How high are the costs of a business succession or an M&A project? This is a question asked by many family entrepreneurs who are about to sell their business. The following comparison first presents the individual compensation models and their advantages and disadvantages. In summary, we take a look at the level of costs an entrepreneur has to reckon with.
There are basically three models in the market for business succession advice:
- Fee on a contingency basis
- Monthly fees + success commission
- Consultancy fee + success commission
Fee on a purely contingency basis
There are business brokers or agents who offer their services purely on a contingency basis. In this type of succession support, the focus is often on trying to close a deal quickly. The individual characteristics of a family business, a solid analysis and the preparation of comprehensive sales documents usually receive insufficient attention. However, if a sale takes too long or becomes demanding in terms of support, many advisors also lose interest and turn to the next project. The M&A project is then mostly over for the time being.
The costs of a business succession are then zero. A revival of the project can then often only be expected after some time. Especially in manageable sectors, a new start is unlikely to have a positive effect on the achievable sales price.
Watch out for unclear mandate relationships
Caution is advised if the remuneration model deviates from the buyer principle and thus suggests a conflict of interest: In this case, an advisor is only supposedly mandated by the seller. However, the success commission and other costs of a business succession are to be paid by the buyer. This is often a clear indication that the client relationship has not been clarified. A serious M&A advisor represents his client and is also remunerated by him according to his performance.
Hans-Reinhart Grünbaum, lawyer at the Frankfurt Chamber of Commerce and Industry, also commented on this in an interview with the Nachfolgeclub Sachsen-Anhalt: ‘Serious advisors I know only exceptionally accept the wish to be paid exclusively on the basis of success. A well-founded service is associated with a workload that should not be underestimated. The success of the placement, on the other hand, depends only partly on the consultant.
For this reason, it has proven useful to consider and remunerate counselling and mediation separately. In practice, the following two models have become established.
Monthly fees + success commission
Particularly in the case of very large corporate transactions, remuneration on the basis of monthly lump sums (so-called “retainers”) with a subsequent success commission has become established. For the client, this results in a certain degree of predictability.
In family-run SMEs, however, this approach often leads to a typical Advice trap in business succession. The fees resulting from such a service contract with a term of up to two years quickly increase the costs of a business succession or an M&A project to several tens of thousands of euros. A concrete service description and project plan are usually missing. Concretely measurable results are also often missing.
Since reputable advisors do not earn their money through high monthly lump sums, it is worth taking a look at the following model:
Consultancy fee + success commission
A clearly defined offer with a service description makes the costs of a business succession or an M&A project clear in advance. A written service description contains fixed prices for a business valuation with Enterprise value calculation or a meaningful exposé and time-dependent components for negotiation facilitation. A project plan records the essential milestones of the project as a deadline. Each service rendered thus becomes traceable. The commission due in the event of success usually fairly offsets significant parts of the upfront costs.
In rare cases, a lump-sum settlement of service packages is made upon achievement of pre-defined goals. This is, for example, the completion of the exposé or the signing of a letter of intent.
How high are the costs of a business succession or an M&A project?
Due to the complexity of a sales project, the exact amount of costs for a business succession or an M&A project cannot be reliably predicted in advance. Typical costs include e.g.:
- Preparation of a company exposé and a Business valuation;
- Search for company successors with examination of backgrounds and intentions
- Targeted approach of matched prospective buyers
- Negotiation support;
- Due Diligence (DD)Strengths and weaknesses of a company are examined in detail. In smaller companies, this is often done “manually” by inspecting files and contracts. For larger transactions, an online version in digital form is becoming increasingly popular. The time required for the buyer to prepare and carry out such an examination should not be underestimated. Experienced succession advisors help here, the Due diligence process structure and to keep the effort associated with such an audit as low as possible.
- Costs for tax advisors and lawyers to accompany all tax and legal issues, preparation of a LOI (letter of intent) and the purchase contract;
- Notary fees (usually paid by the buyer);
- Success commission.
“Looking back at the large number of projects carried out by K.E.R.N ? Succession Specialists, we can say that the average cost of a business succession or M&A project regularly ranges between 5 and 10% of the transaction amount,” says Ingo Clauswho accompanies entrepreneurs in the sale of a company in Osnabrück and Münsterland. This usually includes the costs of all consultants, specialists and service providers involved in the transaction.
A well-organised business succession is an investment
Claus points out some essential points in the consultancy contract: “A company owner should therefore not only pay attention to the investment for the complex consultancy but always also to the term of a consultancy contract. As a rule, reputable consultants do not agree to any time commitment periods at all, but use trust as the yardstick for a cooperation. If consultants demand a time commitment, caution is advised!”
Because should trust suffer at any point in the counselling process, a separation must be possible at any time as an option for the client. Without any deadlines.
In summary, good succession advice costs money. Against the background of the increasing Lack of entrepreneurs bad or even missing advice can cost a fortune!
Tips for further reading:
How do you find a reputable advisor for your business succession?
Interview: Preparing the succession within the family well
DIHK: Challenges for company successions are growing
Comment: Unresolved company successions endanger our prosperity
Clarify important questions about business succession in advance
Company successions in East Westphalia and Bielefeld are on the rise
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