Establishing and developing a business, or taking over and further expanding one, is a lifetime achievement. Thus, succession can become emotional for entrepreneurs, who may tend to postpone it for (too) long. How can you make sure that your succession planning is timely and beneficial?

According to Dun & Bradstreet, over the next five years more than 91,000 small and medium-sized enterprises in Switzerland will encounter succession issues. In the worst case, this may lead to the dissolution of the company and to the destruction of jobs, capital and expertise. Particularly affected are businesses employing 10 to 49 people (15.4 percent) and up to nine people (15.2 percent). At 7.8 percent, the ratio of companies employing 50 to 249 people is only half as high. It appears that entrepreneurs who run larger companies are able to plan and arrange their succession in advance.

The right time for succession planning

It is best to plan your succession sooner rather than later. Usually, family businesses handovers take years:

  • 6.6 years, if you arrange the succession within the family (Family Buy-out)
  • 3.3 years, if you sell the company to employees (Management Buy-out)
  • 1.6 years, if you sell the company to outsiders (Management Buy-in)

According to the study, this relates to the time required from the first conversation to the actual handover. For example: if you wish to retire at 65 and hand over the company to your descendants, you should consider planning your succession at the age of 58, at the latest.

Four possible succession solutions

Out of five SMEs, two will continue to be run by the family, one will be taken over by management and two will be sold to third parties. All succession solutions have both advantages and limitations:

  • Family buy-out: Most entrepreneurs hope for their descendants to carry on with their life’s work. The best way to take over for the new generations is for the children to enter the company early, learn the business firsthand and earn the respect of their employees – if this is what they want. It is often difficult for many parents to assess whether their children have the required skills.
  • Management buy-out: Without descendants, or if the children are not able to run the company, or they prefer not to, the existing management represents the most obvious solution. Employees know the market, understand the business and their skills have been tested. Furthermore, continuity is important for maintaining trust from the part of clients, partners and employees. Often, at this stage, different ideas about the value of the company emerge: this is a matter which need to be resolved.
  • Management buy-in: Increasingly, family businesses are being sold to third parties, outside the family and the company. On the one hand, the sale secures the future prospects of the company, because new owners bring in innovative ideas. On the other hand, sales proceeds are generally higher than in the case of a transfer to descendants or a management buy-out – among other things, because of the research for an external strategic buyer. Moreover, a sale avoids potential inheritance disputes, as proceeds can be distributed fairly more easily.
  • Trade Sale: Companies with no succession solutions within the family itself are often sold to strategic or industrial investors, usually other companies from the same industry. Generally, stock corporations or limited liability companies have all of their shares sold (asset deal), which simplifies the subsequent distribution of the inheritance, such as in the case of management buy-in.

What about the previous owner?

As a result of many family buy-outs or management buy-outs, the previous owner remains financially involved in the company, because the descendants or the management are not sufficiently liquid to take over all shares. In companies with high liquidity, this can be resolved via debt dividend, which, however, restricts corporate flexibility. Another factor to be considered is whether the owner wants to give up the business entirely or they still want to make a strategic contribution.

Good advice has great value but is not expensive

When planning their succession, many tend to listen to their heart. However, you should also listen to your head: A consultant can help you to weigh emotional and rational arguments in order to find, or give up on, a succession solution. Individual succession planning is based on various important aspects, including:

  • Analysis of the current situation, including pension scheme, risk analysis, company valuation and financial assets
  • Target analysis including personal (financial) goals and the vision for the company
  • Scenarios assessing the financial, legal and tax consequences for the family and the business
  • Recommendations for marriage and inheritance contracts, family constitutions, wills or advance healthcare directives

A serious consultant should listen, ask questions and only recommend solutions when they have fully understood all of your wishes and the needs of both the family and the business. On this basis, they will work with you in order to develop an overall concept, taking into account all the requirements. They support you, your family and the management through the entire succession process and can mediate in the event of conflicts. This ensures that all family members are treated fairly and that none of them feels penalized.

Tip: An independent consultant familiar with company sales, well networked in the private equity field and with an understanding of the emotional aspects is instrumental to a successful succession solution.

The advantages of succession planning

The sooner you think about your succession, the easier the generational shift, the change of course or power is going to be for everyone. You have the chance to train your successor with no pressure, gradually withdraw from daily business and enjoy your well-deserved retirement in a relaxed and worry-free manner. This allows your successor to have more time to learn from you before they take on the responsibility. Furthermore, employees have more time to prepare for new tasks and learn new skills. Indeed, well-thought-out succession planning takes years.

“In addition to the financial, legal and tax aspects, emotion plays a central role in succession planning. For this reason, entrepreneurs should deal with their succession at an early stage.”