External Succession: Strategic Buyers and Financial Investors

External Succession: Strategic Buyers and Financial Investors

External succession is a significant option for entrepreneurs who wish to transfer their business to external parties. Unlike internal succession, where leadership remains within existing structures such as family members or employees, external succession involves selling the company to strategic buyers or financial investors. These succession models offer distinct advantages and challenges that must be carefully weighed to ensure a successful business transfer.

For many entrepreneurs, external succession often represents the only realistic option, especially when no suitable internal successors are available or the necessary financial resources for a management buyout are lacking. However, the decision to pursue external succession should not be made out of necessity but rather understood as a strategic decision shaping the future of the company. A professionally executed external succession can not only secure the continuity of the business but also generate new growth impulses and maximize the potential for successful further development.

Strategic Buyers: Synergies and Growth Potential

Strategic buyers are typically companies from the same industry or related sectors that seek to strengthen their market position, expand their product portfolio, or grow geographically through the acquisition of the target company. These buyers bring not only capital but also valuable resources, expertise, and networks that can foster the growth and competitiveness of the acquired business.

A key advantage of external succession through strategic buyers lies in the potential synergies arising from the integration of the two companies. The merger can lead to cost reductions, efficiency improvements, and the opening of new market opportunities. Additionally, strategic buyers often have established sales and marketing channels that can accelerate the growth of the acquired company. These synergy effects may manifest across various areas: from procurement and production to marketing and distribution.

Strategic buyers are frequently willing to pay a higher purchase price than financial investors because they incorporate the strategic value of the acquisition into their valuation. This strategic value can stem from eliminating competition, gaining access to new technologies or markets, expanding the customer base, or strengthening negotiating power with suppliers. Furthermore, strategic buyers often provide better continuity for the employees of the acquired company, as they tend to largely maintain existing structures and processes.

However, acquisition by strategic buyers can also present challenges. Differences in corporate culture, management style, or long-term objectives may lead to tensions and complicate integration. Therefore, it is crucial to find a buyer who is not only financially sound but also shares the company’s values and vision. Thorough due diligence and transparent communication throughout the process are essential to minimize cultural and operational integration issues.

Financial Investors: Capital and Expertise for Growth and Restructuring

Financial investors, particularly private equity firms, represent another important group of external successors. These investors specialize in injecting capital into companies to increase their value and later sell them for a profit. Financial investors bring not only financial resources but also strategic expertise and management support that can assist companies with restructuring, expansion, or optimizing business processes.

The main advantage of external succession through financial investors lies in the provision of capital that can be used for growth, acquisitions, or improving operational efficiency. Additionally, financial investors provide access to a broad network of industry experts and potential business partners who can strategically support the company. Their expertise in financial management, strategy development, and operational excellence can be decisive in maximizing company value.

Private equity firms often have extensive experience in corporate governance and can provide valuable impetus for professionalizing business processes. They bring proven management methods and systems that can help especially medium-sized companies enhance efficiency and improve their competitive position. Many financial investors have specialized teams focused on specific industries or functional areas, thereby contributing targeted know-how.

Another important aspect is the possibility of a phased succession. Many financial investors offer the previous owner the option to retain a portion of their shares and remain involved in the company. This can be an attractive option for entrepreneurs who want to gradually step back from operational responsibilities while still benefiting from future growth.

However, collaboration with financial investors can also pose challenges. Financial investors often have specific return expectations and time horizons that may influence the company’s long-term direction. Moreover, investor influence on strategic decisions can increase, potentially leading to conflicts of interest. It is therefore important to establish clear agreements and governance structures to align the interests of both parties and ensure harmonious cooperation.

Hybrid Succession Models and Alternative Investors

In addition to traditional strategic buyers and private equity firms, hybrid succession models and alternative investors have gained prominence in recent years. Family offices, sovereign wealth funds, and industrial holdings often pursue longer-term investment strategies than traditional financial investors and can thus represent an interesting alternative. These investors frequently combine elements of both approaches: they bring both financial resources and strategic expertise without the short-term return pressures typical of many private equity firms.

Search funds and entrepreneurial acquisitions are also becoming increasingly relevant, especially for small and medium-sized enterprises. In this model, often young executives or entrepreneurs specifically acquire companies to operate and develop them further. These buyers frequently bring fresh ideas and modern management approaches while respecting the established structures and cultures of the company.

Valuation Methods and Price Determination

Business valuation plays a central role in external succession. Different valuation approaches are applied depending on the type of buyer. Strategic buyers often base their valuation on synergy potentials and strategic advantages, whereas financial investors primarily focus on expected cash flows and returns. A professional valuation by external experts is therefore indispensable to develop realistic expectations and establish a solid basis for negotiations.

Various valuation methods such as discounted cash flow (DCF), multiples, or asset-based approaches can be applied depending on the industry and type of company. It is important not only to determine the current value of the business but also to consider the potential for future value appreciation. A detailed analysis of market position, competitive advantages, and growth prospects is crucial.

Preparation and Planning for a Successful External Succession

Preparing for external succession requires careful planning and strategic consideration. Entrepreneurs should start early to prepare their company for a potential sale by optimizing financial and operational structures and ensuring transparent documentation of all business processes. A realistic business valuation is equally critical to achieve the optimal sale price and attract potential buyers.

Optimizing company structures should begin several years before the planned sale. This includes professionalizing reporting systems, implementing modern controlling tools, and standardizing business processes. Diversifying the customer base and reducing dependencies can also significantly increase company value. Legal and tax structures should be optimized as well to avoid deterring potential buyers and to accelerate the transaction process.

Engaging external advisors such as M&A specialists, tax consultants, and attorneys can greatly facilitate the succession process. These experts provide valuable support in identifying potential buyers, conducting due diligence, and negotiating contract terms. They can also help optimize tax aspects and avoid legal pitfalls that could delay or increase the cost of the sale.

Clear and transparent communication is another essential success factor for external succession. Entrepreneurs should inform their employees, customers, and business partners about succession plans early to reduce uncertainty and strengthen trust in the transition process. Open communication helps gain stakeholder support and ensures a smooth handover.

The Sales Process: Structured Approach for Optimal Results

A structured sales process is crucial for the success of external succession. It typically begins with a confidential market analysis and identification of potential buyers. This is followed by the preparation of a compelling information memorandum that presents the company and its strengths optimally. Approaching potential buyers should be targeted and professional to attract qualified investors.

The actual sales process usually consists of several phases: after initial contact and the provision of a teaser document, interested buyers sign a confidentiality agreement. They then gain access to a data room containing detailed company information. Concurrently, management presentations take place, during which the leadership team introduces themselves and explains the company’s strategic outlook.

Following the submission of indicative bids, the due diligence phase begins, during which remaining bidders conduct a thorough examination of the company. This phase requires intensive preparation and support from the seller’s team. Finally, the final offers are evaluated, and contract negotiations are conducted with the selected buyer.

Tax and Legal Considerations

The tax implications of external succession can be significant and should be incorporated into planning early on. Depending on the company’s legal form and the structure of the sale, different tax optimization opportunities may be available. The sale of shares is subject to different tax regulations than the sale of assets (asset deal). Utilizing tax exemptions and optimizing the timing of the sale can also yield substantial tax benefits.

Legal aspects such as shareholder agreements, employment contracts, and licenses must also be carefully reviewed and, if necessary, adjusted. Change-of-control clauses in contracts can complicate the sales process and should be identified and addressed in advance. The structuring of warranties and representations in the purchase agreement also requires careful consideration and professional advice.

Success Factors and Common Pitfalls

Successful external succession depends on various factors. In addition to thorough preparation and professional advice, timing is critical. The optimal sale timing should consider both the company’s development and market conditions. Selling during an economically challenging phase or when company figures are declining can result in significant valuation discounts.

Common pitfalls in external succession include incomplete or insufficient documentation, unrealistic price expectations, and inflexibility during negotiations. Underestimating the time commitment and emotional strain of the sales process often leads to problems. Entrepreneurs should be aware that external succession typically takes 12 to 18 months and requires substantial resources.

Best Practices for External Succession

To ensure successful external succession, entrepreneurs should observe several best practices:

Strategic Preparation:

• Early planning with a lead time of 3-5 years
• Optimization of company structures and processes
• Development of meaningful reporting systems
• Diversification of the customer base and reduction of dependencies

Professional Support:

• Engagement of experienced M&A advisors
• Collaboration with specialized tax consultants and attorneys
• Utilization of networks and industry contacts
• Regular valuation and market analysis

Process Optimization:

• Structured buyer approach and selection
• Professional preparation of information memorandum and data room
• Systematic due diligence preparation
• Clear communication and expectation management

Strategic Decisions:

• Realistic valuation and price determination
• Consideration of non-financial aspects
• Flexibility in negotiations
• Long-term perspective beyond the sale

Conclusion

External succession through strategic buyers and financial investors offers entrepreneurs diverse opportunities to successfully transfer their business while unlocking new growth potential. While strategic buyers bring synergies and industry-specific know-how, financial investors provide capital and strategic expertise for optimizing and expanding the company. Careful planning, professional advice, and transparent communication are essential to overcome the challenges of external succession and ensure a successful business handover.

The decision to pursue external succession should not be based solely on financial considerations but also take into account the long-term prospects of the company and its stakeholders. A professionally executed external succession can not only secure the company’s continuity but also promote its further development and growth. By considering the specific advantages and risks of the various succession models, entrepreneurs can select the appropriate form of external succession and entrust their life’s work to the right hands.

The complexity of the topic requires an individualized approach tailored to the specific needs and goals of the respective company and entrepreneur. With the right preparation, professional support, and a well-thought-out strategy, external succession can become a successful conclusion to an entrepreneurial career and simultaneously a promising new beginning for the company.