According to research at the Bonn IfM (an institute for medium-sized business research), every year 70,000 companies have to work out who should next head up the company. The number of family firms recruiting a successor within family ranks is declining. And more and more firms are closing down. But there is an alternative, as a technical trading company discovered. By thinking ahead, it secured jobs, its future and its next chief executive.
According to the IfM in Bonn, between 2005 and 2010 some 350,000 family companies will be looking for a successor to head up the business. The IfM estimates the number of family businesses seeking a successor in 2005 at 70,000. These firms employed around 680,000 people and only 44 per cent found a successor within family ranks. Some eight per cent had to close down operations in 2006 solely because they could not find a successor. According to a current DIHK survey, one third of all senior managers questioned said that they could not find a suitable successor.
The problem does not only lie in the lack of family successors – the specific nature of many sectors of industry works against an elegant solution. For example: technical trading companies, the link in the chain between production, processors, trade and industry. The backbone of any such business is years of intensive networking, relationships that go beyond the price of a component, key aspects (often more important than competitive pricing) such as constancy of supply, meeting deadlines, trust, and an ability to respond to individual requests and special needs. Lots of technical supply companies are medium-sized by nature with several generations of a family working side by side. Lose the head of the business and in one fell swoop you lose acquired knowledge often going back decades – as well a network of personal contacts. The only alternative is to seek a successor from outside the family. The key to success will then be the matching process between the business manager and the business. Without external input, scouting for recruits is generally haphazard and unmethodical so the success rate is usually very low. Under increasing time pressure, companies even start considering the merits of financial investors who may well look after the personal interests of the owner but will tend to neglect the ongoing interests of the company – to say nothing of the ongoing employment of staff. Pure financial investors often expect such inflated returns that it weighs heavily on the medium and long-term survival of the business.
Johannes Bogner (name changed), was a 62-year-old sole trader looking for a successor for his second-generation technical trading company. His aim in identifying someone to take over the business was to sell his own share of the company for the best possible price (especially as this would affect his financial situation in retirement), but also to safeguard the jobs of staff who had been working for the company for years. He was also keen to keep up the good work of his parents and the strong image of the traditional company. Bogner wanted the sale to be over and done with quickly as he was nervous about the economy, saying, “If sales and margins went down it would lead to a devaluation of the company. Apart from which workers wanted some medium-term security.”
Bogner’s first, almost arbitrary attempt cost him valuable time as the broker he went through was not familiar with the industry. “He spent more time thinking about the value of fixed capital and stock; he hardly looked at our reputation and the years of contacts we’d built up,” recalls Bogner. The broker also failed to approach enough potential buyers and cut too many corners when researching buyers. The result: not enough meetings and presentations.
The second time round, Bogner was more methodical. Having already worked with Steinbeis on a material testing project and a market and technology evaluation, he was familiar with the workings of its network. What he did not yet know about was Steinbeis Mergers & Acquisitions, a transfer center specialized in consulting in the technical equipment trade with a long list of reference projects to its name. No sooner had he called in the experts, he knew things would be totally different from his first attempt. “We started with a detailed analysis of the current situation looking at the company’s strengths and weaknesses. This was important for later negotiations as knowing your strengths and weaknesses makes it easier to deal with the buyer,” explains Managing Partner, Steffen Lohrer. The team also drafted a résumé on the company to provide potential purchasers with a quick overview.
Next the Steinbeis experts conducted market research and pinpointed 80 potential buyers or investors. Bogner continues: “After detailed discussion with me they then drafted a short list of 30 key contacts who Steinbeis M&A got in touch with. Parallel to this the team sank its teeth into the company evaluation.“ One of the Steinbeis experts, Jürgen Rehberg, explains the sector-related evaluation criteria: “At the moment sector-specific factors are given a score between 4 and 7, depending on the product portfolio, growth rates, returns and overall turnover. The second and more detailed evaluation is carried out using “discounted cash-flow methods”. Naturally, during negotiations we use the method that gives us the higher value.“ The investors on the shortlist were approached through an anonymous invitation to tender which was followed up quickly in person. The outcome of telephone calls went into a status report which was sent to Bogner every weekend with comments. At the end of this two month process, eight meetings had been requested by potential buyers. Two of these – direct competitors – were approached, very carefully, using the argument that the company was looking for a strategic expansion partner. The team was delighted with the results, as Johannes Bogner explains: “After three months we had received six offers, three of which were highly interesting.“
The team quickly agreed a statement of intent with one of the bidders capturing all key aspects of a takeover. “But things got quite interesting again as the bidder started backtracking. Apparently the second level of management was not up to managing the company,” says Bogner. The team soon worked out a solution, as Steffen Lohrer concludes: “Thank goodness the selection procedure on the last three bidders was so systematic. After the first candidate withdrew we shifted straight into final negotiations with the second. Interestingly, it turned out to be a local direct competitor which was able to build on the most number of synergies, so it was willing to pay a good price.“
After detailed price negotiations, the buyer then carried out due diligence checks, which usually involve a close examination of the business by chartered accountants, lawyers and tax consultants. As all data and facts were in order and available and no unexpected risks could be identified, both parties progressed to the final contract. Despite this there were a number of hiccups which almost led to a breakdown in negotiations. Explaining his mediation role, Steffen Lohrer says: “After protracted discussions, as mediators we found time and again that we could get to win-win. When discussions take place directly between the buyer and the seller things don’t always work out for the better.“ Within eight months, Johannes Bogner had achieved what he had set out to – an ideal selling price, secure jobs and the continued existence of the company. The buyer also finally accepted his concerns about the location and guaranteed job security for all employees – and made that part of the agreement. Summing things up, Steffen Lohrer notes: “To maximize the selling price and find the right buyer, it certainly makes sense to be methodical. The selling process has to be clearly defined in terms of timing and you need to negotiate with several potential buyers at the same time to optimize synergies and the price paid by the buyer.“ In the case of the technical trading company, Bogner was highly satisfied with the outcome which even exceeded initial expectations. He can now sit back and pass on his life’s work to his successor.