Company Succession in Practice: The Challenge of Generation Change
For every entrepreneur, corporate succession is one of the most crucial strategic tasks to be performed. Our survey of over 1,300 Swiss small and medium-sized enterprises (SMEs) clearly shows just how important this subject is in the eyes of business owners. More than three-fourths of the managers surveyed had already begun in some form to tackle the issue of finding a successor.
According to the figures, one in five SMEs is planning to go through the process of corporate succession within the next five years. For the economy as a whole, that means roughly 70,000 to 80,000 SMEs expect to hand over the reins to the next generation by 2021. These companies are responsible for over 400,000 jobs, equal to approximately 10 percent of Switzerland's entire workforce. So, there is no denying the great importance to the Swiss economy of succession processes being carried out successfully. Failed or unsatisfactorily executed company succession is not only a burden on the company affected and its employees but also on its business partners. For example, according to our survey, about one-fourth of all SMEs reported having had often negative experience with the corporate succession of their business partners such as customers or suppliers.
Demographics Will Mean More Successions in the Next Few Years
The percentage of SMEs planning to pass on management to the next generation within the next five years has fallen slightly from 22 percent to 20 percent compared to 2013. In our opinion, the decrease is most likely just a temporary phenomenon. Today, over half of the managers of SMEs are baby boomers, i.e. aged between 50 and 65. Across Switzerland, the number of individuals aged between 60 and 65, and thus on the verge of retirement, is currently about 560,000. In 2030, the number will soar to 750,000—almost 50 percent more. Over the next 15 years, as the baby boomers retire, there is a high probability of a significant rise in corporate successions.
However, the considerably slower growth in the age group of the next generation could lead to a growing dearth of potential successors in the next 15 years. One possible strategy to fill this looming gap could be to increase the number of managers who are female. Although the share of women in these positions has risen over the past few decades, they make up just under 10 percent of top managers in all SMEs. The percentage of women sitting on boards of directors and executive boards is approximately 20 percent. An increase in the number of female managers could possibly counteract the future imbalance (as a result of demographics) between the number of (male) managers transferring their companies and the number of (male) successors.
Falling Number of Family Firms
Corporate succession affects all companies, but family firms are more heavily impacted by the issue because the owner's financial and personal connection with the company is especially pronounced. According to the survey, 75 percent of all SMEs today are family firms. That corresponds to 375,000 family firms with 1.6 million employees across Switzerland. Compared to data collected for 2004 and 2013, the proportion of family firms has fallen slightly. The reasons for the decrease may be both economic and sociological. Firstly, in recent years, Switzerland has experienced growth mainly in sectors such as healthcare, IT services, and business services, where the proportion of family firms is generally lower. Secondly, social changes over the past few decades have resulted in more and more offspring of business owners embarking on careers outside the family business. To put it another way, children are today less willing to take over their parents' companies than in the past.
In this context, it is hardly surprising that the number of companies planning succession from within the family is approximately the same as the number of companies looking for a successor from outside the company. Nevertheless, a relative majority of 41 percent of SMEs still desire to transfer ownership of the company to a family member. Roughly one-fifth of these, however, is also considering solutions involving external succession. All in all, the number of SMEs currently striving to find a solution involving an outside successor (34 percent) is only slightly above the number exclusively seeking a successor from inside the family (33 percent). In the survey we conducted in 2013, these positions were reversed. Among the solutions for external succession, the most commonly cited was the sale of the company to former (executive) employees (management buyout, 25 percent), followed by the sale of the business to a different company or private equity firm (21 percent), or to an individual outsider (management buy-in, 17 percent). The reality is that, above all, management buy-ins occur more frequently than many SMEs plan. A full 46 percent of today's managers took over their companies from a family member, 25 percent as part of a management buyout and 30 percent by means of a management buy-in.
Family Members and Friends Pay Least for Their Companies
In every succession management plan, the goal is to set a price for the company to be transferred. The price depends heavily on the personal relationship between the departing owner and the successor. Our survey revealed that family members and friends can purchase a company for an especially low price. Both groups receive, on average, a discount of 41 percent off the market price. In 18 percent of cases, successors from within the family were even given the company "for free." Only about one-third of all successors pay full market price or more. Business partners receive the smallest discount at 22 percent. When a company is bought by previously unknown individuals or is transferred to a company insider, the discount is 27 percent.
Success Factors and Pitfalls in Corporate Succession:
- Approach your succession planning as a project, and define the participants, goals, roles, guidelines and a timeline
- At an early stage, clarify the expectations of the stakeholders and the power that they wield
- Take steps to ensure that your company can cope with a succession: Analyze its capital structure and define organizational rules in writing
- Carefully analyze your precise requirements for advice, and, only after you have done so, select a partner who can definitely meet your needs
- Always review several different succession options and consider the benefits and drawbacks of each one
- Give consideration to all the legal aspects, such as the requirements stipulated by inheritance law
- Create financial transparency to give yourself an objective basis for making decisions with your successor during the transfer phase
- Take action early to plan your personal future outside of the company
- Miscalculating the value of the company
- Focusing on a single succession option
- Lack of company fitness (allowing the company to gradually become dormant prior to the sale)
- Accounts bloated with excessive non-operating assets (problem of hidden reserves)
- Planning too late = inability to take advantage of opportunities for optimization
- Company's legal form limits flexibility
- Extreme emotional ties to the company