Financing the business succession

6 practical tips for financing business succession

Time and again, the difficult financing of business succession is pointed out as one of the biggest obstacles for successors. Just as Gerald Grusser, Chief Executive Officer of the Erfurt Chamber of Industry and Commerce (IHK), did in a recent press release. What are the reasons? How can succession financing be well prepared. We give six tips for a promising financing request.

Obstacle Financing?

Financing remains the greatest obstacle to business succession ? even though the environment is currently extremely favourable with historically low interest rates," says Grusser, head of the Erfurt Chamber of Industry and Commerce. The press release goes on to say that despite this, almost every second successor had financing problems. The current plans of the Basel Committee on European banking regulation aggravate the situation even more.

But is this the only reason? After all, the house banks of companies due for a generational change are mostly interested in a good succession solution and thus the continuation of an established business relationship.

House banks are interested in customer relationships

Because in our opinion, only part of the problem seems to be due to the banks' increasing equity requirements (Basel I-III). Rather, the financing of a business succession often fails due to its lack of preparation well before the decision for or against a loan commitment.

Thus, a good preparation of a financing request should answer the following questions:

1. is the company capable of succession?

An essential criterion for banks is a company's ability to succeed. A company is always fit for succession if the (new) company owner pays himself a normal market entrepreneurial wage and the equity capital earns a positive interest rate.

If the aforementioned is already not answered, in short, it becomes tight with the planned financing of the business succession by a bank.

2. does the business plan accurately represent the company's future expectations?

The business plan describes the company buyer's plan in detail: A business plan presents the company's goals for the next three to five years. It describes with which strategy and which (financial) means the company will achieve the set goals in the competitive environment.

It goes without saying that a realistic business plan must be submitted. Significant increases in turnover or cost reductions must be justified in a comprehensible way. If you think about your business plan in terms of realistic alternatives, plan conservatively and can also give plausible reasons, you will easily convince a banker of your plans.

Here you can find more Tips for creating a business plan for the financing of business succession.

3. am I the right person to continue running the company?

An essential point in all financing discussions is the person of the successor. Not only senior entrepreneurs but also banks ask themselves whether the successor is professionally and personally suitable to take over the company. If the company is small and therefore very much shaped by the owner, the appropriate professional qualifications of the successor play a particularly important role in the bank's risk assessment. A certain closeness to the industry pays off for a takeover bidder.

In larger companies, a company owner often has the support of a second management level. In individual cases, a generalist from a different sector or an absolute specialist can take over the company. At this point, the risk assessment pays close attention to the soft factors and social competences in addition to the technical ones.

In any case, it must be explained how gaps in know-how are to be reduced or compensated for by the second management level.

Click here for the second part, which deals with equity capital, personal guarantees and the documents required for a financing application.

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