the market is the candidate successor, the process usually takes longer than with an acquisition within the family. There are both advantages and disadvantages to each type of succession by selling your business.
Type of buyers in business succession
There are roughly three different types of buyers who qualify for your succession:
1. Management buy-in
In a management buy-in (MBI), an unknown individual from outside your business takes over. Although a management buy-in was seen by many sellers as something of a last straw until a few years ago, this form of transaction has recently been gaining popularity.
Advantages:
+ identity, culture and company name are preserved
+ fresh wind blowing through the business
+ easier to disclose competitively sensitive information
Disadvantages:
- dependent on bank, investor and/or seller for financing
- familiarisation period, especially for MBI'ers not familiar with the sector
- sometimes little experience with entrepreneurship in SMEs
2. Management buyout
In a management buyout (MBO), you transfer your business to one or more employees within your company. This often involves the second-in-command, a manager in charge of a division of the company or the current management team (the second echelon).
Benefits:
+ relationship between buyer and seller
+ employee knows business, customers and suppliers
+ often faster business transfer
Disadvantages:
- good employee not always good entrepreneur
- limited financial (own) resources
- dissatisfied employee after unsuccessful transfer
A special form of a management buyout is the transfer of the family business. The son, daughter, nephew, niece or other family member is often already working within the business or gaining experience at another business to return later as successor. Although it used to be natural for (one of the) children to take over the family business, nowadays there is less and less interest in family succession. The new generation of entrepreneurs would rather start their own businesses than follow in the footsteps of the "old gentleman.
Advantages:
+ continuity of business guaranteed
+ relationship between buyer and seller
+ succession preparation can start early
Disadvantages:
- no objective assessment of qualities of successor
- usually lower sales price
- unrest within family after unsuccessful transfer
3. Strategic acquisition
In a strategic acquisition, you sell your business to another business. This could be a direct competitor, a strategic party or a financial party.
Every business owner looks at the competition with an oblique eye. For a competitor, your business may be an interesting acquisition target. This buyer wants to strengthen its own market position through synergy advantages, because the other company has developed a new technology, to offer customers a wider assortment or to negotiate a higher discount for a larger purchase volume.
A new market has high barriers to entry for an existing business. A smart way to still gain access to that market is to buy a business in that industry. The buying company (strategic buyer) then does not have to fight for customers, revenue and a piece of market share, but buys an already "moving train.
Advantages:
+ higher selling price due to expected synergy benefits.
+ short or no familiarisation period due to familiarity with the industry
+ high chance of cash
Disadvantages:
- identity, culture and company name disappears through integration
- disclosing competition-sensitive information
- sometimes not a serious buyer, but only a 'look-in-the-kitchen'.
An investor is always interested in businesses with a lot of growth potential. For small and medium-sized companies, this buyer is often an investment company. This investor is not likely to run the business itself. Therefore, these types of deals often go in combination with an acquisition in the form of a management buy-in/buy-out or the investment company comes up with an MBI/MBO itself.
Advantages:
+ sufficient liquidity
+ no familiarisation period
+ large chance of cash
Disadvantages:
- see business as cash cow
- want the entrepreneur to stay on
Business succession regulation or business succession facility
The Business Succession Arrangement (BOR) is also called the business succession facility (BOF). You can use the business succession arrangement with the Tax Office when you inherit or are gifted a business and continue it. You then pay less or no tax. If you do not continue the business, you must pay inheritance or gift tax on the value of the business. On the website of the tax authorities you can read how you can make use of this business succession scheme.
If you have made the choice to find a successor for your business, a long process begins. A process that is experienced as very intensive, because you are going to hand over a piece of yourself that you have been working on year after year. With this short step-by-step business succession plan, we will help you on your way to a successful succession.
Step 1: The preparation
Think early about the future of your business. As a business owner, how long do you want to be at the helm? Do you envision an early retirement or will you stay in charge well beyond this age? And what does your life without businesses look like? What assets will you have available for that in the future? With business succession within the family you don't want the successor to pay the highest price, but you don't want to be left out in the cold either. Get good advice on this.
But who will take over your business next? It can be a very emotional process if there are several suitable and benevolent successors within the family. A mediator can help you manage the selection process so that family ties will not suffer too much as a result of the business succession.
Step 2: Valuation and purchase agreement
Have a valuation performed by a financial expert. This is necessary to determine a proper sales price. This is also very important for business succession within the family circle. This is because a favorable takeover price for the business successor can be noted by the tax authorities as tax avoidance.
In addition to fine-tuning the tax structure, it makes sense to see if you can invoke the Business Succession Arrangement (BOR); this allows you to have the business succeed virtually without income and/or gift tax. Record the sale value and other arrangements for the succession in a preliminary purchase agreement.
Step 3: Financing
Chances are your successor will need external financing to take over the business. To take out a loan, but also to get a good overview of the "as is" situation, it is wise to conduct a due diligence investigation. Such a study gives a complete picture of the state of the business. Combined with the valuation, your successor can set out to secure financing.
As the selling party, you can also financially support your successor in the purchase price, such as with a vendor loan, an earn-out or a subordinated loan.
Step 4: Closing the deal
Financing complete? Then you can establish the final purchase agreement. After signing at the notary, the business succession (taking into account the effective date) is a fact and the champagne can be uncorked.
Although the business succession roadmap is articulated on a single page, each step has many challenges and also a lot of time passes before it's champagne time. Therefore, start on time and engage experts who can help with both the business and emotional side. That way the business succession remains a pleasant process for everyone.
Start on time
Regardless of who will buy your business, it is incredibly important to begin your search for a suitable candidate in a timely manner. Because all successful business transfers have one characteristic: the entrepreneur worked systematically towards the sale of his business. A thorough preparation and planning gives peace of mind, overview and structure.
