Buying an SME: the five essentials

Buying an SME rather than starting a new one has many advantages. As long as you follow some good advice.

Two people shaking hands.

Becoming an entrepreneur is the dream of many employees, but you don't necessarily have to start from scratch to achieve it. Why not take over an already existing SME? Acquiring a company has a definite advantage: according to the FSO, for companies acquired in Switzerland, the survival rate after five years is over 90%, compared with only 50% for newly created companies. However, there are five things you should consider before taking the plunge.

1. Finding the right opportunity

Unearthing that rare gem is the first step. A lengthy and difficult process that should not be neglected. “It's not just a transaction, it's a process,” warns Jörg Sennrich, director of the specialist support structure KMU Next. 

Before getting started, it is essential to ask the right questions: what do I want? In which sector will I be most successful? Etc. “I have observed that in too many cases, potential buyers have not defined a clear profile." On the website, “clearly worded ads looking to buy businesses are much more successful than others." Furthermore, you should not hesitate to readily contact SMEs in the sector concerned, if you know that they may be facing a succession problem

2. Clearly defining the value 

Estimating the value of an SME is one of the most important points in the transfer of a company. The first step is for the buyer to carry out an in-depth analysis of the target company (due diligence), which includes legal, tax and social aspects. 

Different methods can then be used to value the company, based either on yield, balance sheet or cash flow. Good to know: the value of an SME is not the same as its selling price. The latter depends in particular on the association between the two stakeholders, the urgency felt by the transferor or the guarantees provided by the purchaser in terms of job preservation. The fact remains that "without money, you cannot buy anything at all,'' Jörg Sennrich emphasizes, further specifying that "30% to 50% of equity capital is typically required."

3. Successful negotiation

By tending to the due diligence process, the buyer holds the best cards to tackle talks on the company purchase. According to Marie Théraulaz, a partner at Théraulaz&Graf, once the risks associated with the transaction have been identified, it is indeed possible to negotiate guarantees. These offer protection against future charges related to the activities of the SME prior to the sale. This could be a tax audit, a lawsuit against an employee, or judicial non-compliance for some of the business.

The stakeholders can also agree on the period of validity of the guarantees, as well as on the terms of payment of the sale price. The tool known as the price adjustment clause, or "earn out", ensures that only a portion of the transaction amount is paid immediately to the former owner of the business. "The rest depends on various criteria such as the success of the company after its takeover."

4. Agreeing with partners and the board of directors

Even a very small minority shareholder has the power to hinder the success of the new management. When considering buying an SME, it is therefore essential to be well informed about its potential partners. To do this, the purchaser can, for example, contact other key stakeholders in the sector. Ideally, these shareholders should also be met with one on one; on one hand in order to understand their relationship with the company and their vision for the future, on the other in order to prepare them for the changes that lie ahead.

It is also worth asking the transferor whether a shareholders' agreement exists. This document is valuable because it contains a framework for scenarios such as the sale of shares, death or transfer.

5. The best possible way for communicating recovery

"Every SME has key people, whether they are executives, opinion leaders or particularly experienced employees," observes Jörg Sennrich. "If these key people leave after the company’s acquisition, it can have drastic consequences for its development."

Internal communication plays a significant role in avoiding this scenario. The future manager must reassure employees both of their value and of his intentions. External communication of the takeover must also be carefully handled to prevent customers leaving the SME at the same time as the former owner. The ideal scenario? That the seller himself introduces his successor to all customers.


On the theme

SME succession in three points

  1. According to the Federal Statistical Office (FSO), in 2018 almost 40,000 new businesses were founded in Switzerland. At the same time, nearly one in three SMEs disappeared for lack of a buyer, according to a study by the KMU Next Foundation.
  2. According to figures for August 2021 compiled by Dun & Bradstreet, more than 15% of the 603,000 companies with fewer than 250 employees in Switzerland (i.e. more than 90,000) are looking for a buyer.
  3. A 2016 study published by Credit Suisse and the University of St. Gallen found that the share of SMEs seeking a purely extra-familial transfer solution was almost equal to those seeking a purely intra-familial one, i.e. 34% and 33% respectively.

Last modification 05.01.2022

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