How to finance succession of a company?

For the financing of succession of a company to proceed as smoothly as possible, a certain number of parameters need to be taken into account. 

Some key factors contributing to the success of the financing of a company succession are set out below: 

Valuation of the company

  • Realism. Previous managers asked to assess the value of the company tend to overvalue their own performances. To get a realistic valuation, entrepreneurs are therefore advised to ask independent third parties to handle this.
  • Return or intrinsic value. Nowadays, companies are valued above all from the perspective of return. When preparing for the transfer, entrepreneurs are advised to remove from the company fixed assets not necessary to operation along with superfluous floating assets.
  • Validity of assets. Before the transfer of a company, the assets should be examined in minute detail and, if necessary, purged (e.g. bad debt, obsolete goods, old expenses, etc.).
  • Healthy equity contribution. Before the transfer, it is worthwhile making sure that the equity amount is usual for the sector compared to the balance sheet total. An excessively low equity contribution rings alarm bells for investors. 

Sufficient transparency

  • MIS, a reliable planning, budgeting and controlling system. Financing partners will be able to form a clear idea of the company more quickly when there is an information system that provides figures prepared identically for several consecutive periods. The easier it is to draw up an intermediary balance sheet (monthly profit and loss account, or one based on an even shorter period), the easier it is to act promptly on price and, if necessary, redress the balance.
  • Organization of processes. For both the financial partner and for the successor, it is vital that processes within the company are clearly defined and recorded in order to enable them to more easily form an idea of the company. This approach also reduces dependence regarding key people whilst facilitating employee conduct. 

Examining alternatives for the transfer

  • A clear analysis of all the options (family, MBO, sale of company, etc.) and a rational decision-making process when choosing the successor (descendants or people from outside the company) also help funders have confidence in the company management, in the knowledge that it will continue to make intelligent and rational decisions. 

Realistic estimate of capital requirements

  • Assessment of several variants. Unexpected negative developments in terms of turnover or costs should also be taken into account during planning. It therefore proves particularly helpful to draw up the cash flow plan in relation to different market conditions. The following are closely related to this:
  • Consideration of guarantees. For investors, it is important that the company is able to survive unfavorable market developments. It is therefore worthwhile thinking about the origin and availability of additional resources should unexpected events arise. 

Clear definition of responsibilities

  • Authority to sign, appointment of organs, corporate governance. The company environment is becoming more complex and changing rapidly, while competition is getting tougher. For these reasons, it is important for independent individuals to provide their support to the entrepreneur, male or female, when making important decisions. A strict separation of powers prevents the success or failure of the company being the responsibility of a single person or group of interests. 

Self-limitation

Financial partners want to limit their risk. In the interests of the company and reduced risk, it is desirable that:

  1. All areas and organs of the company (for capital companies) are not dominated by just one person;
  2. Decision-making know-how is shared by more than one person;
  3. The processes within the company are transparent.

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Last modification 06.08.2018

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