Thinking about succession arrangements for your company and looking for an independent partner to provide you with professional advice? Every corporate succession process has its challenges, especially if it involves an owner-managed business, so it’s important to have someone you can turn to early for advice – someone you can trust as an experienced consultant ... like KP Tech.
Why you should plan handing over to the next generation early.
The benefit to you: In addition to its experience in front-line business management, KP Tech looks back on many years of consulting in different sectors of industry. If required, we support clients already gearing up for corporate succession. This allows us to lay a solid foundation for successful transition to the next generation – and optimise corporate value. As well as advising companies on restructuring, we also provide advice on separating management and capital, as well as the design of corporate governance management and control systems. In a partnership of equals – tailored to your individual ideas and aspirations.
Corporate finance consulting: corporate succession
Corporate succession glossary:
Key things to know about handing over to the next generation.
Company succession: advice and alternative succession planning
Family owners basically have two alternatives when it comes to company succession arrangements: hand over to somebody within the company or find an external solution.
If you choose an internal company succession arrangement, either a family member or a manager currently working for the company takes over.
External succession can be solved by arranging a management buy-in or selling the company.
We can explain the pros and cons of the different approaches to corporate succession and advise you on the various options.
Management buy-in (MBI)
It’s fairly common to find that there is no suitable candidate within the family of the shareholder(s) to become a successor. In such cases, one option is to bring in a manager from outside the company. This external manager acquires a majority of up to 100% shares and becomes a member of the management board.
Buy-ins are often financed by banks or vendor loans.
Often, management buy-ins also involve the participation of private equity investors to finance the share purchase. The current shareholders then gradually step back from managing the company.
An important benefit of an MBI is the injection of energy new managers bring to the company. After MBIs, the new ideas, different outlooks and management experience from other companies tend to fuel faster growth at the company.
The biggest challenge with an MBI is the chemistry between the current shareholders (family members) and MBI candidates.
Management buy-out (MBO)
One alternative to an MBI is an MBO. With this form of corporate succession, the company shares are taken over by current employees or managers.
The advantage of management buy-outs is that candidates already have experience and knowledge of the company.
Owning a share of a company generally boosts motivation among staff and managers, who take over shares from the founders for the MBO. One advantage compared to MBIs is that it takes less time for people to familiarise themselves with the new set-up and as a result, the previous shareholders can exit the company more quickly.
The disadvantages of MBIs usually come when purchasing the shares. The company successors in management typically lack the required equity. As a result, the succession arrangement is often financed through a combination of loan capital, private equity and vendor loans.
Third-party management as an alternative to selling a company
Another alternative to arranging a company succession is to bring in managers from outside the company to run the business. The current shareholders withdraw and adopt a role on an advisory board or supervisory board.
As a result, with third-party management there is a separation between running the business and capital arrangements.
In contrast to an MBI, the new manager from outside the company does not take over any shares in the business. The current shareholders retain their control of the company and may participate in the long term through profit dividends and appreciation in the value of the business. If it turns out that the new manager is not a good fit with the company, compared to MBI or MBO candidates it’s easier for shareholders to replace the appointee with a new manager.
Setting up a foundation as an alternative to corporate succession
Setting up a foundation is a long-term commitment that often stays in place for many decades. It also means that selling the company is no longer a simple option. The aim of setting up a foundation as part of succession arrangements is thus to secure the existence of the company in the long term.
One important advantage with setting up a foundation as part of succession arrangements comes with tax benefits. Unlike making a gift, with a foundation no inheritance tax is incurred. The current shareholders determine the purpose of the new foundation and this cannot be changed, even when shareholders pass away.
With a foundation, the existing shareholders continue to wield influence over the corporate strategy. The existing shareholders continue to exert a strong influence on the company through the advisory board.
One crucial aspect with a foundation is the foundation charter. This should therefore be drafted extremely carefully by an experienced law firm with the support of the shareholders.
If shareholders decide to cash in on the value of their shares by exiting management, the company should be sold.
Often the potential buyers of those shares are private equity companies and strategic investors.
When they sell the company, the shareholders should bring an experienced M&A consultant on board to make appropriate preparations and conduct the M&A process. Failing to involve consultants with experience of M&A processes often results in the sellers making expensive mistakes and forfeiting major sums of money by selling the company below value.
Company succession – financing a company without regulating company succession arrangements leads to significantly worse terms
Having succession arrangements in place at an early stage improves the credit rating of a company, and this is reflected in the conditions and options of corporate financing. Banks even downgrade the rating of a company when a managing shareholder turns 55 years of age, because unresolved company succession arrangements entail a higher level of risk for lenders.
For this reason, company shareholders should take early steps to initiate corporate succession arrangements in order to find a successor and complete the intended handover process successfully.
In our experience, based on many years of advising companies on corporate succession, the process of handing over professionally to a successor takes at least three years. For this process to succeed, all arrangements should be planned early and in detail. The process should also be carried out with the support of a consultant with experience in corporate succession.