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Company succession within SME's

Company succession within SME's

Mr Mumm, Mr Bludau – Why is a timely arranged succession essential for companies?


Kaan Bludau: Especially within small and medium sized enterprises, the managing director or owner is the most important person inside the company. Usually, he/she knows the company inside out due his/her personal involvement during the initial build-up. Without “Plan B”, the absence of the top management could lead not only to insecurities about the continued existence of the company but also to the inability to act.

Helmut Mumm: Apart from that, the succession process involves different phases and often takes years. One should calculate a certain amount of time for the preparation and implementation. Those who deal with their succession too late do not have enough time to implement the actual process at the end.

Mr Bludau, how do you point out the topic of company succession to entrepreneurs?


Kaan Bludau: The topic of succession needs to be on the risk-checklist of every company. We systematically address this issue with owners and managing directors during our cooperation and thereby we are trying to attract attention to the topic. If necessary, we specifically interview the top management, for example production or sales manager, to gain a profound insight into the characteristics of the current managing director and into how the future without him/her could look like.

,,One should calculate a certain amount of time for the preparation and implementation.”

In the upcoming years a whole wave of succession will spread throughout small and medium sized enterprises. In 2018 and 2019 SMEs are looking for 240.000successors in total. The generational change therefore affects around 6% of all small and medium sized businesses in Germany. Until 2022 over half a million of the current owners of SMEs are planning a company succession.
More than 58 % of SMEs in need of a succession plan already found a successor in the coming two years. About half of these companies have successfully completed negotiations – the other half is still currently in the bargaining process. Therefore, 137.999 SMEs are already taken care of, whereas 99.000 SMEs are without an appropriate succession plan.

How do employees react to the issue?


Kaan Bludau: Very different but informative and helpful in regard to the ideal risk management process. On the one hand, you hear that the absence of the top management creates an immense problem on the client side, since the owner has personally been taking care of client and business relationships for years. On the other hand, they tell you that this could be an opportunity to strategically position the company in a different manner. This way we receive a comprehensive overview of the types of risks the company faces. Based on this knowledge, we are able to support the planning as well as the measures to prepare an organised succession in the best way possible.

What are the risks that can arise for the company in regard to succession? What are the specific challenges?


Kaan Bludau: The maintenance of client relationships is a major challenge. Especially in family-owned companies, in which the owner has established and maintained those contacts for years. If someone new gets into the business, the relationship often becomes less binding for clients. Particularly in economically difficult times, clients will probably feel less obligated to a new top management and either abandon the relation or change to another provider.

Helmut Mumm: I can only confirm this. Another risk is that the owner who build up the company cannot let go. Therefore, they prefer to repress the topic of succession. If the company has no succession perspective, neither from the shareowner side nor from the side of the managing director, it will lose its future prospect. A further consequence is that top performers leave the company.

Kaan Bludau and Helmut Mumm develop customised succession plans for small and medium sized enterprises.

How can an owner find a suitable successor?


Helmut Mumm: Keeping it in the family is usually the first approach. If there are no suitable direct descendants and you do not find an appropriate successor within the wider family circle either, several options are possible.
In case the company already has an employed managing director with ambitions for ownership, he/she is able to take over the company in cooperation with the top management. This would be the traditional “management-buy-out”.
Alternatively, it is possible to build up high performing managers within the second management level. It is crucial to carefully assess if these employees indeed have the potential to function as the executive management. Aspects such as personality, social intelligence, an open mind, education, age and experience have to be put under scrutiny and be considered systematically. In case no suitable successor can be found within the company environment, the search needs to continue externally.
For reasons of neutrality and objectivity, I strongly recommend professional consultancy for all topics with regard to succession. Professional consultancy can start with situational analysis, continue with the coaching of the restructuring process and can even include the search for a successor, if necessary. The transition period until the company transfer should also be well planned and professionally guided.

Are there any other significant questions to be clarified before succession?


Kaan Bludau: The successor does not only take over the company but also all of the pension commitments the entity has made. In case of pension commitments to the owner or the top management, the actual financial amounts have to match the assurances made upfront. A study of 2012 by GGW came to the conclusion that the amounts are not regularly checked and adjusted in regard to later demands. This is how liquidity shortages can arise when payment obligations become due. Obviously, the successor should circumvent this risk by assessing the situation appropriately.

Helmut Mumm: Generally, the company should be capable for sale. In this context, a seller due-diligence is conducted. Thereby, the company is being looked at from a potential seller’s point of view and value enhancing as well as value impairing factors are being considered. Assessed value impairing aspects should be eliminated so that the company is presented in an attractive and future-oriented way. This includes an attractive public image, a solid 5-year-plan, good staffing, clear competence regulations and a strong balance sheet. At this point, topics such as the increase of equity needs to be assessed, as well as increases in turnover by means of a strengthened sales force. A corporate buyer is especially interested in the future perspectives of the company and the consequential profitability.

Kaan Bludau: For me, a parallel to risk management can be drawn here. Risk management processes specifically look at market relevance. Naturally, the situation of a company can be improved by rationalising and cost savings. But companies receive a higher ranking if they are able to create perspectives for the future. Above all, a well thought-through strategy, the entry into new markets, innovative products/developments as well as future-oriented projects are important factors.

For me, a parallel to risk management can be drawn here. Risk management processes specifically look at market relevance. Naturally, the situation of a company can be improved by rationalising and cost savings. But companies receive a higher ranking if they are able to create perspectives for the future. Above all, a well thought-through strategy, the entry into new markets, innovative products/developments as well as future-oriented projects are important factors.

Mr Mumm, what is there to think about when it comes to the implementation of succession?


Helmut Mumm: The whole package needs to match. In most cases, a lot of time passes from the decision, up to the planning, until the actual implementation and integration after the handover. Meanwhile not everything runs smoothly. Therefore, it is important to set a specific date on which the company is effectively being handed over to the successor. This date serves as an orientation for all necessary tasks upfront.
Topics such as the modality of the purchasing payment as well as the transfer of ownership, benefits and encumbrances must be clarified precisely. It becomes more complicated in case of stretched payment processes and purchase price adjustments within the scope of earn-out-clauses, in which parts of the purchasing price are dependent on the prospective economic development of the company. Specific care must be taken in this matter, since the seller’s revenue is dependent on the performance of the successor.

At the beginning you mentioned that the succession process takes years…


Helmut Mumm: This is correct. Usually, a duration of one to five years alone is anticipated for a preparatory seller-due-diligence and the consequential measures. Independent from that, the successor is to be found upfront. If this is the case, training and effective handover takes 12 – 18 months. Additional time needs to be taken for finance, taxation planning and optimisation, as well as the composition of contracts. Complications, such as divided parties or a successor who bails last minute, can additionally prolong the process of succession.

What are you taking with you from your clients in regard to company succession?


Helmut Mumm: Personally, company succession is one of the most interesting fields in my profession, because it is future-oriented and if everything is being handled in a professional way both parties benefit from the process: the owner is pleased about his/her well-deserved retirement and the successor is determined to create something and therefore gets started immediately. Especially within owner-managed small and medium sized enterprises, the implementation of company succession is successful, if it is being dealt with in a timely manner. I believe this is the case because an entrepreneur wants his/her lifetime achievement to be sustainably preserved and therefore searches a successor with passion who as well has a long-term ambition.

Kaan Bludau: I share that sentiment. The subject of succession has two sides: Often the risk is seen above all - but there are also a variety of design options on the way to the future.



INTERVIEW WITH:

Helmut Mumm

Council Member at BludauPartners

AND

Kaan Bludau

Managing Director at BludauPartners

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