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Thinking about the Future in Good Time: Corporate Succession for Smaller and Medium-Sized Enterprises

Do you already know what will become of your business in the long term? Developing a strategy at an early stage with alternatives for succession management ensures the future of your life's work. Here we show you the most important strategies and options for preparing a company succession.

Demographic change in Switzerland is having an economic impact on small and medium-sized enterprises (SMEs) too. Across Switzerland, the number of individuals aged between 60 and 65, and thus on the verge of retirement, is at present around 560,000. Many of them have founded companies, or belong to the second or third generation successfully managing family firms. When such a baby boom generation retires for reasons of age, the issue of company succession becomes a special challenge because the next generation is numerically much smaller.

Many firms find themselves facing three important questions:

  • What will happen to the company when an influential leadership figure departs? 
  • What form of succession will best ensure that the company will continue in the long term? 
  • What will happen if there is no one who can be considered as a successor?

Company Succession Is a Matter of the Heart

For many owners who are also the boss, managing a small or medium-sized enterprise has a very emotional side. In addition to the economic aspects, there are often non-material values that have been passed down in the company's management for generations. For entrepreneurs who founded the company themselves, the future success of the business is their primary concern even after they retire.

Five Options for Company Succession

Succession within the Family (FBO/Family Buy-Out)

If willing and capable descendants enjoy the owner's trust, the question arises about a fair family price for taking over the company. This complex topic is further complicated by the requirement to link responsibility with decision-making authority (a majority of shares), because parents want to treat their descendants equally in economic terms. As the value of the company often represents the bulk of a family's wealth, a purchase of a company's shares by the descendants who are assuming responsibility is also necessary, owing to the relatively rigid inheritance law with high compulsory portions. These emotionally very sensitive topics can be facilitated with outside assistance based on the experience of many other family successions, and can be placed on a more rational basis with regard to the financing for the descendants.

Handover to the Existing Management (MBO/Management Buy-Out)

Handover to the existing management is often the next best option, because the company will be managed by people who enjoy the owner's trust. On the other hand, this solution can lead to disquiet within the company. Even for capable managers, it is a major challenge to assume responsibility as owners and to take on external debt to pay for the company. Furthermore, not every company has the potential for internal succession.

Handover to External Management (MBI/Management Buy-In)

Handing the management of the company over to an external party can be a good solution. An outside entrepreneur can introduce new ideas and additional expertise. In many cases, this solution is nothing more than a sale to financial investors, who use the existing middle management as a basis and bring in their own senior management team. This means that the selling owner does not have to assume any residual risks (vendor loan) either. The drawback, however, is that financial investors have to resell the companies they have acquired after a certain time. In the longer term, this may lead to the loss of the company's previous identity or family-based name, or to other changes, which can be significant emotional obstacles for the selling owner.

Here too, objective, solution-neutral advice can help to prepare and implement the best solution for the company's long-term prosperity.

Selling the Company

From a financial point of view, companies can benefit from selling to a solvent financial or strategic buyer owing to the potential for obtaining the best price. In this case, however, it is crucial that the sale process is professionally executed, first so that the owner has a selection of potential buyers, and second so that the potential buyers are in competition with each other. This approach not only helps to obtain the best price and ensure greater transaction security, but reduces possible guarantees and permits contractual provisions that take account of the selling owner's primary concerns for a certain time.

As an alternative to a professionally managed sales process, professional network exchanges such as Credit Suisse's confidential Opportunity Net can allow smaller companies to extend their own networks in a targeted manner and identify more potential buyers.

Cessation of Business

In some circumstances, the decision is taken to cease business. This is also a complex process that must be carefully prepared and takes some time.

For all succession options, numerous tax, legal, and economic factors must be borne in mind, and taken into account even while the preferred option is being prepared, because such procedures sometimes take a very long time. Accordingly, the succession process should be started as a project at least five years before implementation. In many cases, entrepreneurs should start thinking from the age of 50 about where their life's work should be in five, ten, or fifteen years' time so that the company can continue to be a reliable partner for employees, clients, and suppliers even after they themselves are no longer actively involved.

It is impossible to generalize about the best options for a company. Instead, the important thing is to define the internal opportunities for development, economic requirements, and personal objectives and thereby propose the best solution with possible alternatives through a systematic research process. A company succession strategy is also a process that takes several years to implement in almost all cases.

Succession Management Assisted by Experts

For owners, successful company succession is a most important and emotive business, one where they cannot or do not wish to fall back on their own experience or have discussions with those around them. It is therefore advisable to seek external advice at an early stage and before making a decision about a specific solution.

The process of company succession supported by experts comprises five steps:

  1. Initialization
  2. Analysis of current situation
  3. Evaluation
  4. Preparation
  5. Handover and conclusion

Credit Suisse is specialized in SME succession processes and, if necessary, can arrange for other experts from its network. The aim is to provide entrepreneurs with solution-neutral support as they decide which options promote the successful continuation of their life's work and what preparations are required in order to achieve this goal. Among other things, Credit Suisse operates the OpportunityNet platform for company sales, and publishes studies that deal with the subject as a whole on the basis of surveys and contain statistically reliable additional information.

Detailed information about managing the succession process can be found at: The Succession Process. We will be happy to help you prepare and implement the most important decision for your company.

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