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Business succession in small and medium-sized enterprises – the biggest mistakes
A successful business succession is crucial to a company’s future. By avoiding common pitfalls at an early stage and planning the handover process strategically, you lay the foundations for a successful generational transition. The most common mistakes include planning too late, a lack of financial strategies, unresolved succession issues and inadequate legal preparation.
- Planning business succession in SMEs at an early stage – ideally 3 to 5 years in advance
- Demographic change is exacerbating the succession gap in SMEs
- Internal and external succession solutions offer different opportunities
- The biggest challenges are finding a successor, financing and business valuation
- Good preparation increases the chances of a successful business handover
- The most common mistakes are planning too late, unrealistic expectations regarding the purchase price and a lack of financing strategies
- Factoring can support business succession by providing liquidity and creating financial flexibility for the handover process
What is business succession?
Business succession refers to the planned handover of a business to a new owner. The aim is to ensure the business’s continued existence and to make the change of leadership as smooth as possible. Succession may take place within the family or involve external successors, such as employees, investors or other companies.
In small and medium-sized enterprises (SMEs) in particular, business succession is one of the most important strategic decisions. It affects not only the owners, but also employees, customers and business partners. Early planning helps to clarify legal, tax and financial issues in good time and to safeguard the value of the business in the long term.
Experts recommend preparing for business succession at least three to five years before the planned handover. Recent studies highlight just how great the need for action has become among German SMEs.
Business succession in small and medium-sized enterprises:
Latest developments & facts
Business succession is one of the greatest challenges facing German SMEs. Demographic change, a growing shortage of suitable successors and changing market conditions are increasing the pressure on business owners to plan their succession at an early stage. As more entrepreneurs approach retirement, finding suitable successors is becoming increasingly difficult, raising the risk that otherwise successful businesses may have to close. Early succession planning significantly improves the chances of a successful transition by providing enough time to identify suitable successors, secure financing, negotiate a fair company valuation and ensure the long-term continuity and competitiveness of the business.
How does business succession work in small and medium-sized enterprises?
Business succession often takes several years. By planning well in advance, you can make strategic preparations for financing, business valuation and the search for a successor, and avoid common pitfalls.
What types of business succession are there?
Broadly speaking, there are two approaches to business succession: internal succession within the existing business or the family, and external succession through buyers or members of the management team. Which solution is the right one depends, amongst other things, on the owners’ personal goals, the structure of the business and the availability of suitable successors.
Internal succession within the family
In the case of internal business succession, a family member usually takes over the management and ownership of the business. This is often the preferred solution, particularly for family businesses, as it ensures that the company’s values, expertise and long-standing customer relationships are preserved within the family.
However, successful succession within the family requires that all parties involved agree at an early stage on the timing of the handover, the allocation of roles, and the financial and legal framework. Open communication and long-term planning are crucial factors for success.
External succession by a buyer or management
If there is no suitable successor within the family, an external business succession may be considered. In such cases, the business is sold, for example, to start-up entrepreneurs, investors or other business owners.
Another option is a so-called management buy-out (MBO). In this scenario, a member or a team from the existing board of directors or management takes over the business. The advantage is that the successors are already familiar with the business, the staff and the internal processes, and can continue business operations without a lengthy handover period.
Regardless of the form of succession chosen, the following applies: early preparation creates the best conditions for a successful handover and increases the chances of ensuring the company’s long-term survival.
What are the biggest challenges facing small and medium-sized enterprises when it comes to business succession?
- Finding suitable successors
- Business Valuation and Financing
- Preparing for the handover of the business
Finding a suitable successor is one of the greatest challenges facing German SMEs. Demographic change means that more and more business owners wish to hand over their businesses, whilst at the same time there are fewer suitable successors available. In the case of family-run businesses in particular, there is the added factor that a handover within the family is now far less of a given than it was a few years ago.
It is therefore worth exploring various options at an early stage – ranging from a handover within the family, through a management buy-out, to a sale to external buyers. The more time there is to act, the greater the chances of finding a suitable and sustainable succession solution.
Another key to success is a realistic business valuation. This forms the basis for purchase price negotiations and ensures transparency for all parties involved. At the same time, it is essential to ensure that the financing of the business takeover is viable. This is particularly true in the case of external succession arrangements.
Depending on the size of the business and the succession model, various financing options may be considered. Early financial planning simplifies the handover process and provides certainty for both the seller and the buyer.
In addition to economic considerations, legal, tax and organisational issues also play a key role. Articles of association, tax implications and inheritance law matters should be discussed with specialist advisers at an early stage. Equally important is open communication with staff, customers and business partners in order to build trust and avoid uncertainty during the handover.
Structured preparation ensures that the change in company leadership proceeds smoothly and that the business can continue to be run successfully in the long term.
Marc Meier
Geschäftsführer A.B.S. Factoring AG Schweiz
What mistakes should companies avoid when planning business succession?
Business succession is a complex process in which strategic, financial and personal decisions are closely intertwined. If key issues are addressed too late or misjudged, this can delay or even jeopardise the handover process. However, with early planning and a clear strategy, many typical mistakes can be avoided.
The most common mistakes at a glance:
- Planning business succession too late
- Failing to find a suitable successor
- Misjudging the value of the business
- Leaving financing arrangements until too late
- Neglecting future viability and modernisation
Mistake #1: Planning business succession too late
One of the most common reasons for failed business succession is starting the planning process too late. Many business owners only begin to consider handing over their business shortly before retirement. By then, there is often too little time left to find suitable successors, maximise the value of the business or sort out tax and legal issues.
Mistake #2: Failing to find a suitable successor
Demographic change is making it increasingly difficult to find suitable successors. At the same time, succession within the family is by no means a given these days. Anyone who relies solely on one option risks unnecessary delays or even the failure of the business handover.
Mistake #3: Misjudging the value of the business
The value of a business forms the basis of any business succession. Unrealistic price expectations complicate purchase price negotiations and can deter potential buyers. At the same time, the factors that have a positive impact on a business’s value – such as stable earnings, modern processes or a sound financial structure – are often underestimated.
Mistake #4: Sorting out the funding too late
Planning financing at an early stage provides planning certainty for both sellers and buyers. Many buyers initially rely exclusively on traditional bank loans. However, depending on the size of the business and the succession model, a range of different financing solutions are available today. Factoring can be a useful addition to this, helping to free up liquidity and make the financing of business succession more flexible.
Mistake #5: Neglecting future-proofing and modernisation
Business succession is not just about a change of ownership, but also about the company’s future competitiveness. However, investments in digitalisation, modern processes or new business areas are often postponed until after the handover. Yet potential buyers are paying increasing attention to how well a company is positioned for the future. Investing in efficiency, digitalisation and growth before the business succession takes place not only enhances the company’s attractiveness but also increases its value.
Successfully financing business succession
Successful business succession requires not only the right successor, but also the right financing for the handover process.
Our experts will help you find the right financing solution for your business succession – tailored to your individual needs and the specific requirements of your business.
Frequently asked questions about business succession in small and medium-sized enterprises
Business succession in small and medium-sized enterprises is usually a process that takes several years. Experts recommend starting the succession process at least three to five years before the planned handover. This allows sufficient time to find suitable successors, optimise the value of the business and carefully prepare the financing for the succession.
Business succession is often financed through bank loans, equity, grant schemes or seller loans. Depending on the size of the business and the succession model, alternative financing solutions may also be appropriate. Factoring, for example, can boost liquidity and create additional financial flexibility – both during the business succession process in small and medium-sized enterprises and in the subsequent growth phase.
Yes. Factoring can help businesses secure their liquidity during the business succession process. Selling outstanding receivables frees up tied-up capital, thereby creating financial scope for investment, modernisation or financing the purchase price. Particularly in the case of business succession in SMEs, Full Service Factoring can be a useful complement to traditional forms of financing.
The enterprise value forms the basis for purchase price negotiations and the financing of business succession. It is determined on the basis of, amongst other things, profitability, assets, market position, future prospects and risks. A professional business valuation creates transparency for both buyers and sellers and increases the chances of a successful business succession in the SME sector.
If no suitable successor can be found, this can have far-reaching consequences. Some companies opt to sell to external buyers, whilst others are forced to cease trading. That is why starting the search for suitable successors at an early stage is one of the most important factors for the success of business succession in small and medium-sized enterprises.
Among the most common mistakes made in business succession are planning too late, unrealistic expectations regarding the purchase price, inadequate financing and neglecting the company’s development. Those who avoid these typical business succession mistakes and prepare for the succession process at an early stage significantly increase the chances of a successful handover.
Various support schemes are available from the federal government, the federal states and development banks to assist with business succession. These include, amongst other things, low-interest loans, equity investment schemes and guarantees. Which support is suitable in each individual case depends on the size of the business, the investment project and the chosen financing structure.
Stable liquidity is a key factor in the success of any business succession. It enables investment, safeguards day-to-day business operations and provides financial flexibility during the handover process. In addition to traditional forms of financing, instruments such as factoring can help to improve liquidity and secure business succession in small and medium-sized enterprises in the long term.
Author of the article on business succession
Marc Meier is the CEO of A.B.S. Factoring AG Switzerland and president of the Swiss Factoring Association (SFAV). As a long-time expert in factoring and corporate finance, he assists companies in developing sustainable financing solutions and is actively committed to the further development of the factoring industry in Switzerland.
