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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