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Why do entrepreneurs fail to plan adequately for their business succession?
More than one in six SMEs in Switzerland are looking for their next owner. This substantial figure, from a study by Dun & Bradstreet, is set to rise in the coming years as baby-boomers reach retirement age.
The stumbling block – based on more than 15 years’ experience of supporting sales, acquisitions and valuations of businesses in Switzerland – is that entrepreneurs underestimate the complexity of the undertaking, which in most cases is something they will embark on only once in their lifetime.
There can be myriad reasons for this:
- A lack of objectivity that comes from being overly focussed on day-to-day management
- The (false) impression that succession can only take place with their knowledge of managing the business that they have acquired over time
- A reluctance to address such a sensitive subject, particularly with family
Ultimately, this is an asset – the company and its employees – that is often central to the owner’s wealth and has a strong emotional pull, in addition to its financial importance. It would be a shame to build a successful business over the years only to fail to fully reap the benefits of this investment for lack of adequate forethought.
What is the key to success? Proper preparation in advance and support from experts with experience of the process, which is rigorous, codified and technical. Here are three tips to optimise the conditions for passing on your business.
1. structure your business to maximise its valuation
You wouldn’t dream of running a marathon without training for it. There is a similar logic to selling or handing on a business: this is not an area where you should be winging it. The first step is to put in place robust processes and a clear organisational structure, if these are lacking.
The aim is to make the company less and less dependent on the CEO or key personnel. At the same time, you want to ensure that the economic model is underpinned by solid foundations so as not to undermine the company’s valuation, or even the feasibility of the transaction. This encompasses items such as accounting, financial reporting and contracts with employees, clients, suppliers, etc.
At this stage, an outsider’s view can open an entrepreneur’s eyes and help them to gain greater objectivity. Let’s take the case of the CEO of a retailer, who realised on going through such an exercise that the lease on the company’s main shop would soon be expiring and that the building would benefit from major refurbishment.
It was necessary to secure new premises in a prime location before embarking on the sale process. This corrective action took time, allowing the entrepreneur to act calmly, not hastily.
2. plan ahead for personal and family issues
In essence, selling a business means suddenly liquidating a large part of an entrepreneur’s assets. Under certain circumstances, it can be wise to first put in place measures to optimise your tax position and preserve your wealth by means of efficient asset allocation.
This process often unavoidably involves formalising in advance what the implications will be for the transferring owner’s family. That might involve lifetime gifts, protection for family members or estate planning. Above all – particularly when handing over the reins to others in the family – it is crucial to define the governance structures that will apply between family members.
3. see the transfer of ownership as a stage in your life and not an end in its own right
Entrepreneurs often overlook the psychological aspect of an experience like this, and some even compare the experience of selling up to a bereavement. Our recommendation is to imagine yourself in the future before you even start the process of passing on your business.
Transferring ownership of your business is not an end in itself: it is a way of giving you the means to achieve your next objectives in life. In one case where we supported an entrepreneur on a business transfer, he also needed a huge amount of discussion to help him forge plans for the next chapter in his life, based around one of his passions.
More than ever, wanting to sell your business and being ready to do so are two very different things.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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