How does a company sale of IT companies become successful? Digital entrepreneurs ask themselves this question far earlier than other SMEs. Our expert Ingo Claus spoke to iBusiness about what makes a successful corporate sale of IT companies.
Given the current economic situation, is it worth selling your own business?
The general economic conditions for business succession are extremely good at the moment: low interest rates make for a favourable financing environment. In addition, the baby boomers of the Federal Republic of Germany are slowly thinking about their own retirement. Some of them have founded very successful companies or taken them over from their parents’ generation.
Many of these entrepreneurs face the challenge of passing on a family business to the next generation. According to a study by the IFM (Institut für Mittelstandsforschung), only around 13% of all family businesses succeed in the transition to the third generation. There are many reasons for this: children more often set other professional priorities than their parents or do not want to take on the responsibility of an entrepreneur. And sometimes entrepreneurs simply do not have children.
The number of successor companies is more likely to increase than decrease in the future. Due to the good current macroeconomic framework conditions, Germany is even more likely to see a Lack of entrepreneurs confronted.
What are the most common reasons for selling IT companies?
These reasons for a sale can be very different. One of the main reasons for a company sale of IT companies is to secure the growth of the company. Especially the sale to a strategic investor creates synergies or brings the necessary know-how to create an additional competitive advantage.
Skills shortage drives company sales in the IT sector
The German The IT sector is currently in a state of flux. The shortage of skilled workers means that many companies can only grow very slowly under their own steam. This is certainly not optimal for the industry, which is characterised by speed.
Especially in low-margin segments of the internet industry and software development, a consolidation process has been taking place for some time. In this process, interesting but low-profit companies are taken over by larger companies and thus become more profitable. The same applies to IT system houses that sell holistic hardware and software solutions. Integrated into a larger structure, significant synergies can often be achieved.
A second major reason for company acquisitions is certainly that strategically positioned IT companies are always ready to take over innovative competitors. This expands their own know-how and customer base.
In the future, we will also see one or the other age succession in the IT industry. These are often companies founded in the late nineties whose owners are turning to new perspectives after their working lives.
What options and strategies are there for owners who are thinking about selling their business?
Characteristic for SMEs is the emotional bond of company owners with their company. Our daily work shows that one’s own feelings are often the biggest hurdle for the transferor of a company. The company owner should therefore first ask himself: Am I really ready to part with my company? Do I have a new vision that I am really looking forward to realising? Do I need a clear ‘cut’ with all the consequences, or do I prefer a slow separation in predefined steps? Only after clarifying these important questions can a concrete strategy be developed.
Good preparation supports the sale of IT companies
A company succession is similarly complex as a foundation and thus has to be prepared and managed as a strategic project. Under no circumstances should entrepreneurs succumb to the misconception that a company sale can be handled alongside everyday business. A company sale should be planned as precisely as a large investment. From the buyer’s point of view, a company purchase is always an investment that he decides on together with his financiers on the basis of future expectations.
Personally, I am always surprised how little attention sellers pay to the preparation of a company sale. This is all the more astonishing because the course for the success of the project is already set in this early phase. Good sales preparation can be compared to a good business plan and already answers many questions that an acquirer may have about the company and its market position as well as the figures.
Whether the company is then sold in full or only in part, whether the transaction is structured as an asset deal or a share deal and whether the owner of the company is retained in the future must then be decided in each case depending on the project. Each project is different. It is therefore impossible to recommend a general strategy.
What are the strategies for selling IT companies?
This depends entirely on the company. The specific know-how of a technology provider is interesting for many strategic investors. In contrast, the customer base or market access often plays an important role for online shops or digital agencies. Ultimately, the right strategy for selling IT companies can only be developed in the concrete project.
In many cases, the former owners remain with the company after the sale. When does that make sense?
Often owners can make a significant contribution to the company’s success with their networks and specific know-how even after the sale. For this reason, a soft transition can make perfect sense. This is often the case for young growth-oriented companies that want to lay the foundation for a positive company development in the future through a sale or a significant investment.
Dual leadership tends to lead to problems
In the case of pure age succession, a long parallel operation is rather critical. Employees want a clear contact person. A dual leadership consisting of ‘old’ and ’new’ usually leads to very practical communication problems between management and staff or to conflicts within the company. Thus, dual leadership can have a significant negative impact on the company’s success. In such cases, dual leadership is recommended for a relatively short transitional period of a few months. Ultimately, most companies can be compared to a ship: On board there needs to be a captain who takes command and responsibility with clear decisions.
How long should a boss continue to accompany his company as an employee after the sale? When is it time to leave for good?
This depends entirely on the transaction: If companies are very dependent on the personality of the owner, it makes sense that they remain with the company in the long term. This can be done, for example, through consultancy agreements or the appointment of an advisory board. In practice, we see advisory boards in particular as very cost-efficient and effective instruments for the strategic development of a company.
From my point of view, it is difficult, especially in medium-sized companies, when old and new owners have operational responsibility in parallel for several years. This usually leads to conflicts, which usually have a negative impact on the company’s development.
How sensible is it to consult an advisor for the sale of IT companies? From what size of company is this strongly recommended?
Basically, there are a number of tax and legal issues to be clarified that require special advice.
In addition, there are three main advantages to engaging an advisor when selling a business:
- Maintaining anonymity: By involving a consultant, the anonymity of the seller is preserved. In most cases, the sale of a company is a top-secret project, so it must be implemented with particular care and discretion. Otherwise it could unsettle employees, suppliers and even customers. Competitors often exploit this situation immediately. In doing so, they weaken the company’s position in the long term. A consultant can covertly sound out the market for interested parties without the competition immediately finding out about the plans. This makes an advisor invaluable for a company that is ready to sell.
- Time and cost savings: An advisor can present a company offer to a large number of potential interested parties in a very short time. This disproportionate increase in contacts significantly increases the probability of success of a business sale. It thus reduces the time and costs involved in searching for and identifying potential interested parties.
- Process control and negotiation facilitation: Other advantages of being accompanied by a consultant with practical experience are sensible process control and goal-oriented discussion. A good advisor takes on the role of moderator and addresses the important emotional needs of buyer and seller. Especially in medium-sized companies, the “translation work” between the parties should not be underestimated: Without transaction experience, no buyer should take on this task alone. Because the risk of expensive mistakes and time delays increases significantly.
The interview is the long version of the background interview by Ingo Claus with iBusiness. The special: “How to get the most out. When internet entrepreneurs want to sell” can be found here (registration required).
Tips for further reading:
Free webinar on business succession
Interview: Preparing the succession within the family well
Comment: Unresolved company successions endanger our prosperity
The costs of a business succession or an M&A project
How do you recognise a reputable business sale advisor?
Buying a company - the first conversation is crucial
Areas of conflict in the sale of a company
The general conditions for successful company successions are coming to a head
Better integration of female company successors!
KfW - Analysis: Company succession a burning issue in SMEs
In the overall economy, the general conditions for a business succession are extraordinarily good at the moment: the low interest rates make for a favourable financing environment.
These reasons for a sale can be very different. One of the main reasons for a company sale of IT companies is to secure the growth of the company. Especially the sale to a strategic investor creates synergies or brings the necessary know-how to create an additional competitive advantage.
Often, the know-how and network of the former boss still benefit the success of the company after the sale. This is often the case, especially in growth-oriented companies with investment needs. If the company is heavily dependent on the personality of the owner, long-term employment can also make sense. In this case, 2 favourable solutions are particularly recommended: The appointment of an advisory board or via consultancy contracts. However, the old boss should not be too involved in the operative business. This usually leads to paralysing conflicts.
