Preferably 65 years old!
“We prefer 65-year-old CEOs and owners who want to sell their company. We generally do not accept mandates from anyone under the age of sixty.” It is rare to encounter such a pointed definition of a target group. Admittedly, it sounds rather uncompromising when this M&A consultant describes his ideal clients.
From his point of view, this makes perfect sense. The closer the CEO and owner gets to retirement age, the greater the pressure to act. Opinions always differ when it comes to the purchase price – especially when it is one's own life's work. However, if there is no time pressure to sell soon, deals often fall through just before the finish line. This happens more often among those under 60, who think to themselves: “I'll just keep going for another five years.”
Is that understandable? What is strategically clever for the M&A advisor proves to be less advantageous for the CEO and owner. Shortly before retirement, the scope of options narrows dramatically. Then, in most cases, the only option left is to sell. But is that really the best solution? For everyone involved? For customers, suppliers, and employees?
A look at M&A activity among small and medium-sized enterprises shows that, alongside digitalization, succession is one of the most common triggers for a transaction. This is reason enough to take a closer look at this issue and clarify key questions: Is a sale really necessary? What alternatives are there? What are the next steps? And when should you start?
What are the reasons for selling all or part of your company? When does it make strategic sense? Let's address these two questions first. The following situations, which have occurred repeatedly in recent years, provide possible answers.
Financing – Transformation costs money
Without adequate financing, any transformation remains a pipe dream. This does not refer to companies in acute financial distress or even insolvency. Their restructuring would also require considerable resources, but that is another chapter – in another article.
No, the focus here is on companies that are doing well financially. Nevertheless, the available cash flow is often insufficient to cope with necessary or sensible changes. The situations for this are manifold.
For example, an automotive supplier wants to move away from combustion engine components and switch to electric mobility. After all, not everyone just produces bumpers. This portfolio metamorphosis usually requires new technologies that demand different expertise than before. The transformation is rounded off with new production technologies. This is not only a major mental shift, but above all a very expensive one.
New production facilities are established for a variety of reasons. Relocating production abroad is only one motive. Sometimes existing premises are bursting at the seams, rental or lease agreements are expiring, or regulations are forcing a move. Depending on the scope of the project, parallel continued operation to ensure continuous customer supply, and possible social plans if the locations are too far apart, considerable financing requirements arise. In the case of fully automated production, the sums quickly run into the high double-digit millions — even the most experienced CFO pauses to think about that.
Added to this are industries in the midst of market consolidation. Often, one company starts the process, and all the others are forced to follow suit. In order not to be left behind or to be “swallowed up” themselves, the only option is to actively acquire competitors. This, too, cannot be done without the appropriate financing.
These are just a few examples of how successful companies can face significant financing challenges. These challenges can result in a sale or partial sale. Ideally, however, in such situations, the company should not just bring an investor on board who merely provides the necessary capital.
Skin in the game
The company is now in the comfortable position of having secured financing for upcoming changes, whether through moderate transformation costs, sufficient cash flow, or a generous investor. However, depending on the transformation project, money and leadership alone are not enough. The right expertise and experience are also required.
Digitalization provides a prime example of this. Without the necessary expertise, it is virtually impossible to even select and recruit the first suitable digital expert. Production relocations are highly complex and fraught with pitfalls. Anyone who wants to avoid these should bring the relevant expertise in-house.
A few years ago, there was a DIY-store supplier that had been successfully run by the same family for decades. It could have continued like this for several more years. Fortunately, the family recognized the need for change in their own company in good time. Even though all sales managers were equipped with smartphones, sales were somehow still stuck in the 1980s. Fit for the future definitely looks different.
The family was also aware that they lacked the experience to make such changes to the organization, not to mention the internal expertise in the company. The solution? They sold 50% of the shares to a private equity fund with the relevant specialization. This not only brought expertise and experience on board, but also many helping hands to support the transformation process. Not to be underestimated: the board now included a representative with sufficient skin in the game, so that they didn't turn back halfway just because it was getting tough.
With secure financing and the right mix of expertise and experience, any necessary transformation can be mastered, the company can be positioned for a sustainable future, and substantial additional value can be generated along the way. Is that the end of the story? Not at all — it could well continue.
Stepwise exit
Those who proceed skillfully and have brought a private equity investor on board for one of the two reasons mentioned above can elegantly use Private Equities’ investment logic to their advantage. Private equity funds typically sell their portfolio companies after a holding period of five to seven years. In this sales process, which is usually professionally orchestrated thanks to private equity experience, it is then possible to completely exit one's own company and enter retirement.
A service company with an plain me-too strategy was facing precisely this situation. It was unable to make the leap into the growth phase on its own. The founder and owner was planning to retire in the next 5-10 years. However, in its current state, the company was hardly saleable.
He brought a professional investor on board at the right time, who contributed both expertise and financing for the upcoming changes. Together, they prepared the company for the growth phase and took the first steps toward expansion. After just under seven years, the company was sold in its entirety to the next investor, who was able to immediately devote himself to intensive growth. A happy ending for everyone involved.
The planned and timely partial sale paved the way for the complete exit. The private equity investor increased the pressure on the subsequent sale process. There was no turning back.
Before you get the impression that we are singing the praises of private equity investments in medium-sized companies, it makes perfect sense in many situations. All three scenarios demonstrate thoughtful strategic action. In no case is the decision to sell or partially sell made at the eleventh hour. Instead, someone has given careful consideration to the future of the company beforehand.
And besides that? A great company?!
Entrepreneurs find themselves in a situation where succession has not been thought through, planned, and initiated ten years in advance — and strategic visions for the company are also in short supply. Nevertheless, the exit for founders and CEOs should now take place in the near future. What remains? Sale “as-is.”
This is very reminiscent of buying a used car “as is.” If you think back to the opening story, it certainly works. At least when the founder and CEO has reached a certain age and the pressure to exit is correspondingly high. If the price is right, there is usually always a buyer.
The info memo then talks about a fantastic company with countless opportunities for the future. The somewhat succinct “fantastic” can be replaced by countless other superlatives that praise the company to the skies. This immediately raises a few critical questions: If there are such great future opportunities, why haven't any of them been realized yet? Or at least started to be realized? And even more critically: Why sell a company that is doing so well?
If things are going so well, then why not just keep it? A solidly positioned company could easily be used to finance retirement simply through cash flow. Before investing the proceeds from the sale in a stock portfolio of companies whose products and strategies are unfamiliar, one could simply hold shares in a company that one knows inside out. Instead of a stock portfolio, company shares can also be passed on to children.
But if that doesn't happen, what does that say about the company? What does that mean for the organization? In short, there is probably a lack of confidence that things will continue to run smoothly without the founder and CEO. Difficult.
That's why you should only sell at sixty-five – then you can swallow the bitter pill of realization. The company isn't doing so well after all, the future isn't so bright, it's too late to start thinking about tomorrow. The value isn't as high as expected. Price reduction! But the pressure is on, and then the deal goes through. And everyone is happy...
A kind of carve-out from the CEO
If there were still time, if the seller were not over sixty, what options would there be? Sometimes, even at over sixty, there is still the opportunity to stay on board for another five years and push ahead with the necessary changes.
What is on the agenda? Essentially, it is quite straightforward: to structure the organization in such a way that it can be maintained with a clear conscience. This would essentially be a type of carve-out from the founder and CEO. To make the company independent of him. To dissolve all interdependencies between the founder and CEO on the one hand and the organization on the other.
This means changing processes so that they run through the “normal” responsible parties – not because it has always been that way. When it comes to recruiting, it is no longer Mr. Meyer who makes the final decision, but the responsible manager; after all, they are the ones who have to live and work with the new employee. Pricing is not based on Mr. Meyer's mood on a given day, but on a clear price list and a defined process.
What if the managers described above do not exist? Then it is essential to establish an organization that can make and implement decisions independently. A sustainable structure that relieves the CEO and functions even when he is on vacation, without the company coming to a standstill.
In most cases, there are many implicit rules, processes, tactics, and treasures of know-how. These must be made explicit, at least the important ones. They need to be documented. And yes, they must be transparent. Then it is easy to check whether this is really how things are done or whether success lies elsewhere.
Preparation is everything. That will take time. The positive aspect? The founder and CEO has enormous influence on this. The sooner he can let go and give the organization the chance to emancipate itself, the faster things will progress. There it is again, the question of trust. But if you can't trust the organization while you're still on board as CEO, you won't trust it when someone else takes the helm either. After all, the new CEO won't save the world on their own.
Ultimately, it remains a strategic question
If you don't want to be faced with the bitter truth at the last minute, you need to sit down earlier and answer the question — less for yourself than for the company: What will the future look like when you retire?
Is a future with a different CEO conceivable? It could well be someone from within the family. But more importantly, is there enough trust in the organization that, if in doubt, the shares can simply be retained? Does the future require extensive changes or even a fundamental transformation that requires a financial and strategic partner?
Ultimately, it remains a strategic question. It should be addressed at an early stage, not just twelve months before the planned retirement. And it should be done explicitly. For companies that are (still) highly dependent on their founder and CEO, this should be part of the strategy. Certainly not right at startup phase, but about ten years before the planned or expected retirement.
This gives customers, suppliers, and employees the certainty that work is being done to secure their future and the future viability of the company. Ultimately, it remains a strategic question, but one that is better asked at the outset.
