Business transfer the new way by piet regnerus mba by Frank Hiddink

Business Transfer

The new way PIET REGNERUS, MBA

• Business transfer is a sport • Refurbish first and then think about selling! • Entrepreneurs are missing out on money • Martial arts and business transfer • Help! The business’ value is walking out the door • The most important customer • The forgotten exit strategy • Invisible assets

I hope you will enjoy this book very much. Would you please do me a favour? Share (parts of) this book and help me get this message out there! The development of the philosophy in this book begins with you! Let us all together share this knowledge with other entrepreneurs! By sharing knowledge, we can work together to create a dynamic and resilient economy. Really, it all starts with us! I wish you a lot of success with your future (partial) business transfer. -- Piet

This is a free e-book. You can share the contents through social media. Please leave the content the way it is and always mention the original source.

This book is dedicated to: ‘All those entrepreneurs who are to forget their most important customer.’

Business Transfer

The new way BY PIET REGNERUS, MBA

ÂŠ Copyright 2014 Piet Regnerus, MBA E-mail: pietregnerus@me.com Illustrations by Henk Akker Redaction by Corrie Ponne and Lennard Drogendijk ISBN: 978-90-9026244-4 NUR: 800 Keywords: business take over, business transfer, business succession, partial transfer of business, major customers, closure of business 1st edition 2011 2nd edition 2014 All rights reserved. No part of this publication may be reproduced, sold, stored in a retrieval system, or transmitted, in any form or by any means, be it electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. This book is intended as a guide, not as clear takeover instructions. The information given in the book can help you in making decisions, but is not intended as a substitute for an expert. Realisation in cooperation with:

Partly financed by:

Awareness is power! -Dr. J.B. Jones 1956

Contents A note to you, the reader .......................................................12 Introduction............................................................................13 1.

No business activity, no economy!.............................17

Never be the same again ............................................23

Business transfer is top-class sport ............................26

Finding customers is biggest problem ........................29

One man businesses also valuable .............................32

The forgotten exit strategy.........................................39

First refurbish and then sell! ......................................45

Fit for Exit, a good starting point isâ&#x20AC;Ś ..........................48

The value drivers of a business ..................................52

10.

The most important customer ...................................58

11.

Entrepreneurs miss out on money!............................61

12.

Invisible assets ............................................................65

13.

Knowledge is leaking out of the company! ................69

14.

Help! The businessâ&#x20AC;&#x2122; value is walking out the door!....73

15.

Information, communication and coordination .........76

16.

Buyer is shifting risks away from him .........................82

17.

The art of war and business transfer..........................85

18.

A deal is a deal. Or is it?..............................................92

19.

The role-play of business transfer ..............................97

20.

You can understand it, once you get it.....................102

21.

Online matching supply & demand ..........................106

22.

Stubborn ...................................................................109

23.

A reliable and competent advisor ............................112

24.

No money, no â&#x20AC;Śâ&#x20AC;Ś.....................................................116

Finally: just go for it!.............................................................121 About the author ..................................................................124

Foreword It is the summer of 2014 when I am writing this foreword. The acquisition market is starting to get going again. Business deals worth billions are happening in many industries in America including the chemical sector, the meat industry and the pharmaceutical industry. Also in the Netherlands the takeover climate is improving. There are buyers, money is basically not a problem, as you can read in the magazines and newspapers. But does this apply to all business acquisitions and transfers? No, not really. It applies in particular to those business transfers and acquisitions where innovation plays a significant role. Companies that have recently renovated or renewed are interesting, but also companies that are relatively corny but act in a sector where the industry itself is innovating. But there are also many, barely visible, small micro enterprises. We are talking about small businesses in the construction sector, those performing craft work, hard-working entrepreneurs with tiny businesses. Those who have toiled over the past 30 years: can they also transfer and sell their business successfully? However, there seems to come into existence a new group of potential buyers. Former entrepreneurs who have already sold their businesses, who are more or less financially independent, and who want to do their trick once more. They can get the support of a bank or perhaps they will not even need it. Perhaps that with a targeted search within such a group of former entrepreneurs, lays an opportunity to sell the businesses of those hardworking entrepreneurs of SMEs. I

see another opportunity in the fast growing number of startup initiatives. What if those start-up entrepreneurs would take over a business or part of a business instead of inventing the wheel all by themselves? And what if you, as a future former entrepreneur would invest some time in such a young start-up? Then we have created innovation and we all benefit from the fact that this existing company will continue to be part of the economic regional network. And also: we maintain as much employment as possible for the region. In this book by the entrepreneur Piet Regnerus, who has cultivated a passion for business transfer, you will read tips and learn about the tricks of how to buy or sell a (micro) business. I wish you, also on behalf of the employees of Business Development Friesland and all participants and former participants of Inqubator Leeuwarden, a lot of pleasure reading this book and I hope it will inspire you. Drs. Lennard Drogendijk (director Business Development Friesland and president of Inqubator Leeuwarden) l.drogendijk@bdfriesland.nl

A note to you, the reader The reason you are able to read this book is because I let myself get inspired by other writers and their knowledge every day. Because they offer their knowledge, I am able as a person and as an entrepreneur to develop and improve myself. I would like to share my knowledge with you. I am grateful for everybody who has contributed to the creation of this book. Besides this, I am grateful every day for all the experiences in my life, good or bad, that have brought me to where I am now and that have provided me with the insights and the input for this book. A lot of SMEs are being terminated without being sold. Every investment made by these entrepreneurs therefore also vanishes into smoke when this happens. Awareness of the complexity of business transfer is a must to get entrepreneurs into action to prepare their business properly for transfer. Also this awareness grows the realisation in starting and growing SMEs that business takeover offers a lot of opportunities for the economy. When you as a reader of this book start to think about how you are going to shape your business transfer or if you start to consider to take over a (part of a) business, then this book has had its effect and my mission has succeeded! Piet Regnerus MBA

Introduction Business transfer as a catalyst for employment, innovation and a vital countryside. Economic dynamic and a vital countryside Governments have woken up. Unemployment, urban decay, vacancy, a lack of proper education and poverty must be tackled in order to maintain the viability of the countryside and prevent ghost towns and cities from becoming reality. In many regions, a healthy economic dynamic does not exist on its own. Due to the aging population, there is a great danger that the population in many regions will drop above average and the related quality of life will also decrease. Ageing of the population is a demographic phenomenon that cannot be changed. But preventing the young people from leaving the countryside is something that can be influenced. The largest cause of the departure of young people is the lack of sufficient attractive jobs. A corollary is that the young people leave for other areas where there is enough work. This is a great loss for the countryside of knowledge towards the big cities (brain drain) and more dynamic areas. It is therefore important to encourage entrepreneurship among young people outside the metropolitan regions. More focus on entrepreneurship automatically creates a stronger economy innovation, employment and more youth in the countryside 1.

Minimizing regulatory burden for SMEs Adapting EU regulation to the needs of micro-enterprisesâ&#x20AC;&#x2122; Brussels 2011, pp. 2.

Business activity Insufficient business activity means not enough jobs. Every business is important to the economy and social services in a region. Any company that disappears through relocation or a (forced) closure contributes to impoverishment. It is therefore important to maintain all the businesses in a region as possible. This also means that business closures should be avoided. Therefore encouraging successful SME business transfer should be a point of focus. This can by stimulated by making entrepreneurs, who are ending their business career, aware of the advantages in transferring their company. A thorough preparation has a positive effect on the chances for a successful business transfer. But also, start-up entrepreneurs can be made more aware of the fact that buying an existing business can be a attractive option instead of building a new company up from point zero. Building a business takes time and money Entrepreneurship is being stimulated in many countries by the government. Almost everywhere starting entrepreneurs build their companies from zero. A lot of them do not realise that building a viable business will take three to five years. This â&#x20AC;&#x153;build up periodâ&#x20AC;? will have to be financed with financial means of the entrepreneurs himself or with a loan. These entrepreneurs therefore need to have a financial buffer that is large enough to pay their own income, the business costs and marketing costs. Over half of the entrepreneurs does not have this buffer and is therefore forced to close the business within five years after the start-up. This obviously has negative consequences for the economy.

Who buys our businesses? Every day there is a entrepreneur who wants to sell a business. Who buys the businesses of these entrepreneurs? From estimates it becomes clear that at least half of the businesses are being terminated without selling. And with the disappearance of these companies also disappears employment, knowledge, experience and capital 2. It is important that as many businesses as possible are being transferred to starting and/or growing entrepreneurs to keep the existing economic dynamic and employment. Entrepreneurs want to grow Only healthy companies have a right to exist. The right to exist of a business is partly determined by the presence of enough profitable customers. Every entrepreneur is therefore looking for customers. A start-up can make a running start by buying (a part of) a business and bring it survival rate above ninety percent 3. A growing entrepreneur can grow faster by a business acquisition. However, the business acquisition is not popular amongst entrepreneurs. This is partly due to the fact that a complete business acquisition is very costly, especially in times of economic downturn. On the other hand, a lot of companies that are for sale have too much ballast and therefore risks for the buyer.

Teeffelen, L. van, ‘De effecten van opheffingen en bedrijfsoverdrachten op de Nederlandse economie?’ Hu & KvK 2012, pp. 2.

Mandl, I. (2004) ‘Business transfers and successions in Austria’, paper presented at the EISB conference, Turku, 10th September.

The forgotten exit strategy Taking over an entire business brings with it a large share of risks and is difficult to finance for a lot of entrepreneurs. Added to this is the fact that mostly existing entrepreneurs have an interest in just a part of a business. This means that they want only parts of the business, the not wanted part of the business is seen as ballast. But they do have to pay for this ballast. A partial take-over offers opportunities for both buyers and sellers. We will get into this in more detail later on in the book. Quality of life The core of this is book is about how awareness, innovation and dynamic in the market of business transfer can stimulate business activity and offers opportunities for starting, growing and retiring entrepreneurs. Due to business transfers more start-ups will survive and existing business can grow with the consequence that the employment rate is stabilised and perhaps will grow 4. And it is this employment rate that is a critical factor for maintaining the quality of life in rural areas and small cities. Business transfer (both entire and partial transfer) is a catalyst that can provide a huge impulse for the entire economy.

Each year there are approximately 2.8 million jobs involved in SME business transfer in the EU

No business activity, no economy!

There is a lot being said about the ageing of the population and the corresponding decrease in population in a large number of countries. There is however another large threat to the quality of life in the countryside: the closure of a lot of small and medium sized enterprises (SMEs). Mostly due to loss of business activity do these regions experience a decrease in the population with all its consequences. Impoverishment What regions are we talking about when discussing the countryside? A lot of countries usually only have a few regions (often the big cities) where there is a concentration of economic dynamics. This means that the largest surface in many countries can be considered the countryside and also experience the largest consequences of the shrinking economic activities. What consequences does a decrease in the population have? Firstly, the balance of demography will be distorted. On the one hand due to the ageing of the population, on the other hand due to the fact that young people automatically leave for regions where employment rate is better and the economy more dynamic, the so called brain drain. Secondly, due to the decrease in population the level of services small towns can offer will dramatically decrease or disappear altogether for the simple reason that they cannot exploit for a fair profit. Thirdly, corresponding to the ageing of the population and the decrease in service level,

impoverishment will arise, raising the level of criminal activity and making the region less safe for the people staying behind. Bottom up approach The consequences of a decrease in the population are also becoming clear to policy makers. They also learn more about the role business transfer can play in this issue. Next to the impoverishment of regions and the decreasing quality of life, the vanishing of businesses has large consequences for the transfer of knowledge and experience and therefore with the innovation and economic power of a region in its whole. Where with climate consequences every person is affected, not everybody can imagine the effects of a decrease in population. Not that the decrease in population is the problem directly. The largest problem is the migration from the countryside to the big cities and the economic dynamic that is concentrating more and more in these big cities. This does not leave the countryside a change to develop and leads to a decreasing population. The created economic core zones where all the economic activity should take place are a death blow to the quality of life in rural areas, unless we decide to take another direction.

Entrepreneurship What gets the economic dynamic going and what keeps it going? Right, entrepreneurship. Entrepreneurship is necessary for our prosperity and also for our well-being. This is nothing new, but it does seem that fewer people make the choice for entrepreneurship these days and more businesses are being terminated without being transferred to a new entrepreneur. This means many forced closures for businesses and therefore a loss of capital and employment. The causes of the termination of these businesses instead of selling and transferring them can be different. For example, a business can be difficult to transfer if the whole business

model depends on the entrepreneur itself, if he or she is the business so to say. The failure to prepare the business for a future transfer is also often a cause of not being able to sell the business. Thirdly, not having a suitable successor is also a big cause for terminating a business. The Dutch Chamber of Commerce researched that in over half the cases where a business is terminated, there are valuable parts of the business that could have been transferred to a start-up or a company that wants to grow. This means that many businesses are being terminated unnecessarily with all the consequences this brings for the economic dynamic. Maintaining economic activity Anyone can attest to the fact that economic activity is essential for a vibrant economy. That many companies are terminated unnecessarily is also a point that many people see. Then why donâ&#x20AC;&#x2122;t entrepreneurs, advocacy groups for entrepreneurs and politics have more focus on this? Not only to preserve as much economic activity as possible, but also to minimize or prevent the depopulation of rural areas. After all, for every company in the countryside that disappears, it contributes to the undesirable effect of especially young people who leave for more dynamic areas where there is sufficient work. Taking action There are many studies being executed to find the optimal solution for successful business transfers. Now is the time for national governments to create structural policies that help to realise more successful (partial) take-overs. There are plenty of ideas but now we need to take action. Because no business activity, no economy!

PRACTICE EXAMPLE Immediately after having finished high school I started working in my parentsâ&#x20AC;&#x2122; transport business. At a given time my father wanted to take a step back, at the time he was 65 years old. We decided I would make less hours on the truck and take over more responsibilities at the office and take over the planning and administration for our companies with 10 trucks. But after a while I started to feel suffocated, was this really what I wanted to do all my life? The planning and administration tasks where much more stressful than life as a truck driver. The relationship between my parents and myself also started to get strained because I did things differently then they always had. Our personal relationship took a bad turn due to our different business insights. At a given time I decided to take over only the part of the business that specialised in the transport of containers. I also took over one of the drivers. After a while my energy level started to rise again and I expanded my client base and also started to work in other transport markets. And still, after five years I missed the larger business. My parents had indicated that they wanted to retire. I had to think long and hard before I make a final decision. But due to the personal development I had gone through I really felt I was now ready to take over their entire business. I respect my parents a great deal. Well over seventy years old and they were still running a transport business with eight employees.

I am glad that I am now ready to take over the entire transport business and I intent to let it grow and maintain the employment for my region. It would be a shame if this company of over 60 years old would cease to exist. This way, we maintain the business and the employment for the region.

Successful business transfers contribute a great deal to: • Strengthening and increasing the economy in terms of employment, innovations and growth • Maintaining knowledge and experience • Stimulating the growth and continuity of start-ups and existing entrepreneurs • Counter the depopulation of rural areas • Strengthening survival rates of business start-ups • A financially stable pension for retiring entrepreneurs

Never be the same again

About how the risks, financing and the attractiveness of businesses determine more and more the success of a business transfer. The hard way Our economies are becoming more and more complex, competitive and changes more rapidly. Entrepreneurs have to go with this flow to keep their companiesâ&#x20AC;&#x2122; right to existence now and in the future. Where in the past buyers would sometimes buy a business based on their gut feeling, ambition and the annual financial results, now buyers are more critical about buying a (part of a) business. Too many entrepreneurs found out the hard way that a business transfer is a very complex story. And that this transfer, which looked like a successful acquisition, would turn out to be a nightmare. Otherwise, banks are also reluctant to finance business transfers that have a lot of uncertainties and therefore risks. It is not that banks do not want to finance transfers. It is just that they raise the bar for your own financial input to such a high level that many entrepreneurs become reluctant to expand or start their business through a business acquisition. Opportunities It is about time that entrepreneurs who want to sell their business in the future realise what is going on in the market of business transfers. This means in concrete terms that a timely and proper preparation is necessary before a company

is ready for transfer. Structuring, optimising and eliminating ballasts are the three core principles here because buyers are more critical and banks want to take fewer risks. A â&#x20AC;&#x153;clean houseâ&#x20AC;?, a positive track record and transparency are the minimal features for a company if it wants to be attractive for buyers. Win-win The practical side of business transfer show that both buyers and sellers fight for themselves. To a certain degree there is nothing wrong with this. But this fighting for only your own stakes often leads to a failed transfer. If you want a business transfer to be really successful, then you will need at least six parties to have a win-win feeling about it. Besides the buyer and the seller there are also the employees, the customers, the suppliers and financers of the business. They become more and more important in determining the success of a transfer. Different times The time where buyers solely looked at the finances of a company before buying is definitely over. Entrepreneurs who want to successfully transfer their business need to realise that we live in different times now. This means that if a seller want to successfully transfer his business, he needs to get to know the potential buyer of the company. On the other hand recording and showing the immaterial assets (goodwill) of a company is important to determine the value and attractiveness of the company. Buyers are no longer willing to pay for vague values and unrecorded assets. And even when a buyer is willing to pay a large amount of

goodwill, then still the financer of the acquisition will look at this very critically. In short: entrepreneurs prepare yourself because a business transfer will never again be what it was in the past.

Suggestion Try to make sure that a business can continue to exist without the entrepreneur himself. When the entire operational management and the network is tied to the entrepreneur and not recorded, a business transfer becomes a lot more difficult. This has a negative effect on the value of the company.

Business transfer is top-class sport

Top-class sports and business transfers have many things in common. Entrepreneurs can learn a lot from the way topclass athletes work. Success is determined in the preparation phase In sports they often say that the outcome of a game gets determined in the preparation phase. Athletes spend a lot of time on game preparation to be able to really perform during the game. The game is therefore only a small moment in the entire process that determines the success of an athlete. In short: athletes that do not spend time on a thorough preparation will never be able to win. Health and top-class achievements Besides a good preparation is the physical and psychological health of an athlete crucial for delivering top-class achievements. A healthy body is the basis but a healthy psychological state is indispensable. When the state of mind is not good, an athlete is not able to go to the limit and achieve those things he is capable of. Best return possible The above mentioned is easily transferable to a business. A physically unhealthy business (unstructured, not optimised and too much ballasts) is not capable of performing like a top athlete and create the best return possible. An unhealthy business is therefore unattractive for potential buyers.

The psychological state of a business and its employees also plays a large role in whether the business is transferable. For example, when the founder of the business cannot let go of it and therefore does not prepare for transfer timely and thoroughly, the chances of successful transfer are minimal. The motivation of the employees also plays a part. When the employees are not content with the transfer to a new owner, the motivation will drop and therefore the productivity (the achievements). But it is also conceivable that the best employees leave the company because they disagree for example with the policies of the new owner. A physically (structured, balanced, prepared) and psychologically (culture) healthy business is necessary for a successful business transfer.

Fitness Top-class athletes cannot function without a trainer or coach for guidance and advice. They support and guide the athlete to reach the best achievements. Entrepreneurs can also learn from this point. By timely getting assistance and gaining valuable advice and guidance they can increase their chances for a successful business transfer immensely. Transferring a business is a top-class sport! The success of the transfer depends on the fitness of the business. A timely and thorough preparation takes a lot of time but pays itself back at the moment when a top-class achievement is necessary: during the transfer of the business!

Finding customers is biggest problem

In practice, start-up entrepreneurs have the most difficultly with building up a client base. But there are enough opportunities to build up a good and strong business. A long road to go When you do not have a revolutionary idea as an entrepreneur, you have to enter the existing market and break into the existing structures to gain a turnover. And on the existing markets, the competition is killing. This means working for a low reward, unless the entrepreneurs can set himself aside from the other businesses by unique selling points (knowledge, experience, etc.). This again is often not the case for many entrepreneurs so there remains a long way to go before your business has gained its right of existence in the market. Especially during economic downturns it is difficult to make enough of a turnover to create a viable business in the long run. Greater survival rate Buying an existing business is out of reach for many start-ups and sole traders. On the one hand this is due to financing, on the other hand it has to do with the risks involved with leading a business and the investment it needs. But what if you could buy a part of a business without risks worth mentioning and with a substantially smaller investment? The survival rate of businesses that are built up from the ground is less than fifty percent. By taking over (a part of) a business this percentage rises quickly. The most important

reason for this is the fact that an existing business already has clients and therefore has some continuity, at least for a while. On the other hand, the buyer does not have to put all the time, energy and money into making his business known to the public and building up a reputation. Unknown phenomenon Taking over a part of a business is sadly unknown to a large share of SMEs entrepreneurs. Developing a market for partial business transfers creates a lively dynamic and the accompanying chances for entrepreneurs. An example: the owner of a production business wants to focus solely on production activities. He wants to outsource other parts of the work, for example procurement and warehouse management. He does not want to hire extra employees to take on this task. He therefore needs to find an entrepreneur who wants this assignment. For the first entrepreneur this is a flexible â&#x20AC;&#x153;employeeâ&#x20AC;? and for the second entrepreneur a steady assignment for his own business. Another example: a steel construction entrepreneur wants to solely focus on its core activities: Stainless Steel. The other activities, aluminum and steel, he wants to sell. Another chance for a starting or growing entrepreneur: he can start or grow his business without having to take over all the employees, machines, stockpile and buildings (he can of course if he wants to). The necessary investment is therefore much smaller than if he would take over the entire business.

There are therefore plenty possibilities for other sole traders to find work and a turnover, even during economically difficult times. If SME entrepreneurs learn to think about the traditional business transfer in a modern way, this creates opportunities for starting, growing, consolidating and entrepreneurs who want to retire.

Why are so few start-ups buying existing businesses? • Financing; buying a business requires a large investment • Supply and demand are not transparent • Leadership; a new entrepreneur cannot start to run an entire business with no experience • Risks; buying a business usually is accompanied with noteworthy ballasts (like unnecessary assets or stock) • Awareness; start-ups usually do not realise that taking over an existing business is an option • Ambition; many entrepreneurs seek a balance between life and work and do not have the intention to grow of buy a large business.

One man businesses also valuable

The prevalent view is that businesses of sole traders are not transferable because the entire business is dependent upon the entrepreneur and his or her knowledge. But is this view correct? Independent contractors are often seen as a misfit or outsider in the world of entrepreneurship. They are most often business that depend on the entrepreneur for knowledge and experience. Because they do not have employees, the right of existence of the business therefore depends completely on the owner. All the knowledge, even if this knowledge is unique and valuable, lies with the owner himself and is difficult to transfer and does therefore not hold much value for potential buyers. A flying start It is advisable for start-ups to consider a (partial) business transfer instead of building a company from the ground up. The costs that have to be financed from the entrepreneursâ&#x20AC;&#x2122; own reserve is quite extensive in the first few years. The takeover price, of a business or a part of a business, is usually not much higher than the costs of setting up an entire new business. The advantage of taking over a business is that you are jumping onto a running train and you profit from the existing turnover, knowledge, experience etc. It also seems that entrepreneurs who buy an existing business usually grow faster, make higher profits and create more employment. Also, the survival rate of the business is much

higher in the long run when you take over an existing business. Documents An often heard presumption about businesses of sole traders is that they are difficult to sell. It has become apparent that these companies can be sold if the valuable, mostly immaterial, assets are documented and made transferable.

Making knowledge and experience transferable also changes the mindset of the entrepreneur from â&#x20AC;&#x153;I am the only one who can run this businessâ&#x20AC;? to the realisation that nobody is indispensable. It is important to think about the right form of running a business and whether it can be transferred in the end when starting up a business. This is not only necessary for

the continuity after a business transfer, but also for the continuity during illness, holidays or cooperation with other businesses. Value Making a whole business or a business activity transferable is a critical factor for sole traders to create value in their company and to enhance the attractiveness for potential buyers. When entrepreneurs succeed in doing so, there is a large market for business acquisition for these kinds of small companies. Creating and documenting value in a company is important for potential buyers. But how do sole traders make the value in their company palpable and visible for outsiders? This can be done in different ways: â&#x20AC;˘ Image The image of a business can be measured by periodically doing a customer satisfaction survey. On the one hand this builds up a track record of the quality of the company in the long run and on the other hand it makes the image of the business palpable for an eventual successor. A good image takes a long time to create and can disappear much more quickly. This means that a good image takes time to create and therefore is valuable for a potential buyer. A point of focus for sole traders is that it is better to have a general name for the business than for example the first or last name of the entrepreneur himself (unless he or she is a celebrity).

â&#x20AC;˘

Exclusive rights, designs and patents Exclusive rights are, if documented, usually not personal and can be transferred. They are therefore attractive for buyers. It would be smart for sole traders to register their turnover as much as possible with exclusive long term supply, maintenance and distribution contracts. This can be achieved by getting the exclusive import or supplier rights of a particular product or service in a particular country or region. But also long-term supply or maintenance contracts are good examples and are used by companies (IT, marketing, etc.), governments (road maintenance, buildings and equipment, etc.) and also by individuals (maintenance contract for a heating system or garden maintenance). When an entrepreneur manages to capture a portion of the revenue from multi-year contracts then the company will be more attractive to a potential buyer because there is a guarantee of turnover for a given period. Side note is that it does not cover loss-creating activities or jobs with high risk of financial claims.

â&#x20AC;˘

Books, digital files, audio, websites These so-called knowledge carriers are very suitable for recording and transferring specific and unique knowledge. They make knowledge palpable and therefore transferable through licences, franchise etc. Innovative sole traders can capture their unique knowledge in palpable products (a website, book, publication, training, workshop etc.). A website is the medium of choice to build the track record of the company, for example through images, blogs,

bookmarks, etc. A website can make a company more transparent. And let us just say that transparency is an important factor for a successful takeover. â&#x20AC;˘

Exclusive procedures or methods Also, procedures and methods are often very transferable, provided that they are documented and not personal. An example is a consultant that has gained knowledge in his practical experience and documents this knowledge and makes it applicable in the form of an analysis model. It is therefore important to standardize specific knowledge and procedures as much as possible to increase the possibility of transferring to third parties.

â&#x20AC;˘

Network For every company, whether we are talking about a sole trader or a large firm with many employees, the network of people around it is indispensable and determines the viability of the business. But for many businesses the network is tied to the entrepreneur himself and not transparent for outsiders. It is therefore important to document the network of clients, contact persons, suppliers and other important people for the business in a transparent way. This means that for every client the contact person is documented with other important data to make the network transparent and can also be put to value.

More opportunities If you are unable to create value in your business with the mentioned points it is important to have a good backlog. This allows the potential buyer, at least for a certain period, to have a secure revenue. And security is what buyers increasingly find important in whether or not buying a company. For start-ups the turnover is also an important factor when thinking about buying a business. Finding your own clients (revenue generation) is one of the largest stumbling blocks in creating a viable enterprise. The businesses of sole traders can thus play a valuable role for new or growing businesses. But this goes the other way around as well. More acquisitions of sole proprietorships gives greater economic dynamism and means more opportunities for retiring entrepreneurs, start-ups, retention of knowledge and experience and is a great incentive for entrepreneurial success.

The advantages of taking over a sole proprietorship: • Relatively low take-over price • This makes it easier to finance • A smaller business may be better suited fora n inexperienced start-up entrepreneur • A small business take over is much more transparent and there are fewer risks

PRACTICE EXAMPLE Al my life I have worked for large businesses, promoting their products at fairs and trade markets. But after having turned 69, it is time to teach the trick to somebody else. But how do I transfer this business? My skills are tied to me personally; they cannot be transferred to somebody else with little effort. After a conversation with a consultant it became clear to me that there is only one thing that matters here: the transferableness of my knowledge and network. This has provided me with a steady income all these years. The consultant also advised me to provide workshops to others who want to learn my traits. This way, I can slowly start to finish my career but still be involved for a while. Doing nothing all day is not my cup of tea. Due to the many years of experience, I have a lot of stories to use in my promoting of products. I decided to train people who want to learn what I did all these years and therefore to write a book about my knowledge and experience. I am convinced that I will meet somebody who wants to take over my sole proprietorship and continue it like I started it. Due to my many years of great efforts I build a valuable network of clients. It would be a missed opportunity to let this value disappear.

The forgotten exit strategy

SME business owners have a choice of two options when deciding to retire from their business: namely selling the company as a whole or the (forced) termination of it. And yet there is a third choice that remains unknown to many SMEs: the partial takeover. Many businesses are, either forced or voluntarily, liquidated because the entrepreneurs cannot find a suitable buyer for various reasons. For the seller, this means that a lot of capital is lost. Research shows that in nearly half of the cases of a business termination, a (partial) transfer would have been a suitable option 5. New phenomenon Where in large businesses partial company activities are often sold or acquired (e.g. non-core and non-profitable activities) this is hardly the case for SMEs. This is partly because SME entrepreneurs are unfamiliar with the phenomenon of partial takeover. On the other hand, takeover is an emotionally charged and complex issue for entrepreneurs, leaving little room for experimenting with innovative ideas. And that's a shame because there are opportunities that we are not taking. It appears that there is a need for a change of mindset. To generate a new and more dynamic market for business 5

Teeffelen, L. van, â&#x20AC;&#x2DC;Bedrijfsstakingen in het kleinbedrijf: Onontkoombaar of een gemiste kans?â&#x20AC;&#x2122; InnBus Hu & KvK 2008, pp. 17.

acquisition, entrepreneurs need to realise the benefits of trading individual (parts of) businesses and intangible assets. More chances for the buyer Transfer one or a few separate business activities offers extra chances for retiring and consolidating entrepreneurs to earn back their investment or earn their pension. On the other hand, taking over a part of a business offers big opportunities for starting or growing entrepreneurs. The advantage of taking over a part of a business opposed to taking over an entire business is that the required investment is much smaller, a part of a business is much better manageable for a starting entrepreneur, there are fewer risks involved and it raises the survival rate greatly. For growing entrepreneurs the partial takeover is more easily to finance, but you also take over a lot less ballasts in the form of not wanted activities and non-profitable activities. The chances for â&#x20AC;&#x153;skeletons in the closetâ&#x20AC;? are therefore also much smaller. Stumbling block Especially strategic buyers (competitors and colleagues) often only have an interest in a part of a business. Otherwise, MBIs (Management Buy In = external buyer) and MBOs (Management Buy Out = employees) often have trouble getting the financials in order for the takeover of an entire business. And why would the buyer pay for something he or she does not want or cannot use?

The average entrepreneur is interesting in taking over a business or a part of a business. They do always mention the large investments this would require and the risks this brings for the entrepreneur himself. Selling separate business activities can create a dynamic that will lead to more successful SME business transfers. Sink or swim Selling a business is not an everyday activity for entrepreneurs. A good and thorough preparation is therefore necessary to raise the chances for a successful business transfer. Unfortunately, a lot of companies look like an old boat. After the takeover, you need to clean out all the old garbage before you can sail. And this costs the buyers time and money. Sellers often do not realise this and offer their business in the market without any preparation and with quite some ballasts. Some examples are: â&#x20AC;˘ Non branche related activities (a bike shop that also sells washing machines) â&#x20AC;˘ Non-profitable activities (not turning a profit on a part of the turnover) â&#x20AC;˘ Not completing activities (machine rental company with an engineering department) For the business transfer it is useful to look carefully at all your activities and perhaps sell some if they do not complement the others. A partial transfer also offers a solution to retiring entrepreneurs who cannot find a buyer. The difference between a partial takeover and liquidating the company is extensive. And when your business is your pension there is a lot depending on a successful partial takeover.

Making it easy for the buyer Selling a part of the business before selling your entire business can have some advantages for the sellers. One is that selling a part of the business generates money. It also offers an extra chance for entrepreneurs who cannot find a buyer for their entire operation but who just want to earn back their investment or create a safe pension for themselves. A partial takeover is therefore something to take seriously. Selling entrepreneurs are being forced to make it easy for the buying entrepreneurs. The market offers enough buyers but these buyers want to take as little risk as possible. Looking from the perspective of the partial takeover, a takeover can contribute to more successful business transfers, maintaining knowledge, capital and employment. It takes a little bit of time to get used to such an interesting alternative. It is either sink or swim! A running start by a partial takeover! Why take over an existing company? • Finances; it is much easier to finance a partial takeover. • Transparency: Buying a single business activity is much more transparent for the buyer • Leading; an inexperienced entrepreneur is more suitable to lead a single part of a business • Risks; a partial takeover brings with it a lot less risks and generally a lot less ballast (Buildings, machines and assets) • Fast growth; entrepreneurs can start a new activity quickly • Running start; building up a client base takes a least a few years. By a partial takeover you are jumping onto a riding train and therefore your survival rate is a lot higher.

PRACTICE EXAMPLE My vision for my business was a add agency with different activities. During eight years I build up a great business. Internet, commercials, marketing strategies, magazines and newspapers, my business did it all. The internet was getting more dominant though and I noticed I could not do all these different activities anymore. The digitalising obviously also had a great impact. To survive in the digital world as a publisher, scaling up was important. But my business was not suitable for this. I kept putting off making decisions, I could not simply say goodbye to our publishing activity. I had built this publishing house from the ground up and we had some really good and innovative products. But at a certain point you have to make a decision before somebody else makes it for you. I came into contact with an international publishing house. They wanted to upscale to reach a better regional coverage. Our publishing activity would fit right into their plans. Within a month we finalised the partial business transfer. We quickly agreed about the takeover amount, the numbers from the last years were good and showed a steady growth. We also had long term contracts with advertisers and could therefore guarantee turnover for a certain period. This partial takeover was definitely a win-win situation. I did not receive the entire takeover amount at once. For half the amount we created an earn-out arrangement. This meant that for two more years I would function as an advisor and I would share my knowledge and my network. I could see why the buyer wanted this arrangement, almost all our products

and the network of the business were tied to me and were not documented properly. Beforehand I never expected a multinational could to have an interest in a part of my small business. But I am sure that the portfolio of products and the guaranteed turnover from the advertising guaranteed the quick business transfer.

First refurbish and then sell!

Many SMEs that are being offered for sale are not managed properly, have no desire or intent for change, are not optimised and are underachieving. This sounds hard but is unfortunately true. These businesses are difficult or impossible to sell. A business that has its affairs in order will be sold sooner and for a better price. Noose The world is changing constantly and more rapidly. Many entrepreneurs who approach the retirement age think they will make it to retirement without having to make too many adjustments or having to go with the changing market. And even though in part they might be right, this kind of thinking is the noose around the neck of a successful business transfer, because stagnation means a decline. Little to no maintenance to buildings, machinery and investments may improve the financial number on paper, but the business is more difficult to sell and the new owner will have to take on the cost of these investments and deferred maintenance. Buyers are demanding But buyers are becoming smarter and more demanding. They do not just look at good financial numbers; they also look at the businessâ&#x20AC;&#x2122; structure, culture and the managerial state. On the other hand, potential buyers take fewer risks and on top of this they often have the choice of different businesses that are for sale.

This forces the entrepreneurs who sell their business to prepare for a business transfer timely and thoroughly. Entrepreneurs who want to transfer their business therefore need to adapt to changing circumstances if they want a chance for a successful business transfer. This means: â&#x20AC;˘ Structuring the business and not letting it depend of the presence of the entrepreneur â&#x20AC;˘ Optimising the business (a streamlined operational process) â&#x20AC;˘ Eliminating ballast (unnecessary activities and assets make the business unattractive).

A business that cannot be sold All entrepreneurs who take their business transfer seriously increase their chances for a successful business transfer. For those who do not do this, the only option left is to liquidate the business, with all the consequences this brings (both financial and emotional). A business that has its affairs in order will be sold sooner and at a better price than businesses that have not been structured and refurbished. Therefore: refurbish first and then sell.

Suggestion There is a strong correlation between the amount of documented assets (tangible and intangible) and skills of a company and the attractiveness and marketability of it.

Fit for Exit, a good starting point isâ&#x20AC;Ś

Many selling entrepreneurs spend too little time on an exit strategy. As a result, many companies are not very attractive to potential buyers. Much suffering can however be prevented by the timely and thorough preparation of the business transfer. Two out of three companies are not attractive enough for a business transfer. Not being attractive to buyers in practice means that these companies are impossible to sell. And if a company cannot be transferred, a forced termination is the result. Where viable businesses are not being transferred, it is particularly damaging for those regions that already suffer from economic decline or for rural areas where the disappearance of a single company can have a huge effect of the economy. 6&7 Attractiveness The importance of more successful (partial) business transfers is therefore clear. But reality shows that many SME entrepreneurs are not aware of the fact that the attractiveness of a business is an important factor to for a successful business transfer. But what makes a business attractive for potential buyers? In the diagram on the next page can be seen that there are nine important focus areas that strongly influence the attractiveness of a business.

6 7

Lansberg, I. (1988), â&#x20AC;&#x2DC;The Succession Conspiracyâ&#x20AC;&#x2122;, Family Business Review 1

Martin, C., Martin, L. & Mabbett, A. (2002): SME Ownership succession, Business Support and Policy Implications, University of Central England, Birmingham.

-reason for sale -awareness -preparation -time -financial position -age -emotions -network -dependence

Entrepreneur

-cost effectiveness -structure -turnover -costs (structure) -profitability -future potential

-non-core activities -non-profitable activities -obsolete inventory -obsolete stock -overdue maintenance -overdue investments -long term arrangements with suppliers -long term arrangements with customers -structure and employees

Financials

-intangible assets -tangible assets -tangibility, documented presence of goodwill

Ballast

Assets

Attractiveness and the value of a business: Fit for Exit!

Business -type of business -size -structure -management -affairs in order -expansion potential -product or service -geographical limitations

Employees

Market

-culture -demography -education -craftsmanship -knowledge and experience -innovation -motivation -support -autonomy -satisfaction

-kind of market -kind of customer -competition -expansion potential -economic cycle -customer satisfaction -matureness -substitution of product or service -online visibility

Strategy -SWOT analysis -attractiveness analysis -portfolio analysis -Quality management systems -improvement techniques -innovation -specialisation or hybrid -product/ market combination

Important factors that influence the attractiveness and value of a business

Buyer -family -MBI -MBO -investors -strategic (colleague or competitor)

ÂŠ P. Regnerus

MBA

2008

Of the nine areas of interest in the matrix there are two that influence the attractiveness of a business the most. The ballasts present and the assets of a business become a greater point of focus for potential buyers. Minimalising It is a good thing that retiring entrepreneurs realise that even though they have such a great business and even a buyer, that the eventual sale is dependent upon the financing. Many businesses have such a great deal of ballast that it stands in the way of selling it. Ballast can be everything in a business in which the buyer is not interested but does have to pay for.

By minimising the ballasts as much as possible, a company becomes more resilient in case of unexpected shifts in the market and economic setbacks. On the other hand, the attractiveness of the company increases, investment for

potential buyers becomes less risky and the associated chances of a successful transfer larger. Shared interests Especially strategic buyers often only have an interest in a specific part of a company, in other words, a particular activity; the customer portfolio, etc. The rest of the company that is to be acquired is experienced as ballasts. When the uniqueness of the desired business is large enough, the purchaser will take the ballasts for granted. On the other hand, the ability to finance the acquisition of an entire company is for almost half of the buyers a major stumbling block. Especially in difficult economic times does this aspect clearly play a part and is one of the greatest disturbers of a successful transfer. A partial business transfer can be a solution in such a situation. Preparation It is striking that in less than twenty percent of all businesses, owners say they have a transfer plan for the continuation of the business in the future. There is therefore a lot to be done in this field. Entrepreneurs and their advisors who prepare thoroughly for a business transfer preparation can create a lot of value. A company 'Fit for Exit', it is more attractive, more valuable and much easier to sell.

The value drivers of a business

How much is my business worth? This is often the first question entrepreneurs ask themselves when they feel the time has come to transfer their business. Earning back your investment There are plenty of consultants and valuation methods to determine the value of a company. What counts in practice is what a buyer will pay for, and what price is acceptable for the seller. In addition, the financial eligibility of the acquisition is an important indicator of the value of the company. After all, the buyer must be able to earn back his investments within a certain period of time with the results he generates with the company. The moment you put a value to a business, you must realise that this is always a snapshot. The value is therefore partly dependent on the time of determining the value, the documented tangible and intangible value, the earning potential in the future, the sustainability and risks, in short, the value drivers of a business. To excel in value drivers alone is not enough. A company is only as valuable as a potential buyer experiences this. So it makes sense as a seller to crawl into the vision and background of the potential buyer, possibly with an advisor, to get to the bottom of what the buyer wants and needs. The â&#x20AC;&#x153;whyâ&#x20AC;? questions First of all, it is important that you formulate the ideal potential buyer for the business. Is this a family member, an employee, an outsider, a competitor, an investor or perhaps a

group of entrepreneurs? When the profile of the ideal candidate is formulated, the next step is to determine the attractiveness of the business at the time. Some essential questions the seller has to ask himself are: 1. Why would a buyer buy our company and not another one? Is this because of the unique competences and high motivation of the employees, the economies of scale he can realise by acquiring our business, is it the reputation of the business, the fact that we are market leader etc. 2. And what does the buyer gain by buying the company? Is it the high return of investment, the unique (and patented) knowledge or experiences, unique machinery or the exclusive right to deliver to specific customers? What does the buyer want? Delving into the (possible) wishes and needs of the buyer contributes to the awareness of the attractiveness of the company and therefore its value. For example, a buyer wants to know what the return on his investment in future will be, the gross margin of the products and / or services, how fast the takeover price can be earned back, or what the growth potential of the company is. Remember: a valuable company is a company that makes money! Buyers of a business have different reasons for buying a business or a part of a business: â&#x20AC;˘ The buyer wants to grow rapidly rather than autonomous â&#x20AC;˘ The company has above average profits

• •

The company has a unique value such as knowledge and experience, a portfolio of customers, a specialized product or service The company has products or services that supplement or complement the existing portfolio, in other words: the buyer sees opportunities for synergy the buyer wants to buy a competitor out of the market the buyer wishes to start a business without having to pioneer himself and build up his own customer base, network, etc. and generate immediate income.

The value of a company is often determined by the fundamental blocks of economics, namely supply and demand. It is therefore important to judge your own business or the part of the business you want to sell from the 'buyer's perspective'. Whatever you can get In practice, an objective and realistic valuation of a company means a thorough analysis of: • assets present in the form of tangible and intangible assets • operational management in the form of the structure, culture and operational performance and potential of the business • trade sentiments in the form of strengths, weaknesses, opportunities and threats • market sentiments in the form of economic conditions, supply and demand

The most often used valuation methods in practice are: • valuation techniques proven in practice • gut feeling (intuition) • own common sense The following factors have the most influence on the valuation of a company: • the reasonable income in the recent past and the future perspective (e.g., based on contracts with customers) • the market of supply and demand (operates the company in an industry that is ‘hot’ so to say, are there many candidates for the purchase) • the value of tangible and intangible assets (where the tangible assets are often a more realistic estimate) • ballasts. All non-profitable and non-core activities, obsolete and excess inventory, personnel, lack of maintenance and investment, possible future uncertainties and risks of the company, the industry or market 8 Entrepreneurs who want to sell their business can get a realistic image of the value of the company by examining the above mentioned. But in practice what is still most common: the price is whatever the buyer is willing to pay.

Teeffelen, L. van. (2007): ‘Business transfer in small businesses, small companies also saleable.’ Kenniscentrum InnBus, Hogeschool Utrecht en Kamer van Koophandel.

PRACTICE EXAMPLE In our metal processing company we produced our own product, namely barn equipment for horses, and we were a supplier for a number of agricultural plants and the waste industry. With some training, I became more and more adept to continue to improve the production process of our products. Only then, the company would be able to maintain an existence in the future. Through a strategic reorientation, I came to the conclusion that our own barn equipment products cost a lot of time and money to market. The choice to be made was not easy, but at some point I decided to focus on upstream activities. It took a lot less time to find customers for these products and yielded a higher return. What happened then was not so smart. I left the activity of the production of barn equipment with a substantial turnover, innovative products and a patent bleed to death. My idea was to focus on core activities and reduce all the other activities. Now I'm sure that there certainly would have been a candidate interested in taking over this activity. For example, a starting entrepreneur or a colleague who wanted to grow his business. In retrospect, I think that I was really na誰ve, but I just was not aware of the possibility of a partial business transfer at the time. So I was as you can call it, unconsciously incompetent. There was simply nothing known in the world of SMEs about selling a part of your business at that time. I would therefore recommend to any business owner to take a really good look

at their business and see if there is an activity that is interesting for another entrepreneur. That way you can optimise your own business and make it grow because you have a specific focus. This will prevent the loss of much knowledge and capital. I can tell that from my own experience.

10.

The most important customer

Where SME entrepreneurs in general invest a lot of time and attention to start and grow their business, there is relatively little to no attention for the termination of the company. This has the effect that the bulk of SME companies are not very attractive to potential buyers. That some 'old' companies disappear and are replaced by new ones is fully compatible with an expanding innovative economy. But for some industries this is a loss. Not transferring a company is then also a particular problem in shrinking industries or sectors undergoing structural (technological) changes. Moreover, a business transfer of an SME is often more difficult because the owner often plays a dominant role in such companies. Where viable businesses cannot be transferred, it is particularly damaging in regions that often suffer from economic decline or rural regions where the disappearance of the businesses can interfere a great deal in the economic climate. The most important customer In the past, smaller companies for the most part were transferred within the family. But due to a higher level of education, today's young generation has more opportunities to choose from besides taking over the family business. For this reason, more and more companies have to be transferred to third parties. This means that the attractiveness of many smaller companies needs to be enhanced. If this does not happen, then liquidating the business is all that is left to do.

The right of existence of a company is determined by the presence of customers. Customer acquisition and retention therefore get a lot of attention, and that makes sense. However, where SME entrepreneurs pay close attention to the "ordinary" customers of their business, in general they forget their most important customer. And that is the (future) buyer of the company. This is the client who places the greatest order in the life of the business, namely: the sale of the company or part of it.

Preparation It appears that a timely and thorough preparation is the key factor for a successful takeover. It is therefore striking that few SME entrepreneurs say they have an "transfer plan” on paper. There is therefore so much to do in terms of the preparation of the transfer of the business. Without this preparation, you have a high probability of failure of the business transfer. Win-win The preparation before selling businesses can be improved. It is also smart to approach the business transfer from a winwin perspective. Finding the main customer is, just like finding "regular" customers, for many entrepreneurs a difficult job. But once you have found the perfect buyer, do not let him run away because your business lacks attractiveness. Suggestion Do not build pipe dreams! As an entrepreneur, try to think and act rationally as much as possible during the takeover process, and especially in the valuation phase. Many entrepreneurs fall into the trap overvaluing their company. On paper, the value of a company can still look so good, in practice; the value of a company is determined by the eligibility and "whatever a buyer is prepared to pay!" The value of a company depends on several factors, including: • uniqueness of products / services • Success factors like unique knowledge, flexibility, innovation, etc. • flexibility, knowledge and experience of the staff • added value to customers • debt position of the company • existing assets (materials and resources) • knowledge and experience • presence of sale contracts, licenses and exclusive distribution channels

11.

Entrepreneurs miss out on money!

To prevent that a business transfer ends in a (unnecessary) liquidation and termination of a company, it is advisable to start preparing at least three to five years before the actual takeover. It is striking that only a handful of entrepreneurs make a thorough takeover plan. And this will lead to the fact that entrepreneurs miss out on a lot of money. An entrepreneur needs to keep up with everything that has to do with the transfer businesses during the preparatory process. The following aspects play an important role: • structuring and making the company transparent • optimizing the business processes • the elimination of ballast • finding a suitable successor • fiscal and legal aspects of business transfers • emotional aspects of the business transfer • thinking about the life after the business transfer Good entrepreneurship The preparation phase of a business transfer may take a long time. This depends mainly on the situation in which the company finds itself. A good planning and acquisition strategy with concrete targets is also necessary for a good business. A company that is up-to-date is in fact faster and easier to sell and gets a better takeover price.

Objectives of business transfers Making the strategic objectives of a business concrete and transparent is important for a successful takeover. Some examples of these objectives are: • financial targets for the future (turnover, fixed and variable costs, profit) • commercial objectives (market share, rate large vs. small customers) • Quality Objectives (scrap and waste minimizing, throughput time) • procurement objectives (supplier reduction, savings) • organizational objectives (division of labor, increasing entrepreneurship (autonomy) in employees) • production targets (volume, throughput, cost per unit) • Staff objectives (training, roles, knowledge sharing) In short, by starting to plan and prepare early on, and by setting concrete goals, much money can be earned. Not only to maximize the value of the company for the sale, but also by saving and maximizing turnover in the preparation process. So there is money to be gained during this process while keeping an explicit focus on the core values of the business.

PRACTICE EXAMPLE Our bakery had been in our family for 5 generations. My husband started to work here directly when finishing school. It is a hard-working job that took its toll when he was forty-five years. My husband is a baker at heart, but after some thirty years of working day and night his mind and body were burned out. This process was accelerated because we live in a village of only a thousand people, making it difficult to keep the bakery profitable. But when you are still so young, you do not want to just sit around for the rest of your life. After much deliberation we decided to divest of the bakery section and keep the store in bakery products. But finding somebody to take over the bakery in our small town was not easy. Luckily we found a one-man company that wanted to expand with our bakery. The acquisition still took about six months, but then we did have a nice deal. The staff was taken over by the new owner, and with this he could guarantee the quality and delivery of the products. Especially for our employees, I am very glad. You cannot quickly find another job as a baker in such a rural area. My husband got his energy back after the transfer, even though he admitted that the acquisition process had fallen heavy on him. We can now concentrate fully on the store. That resulted shortly after the takeover in revenue growth, product innovation and new distribution channels such as supermarkets and a web shop.

Even though it was a difficult decision to say goodbye to the bakery after it had been in our family for 5 generation, we are happy and proud that we have taken this step. We now hope that by building a great bakery store, our children will perhaps be the next generation that will continue it. At least now our social life is much more balanced, so that should not be an obstacle anymore like it was with running a bakery.

12.

Invisible assets

Many SME entrepreneurs are not aware of the importance and value of intangible assets in a business transfer. This causes a lot of unnecessary knowledge and capital loss. Intangible assets are assets that arise from the knowledge, experience and network of a company. These values are a source of (future) financial benefits and set the business aside from the competition. However, there are few business owners who are concerned with this, even though intangible assets are becoming increasingly decisive for potential buyers to decide whether or not to buy a business. Important production factor Knowledge and experience are becoming increasingly important for a business. This means that smaller companies have to continuously innovate and distinguish themselves from other businesses to survive in the market. In connection with this the importance of intangible assets is growing in determining the value and hence the attractiveness of a company. A long-term study shows that the importance and marketability of intangible assets in the near future will be an important factor of production for businesses and potential buyers. 9 That means, according to the researcher, also that various markets for the supply and demand of intangible assets (interests in partnerships / projects, brands, patents, etc.) will arise. This will make the value of these assets more transparent and comparable. It is therefore obvious that the 9

Linnemann, C. (2007): ‘Germany’s Mittelstand – an endangered species?’ Deutsche Bank Research

trade in individual businesses and intangible assets will play a large role in the future market of SMEs. This will provide a new dynamic for the transfer market. Some examples of intangible assets that are a worthwhile investment for potential buyers may be (if registered): • image and trademarks, unique domain names • reputation / image / reputation • books, websites and other knowledge providers • licenses and exclusive (distribution) contracts • patents, unique designs, etc. • existing unique (quality) procedures and instruments • innovativeness of a company • the ability to operate with existing knowledge of markets and (new) technologies in niches • knowledge and experience of staff • interests and the presence of professional networks / partnerships / alliances / cooperatives Mobile knowledge Intangible assets in the form of human capital (knowledge and experience) are difficult to transfer because employees are not owned by a company. This form of intellectual capital walks in in the morning and then again out in the evening to return home. In Chapter 14, we will go into this further.

Transferability The transferability of intangible assets is one of the biggest stumbling blocks for (smaller) smaller SMEs. This means that when a company is dependent on the knowledge, experience and network of the 'old' entrepreneur, the transfer is timeconsuming and it is difficult to say whether anything can be transferred to the successor successfully. When a business transfer is thoroughly prepared, and consequently is 'Fit for Exit', then the intangible assets are, as much as possible, made tangible, visible and are recorded. The result is that the transfer is much more effective and the buyer actually gets what he or she has purchased. Learned by bitter experience, more and more buyers of companies are aware that the transferability of the intangible assets is a critical success factor for a successful takeover. Entrepreneurs therefore need to keep an eye on this from the start of their company. Not everyone makes it to the retirement age. Additionally, for the younger generation it is not that common to run the same business for your entire life and sell their company at a younger age to start a new business. Source of value Intangible assets are in most of the smaller companies an indirect source of value at the valuation of the business. This is because entrepreneurs are not fully aware of this and therefore have not made the intangible assets tangible and visible. Intangible assets are only attractive and valuable to potential buyers when they are: â&#x20AC;˘ 'tangible' (proven successful) â&#x20AC;˘ proven to belong to the company â&#x20AC;˘ not dependent on one or more key figures

• •

generating an income stream or are clearly related to an income stream transferable to a new owner

It would be smart for SME entrepreneurs to take a critical look at their business and to see whether the present intangible assets are “fit for exit”. Tangible assets raise the attractiveness and therefore the value of a company greatly. It would be a missed opportunity for the entrepreneur if the intangible assets would go to waste because they were not made tangible. Suggestion How do you ensure that your business is structured, transparent and optimized for the transfer process? These are some practical tips. Make sure that: • the company can continue to run without the entrepreneur, so delegate all the tasks that can be delegated • a transparent administration is conducted. It radiates more trustworthiness • the (legal) structure of the company is optimized • a tax expert has taken a good look at the business to make sure that you have optimally made use of the fiscal possibilities • staff will be informed in due time, the employees feel change earlier than you might think. By informing employees properly you will prevent an unwanted leave of employees. Remember: highly motivated staff is worth gold! • you know how customers feel about the company by using a customer satisfaction survey

13. Knowledge is leaking out of the company! The stepping down of retiring entrepreneurs leads to a great loss of knowledge and experience in SMEs. Many entrepreneurs spend too little time and focus on knowledge transfer when working of the transfer of their business. A jump start To ensure continuity after the takeover of a company has taken place, it is necessary to begin the transfer of knowledge and skills early on. In practice this is not done properly or not at all. When the seller is going to enjoy his well-deserved retirement, there remains a gaping hole of knowledge and experience in the company that will be difficult to fill. A transfer of information at the sale of the business is not the only reason for documenting and registering knowledge. What would happen if the entrepreneur would passes away before his or her retirement? In many cases there remains a very difficult task for the family members. It is therefore important that entrepreneurs frequently ask themselves what the consequences of their passing would be for the business. The successor needs the knowledge and experience of the selling entrepreneur to make a jump start with his business. When this knowledge is not transferred, the "new" entrepreneur often makes unnecessary mistakes that could have easily been avoided.

Knowledge transfer Business transferring entrepreneurs who prepare well take into account the transfer of knowledge. To secure the foregoing, it is important that the old entrepreneur 'disconnects' timely from the company and delegates as many tasks as possible to the staff. On the other hand, it is important to document various matters on paper and digitally. Through a thorough knowledge transfer much unnecessary suffering is preventable. It also preserves the knowledge for both the company and its employees. And this is an essential aspect of a successful business transfer and the continuity of the company.

PRACTICE EXAMPLE Suddenly everything changed. My husband died of a heart attack when he was just fifty. And there we were, me and my sons. Where were we going to go from there? I worked for years with my husband in the business, a technical wholesaler for the industry. But I had little knowledge of all the tasks that my husband performed. In addition, I by no means knew all the people in his network, and who was responsible for what and so on. Since a lot of the knowledge and the network of the business was in my late husband's head and not on paper, we quickly came to the conclusion that the company was unsellable. It was missing a large piece of knowledge that was essential to the business. We were also in a tough economic time and business figures were not optimal. In consultation with my sons, we decided that I, together with my eldest son would continue the business. That was quite a task because we had a lot to learn and figure out what my husband had stored in his head. Everyone around me told me I was crazy. But we had no choice, there were debts and we could not do without the income from the business. Now I'm 68 and still working part-time in the business. The strange thing is that there is now a good working situation, but we actually have exactly the same situation. It is now my son that has the unique expertise which is why customers choose us. The problem is that this knowledge is in the head of my son. But I myself also have specific knowledge and a network of which my son in detail knows little about. We have always said

that we need to share that knowledge, but due to the everyday activities we never really come to this. Should anything happen to him or me, then our family will be in the same situation as when my husband died. To be well prepared we have turned to a consultant. Together with him we have decided that we are going to put all the knowledge and relationships on paper in detail to make it easier transferable in the future. This makes the company easier transferable, the continuity is better ensured and it is worth more when my son decides to sell the business in the future.

14. Help! The businessâ&#x20AC;&#x2122; value is walking out the door! It is becoming more and more obvious that capital is the deciding factor in determining the attractiveness and therefore the value of a company. But human capital within the SME companies is not tangible and very mobile. Value is walking out the door at the end of the day We are moving more and more towards a knowledge-driven economy. This means that knowledge and experience, determine the competitiveness and therefore the existence of a company. In a business transfer, this means that human capital is crucial to the attractiveness, value and success of the acquisition. For example, companies that second highly trained personnel to government agencies are highly dependent on the skills of people and their creativeness. Here, the human capital is an important asset and therefore greatly determines the value of the business during a potential takeover. The knowledge of these companies is usually within the 'heads' of the employees. But at the end of the work day, this value leaves the company and you can only hope that it will return again the next morning. These kinds of companies are often worth very little without these essential employees. People determine the value During a business transfer in such companies, the human capital factor is decisive for the overall attractiveness and therefore for the success of a business transfer. If for whatever reason the staff does not feel good about the

potential business takeover, it simply cannot take place because the business will then have little worth. If the acquisition does take place, then the financial disaster for the new owner will be great. After all, highly and specially trained people can generally find a job anywhere, and will leave for another employer if they are not satisfied. In practice this happens quite regularly with all the disastrous consequences that come with it.

In these cases often the seller also does not emerge unscathed from the battle because claims are increasingly being filed or because the seller has not gotten the takeover sum at once and thus is dependent on the future performance of the company. Both buyer and seller in all cases have an interest in the continuous operation of the

company so that the value of the company remains intact, and is therefore good for both buyer and seller. Tying knowledge and experience to your business It is therefore important to record knowledge and procedures as much as possible so that it is (better) transferable in the future. Document and record knowledge and experience, for example in studies, books, digital files, software programs or other publications. On the other hand it is important to find a buyer who "seamlessly" suits the company and the employees. This means that the ideal candidate should be preferred over the highest paying candidate because ultimately the satisfaction of employees with the business acquisition determines the success of the transfer.

Suggestion A business transfer will happen more quickly when both parties have a â&#x20AC;&#x2DC;win-winâ&#x20AC;&#x2122; feeling.

15. Information, communication and coordination Information is a critical factor for a successful business transfer. Communicating the information present is a second important aspect. After all, if there is sufficient information but it is not projected towards the potential buyer, then there is a so-called information asymmetry (information disadvantage of the buyer against the seller). This increases the chances of a failed business transfer greatly. During the preparation for the transfer of the business, it is important to capture and record all the necessary and value-adding information to ensure that the potential buyer and his advisor can take this knowledge into account. Information A buyer from outside the company is dependent on the information he receives from the seller. The seller knows his business inside and out and thus has an information advantage over the buyer. It is important for the buyer that the company is as transparent as possible when presented by the seller. The buyer can get a much better picture of the company and the possible risks of the purchase. Does the potential buyer not get enough information and are therefore not all the risks clear, then the chances are that he will pull out of the acquisition. Research shows that in 80% of the business transfers, only one buyer is available. It would therefore be wise for entrepreneurs who want to sell their business to provide all necessary information to the potential buyer.

What information is important in any case for a buyer to be able to get a good picture of the business: •

•

Company profile Amongst other things an up to date website can give a clear picture of the history, the present situation and the vision of the future of the company along with other important information Customer satisfaction By regularly conducting a customer satisfaction survey, a track record (file) on the overall satisfaction and needs and desires of customers, or the image / reputation of the company can be captured. Customers are the most important factor of existence of a company. With an excellent reputation / image and satisfied customers, customers will not soon "run away" after the acquisition, which of course determines the confidence of the buyer in the acquisition and therefore determines whether the transfer will take place or not Market In what market and for which customers does the business operate, what is the current status and future prospect of the market. These are important questions to answer. But also a market research and competitiveness analysis (what are the main competitors and what are their strengths and weaknesses) are things the buyer can provide which provide valuable information for the buyer before and after the business transfer Finances Obviously, the annual figures of recent years are important information for a potential buyer. But a

â&#x20AC;˘

clear and objective picture of the future in the form of a multi-year budget is more important. A buyer wants to know what he will gain after a business transfer. It is a good idea to make use of benchmarking: compare financial ratios with those of other companies in the industry. If the company scores lower, investigate the cause so that measures can be taken. Please note that improving the causes of poor financial indicators (solvency / profitability etc.) often can take several years before the desired position is reached General information Information like unique intangible assets (patents, designs, knowledge, experience, etc.), employment contracts of staff, any contracts with suppliers and customers, occupancy rates, potential expansion markets, potential areas for improvement of the company, etc. is important data to capture.

Quality Management Systems (ISO or EFQM) are eminently suitable instruments to capture corporate and customer information according to established and transferable procedures. In smaller companies, capturing information in a file is often sufficient. It is therefore important that business information is stored and not just captured in the heads of employees or one or more key figures in the company, for example the entrepreneur himself. And remember that paper is a willing victim! This famous statement also works in a business. Annual figures are generally easy to manipulate and say a lot about the past, but little about the future. Buyers are becoming increasingly aware of the foregoing and emphasize in their considerations before buying a business more and more the design /

structure, knowledge and experience, operating performance and innovation capacity of the company. It is therefore of great importance that the company is transparent and the structure of the company is at a high level to be able to generate sufficient distinctive power. This provides the entrepreneur with both higher (financial) performance and improved marketability of his / her company. The correct analysis and the valuation of a company depend greatly on the quality and extent of the information available. Information such as financial data is important, specific to the company or the market in which the company operates. But not only official data compiled by the auditor are important. Internal budgets, project / product / service (after) calculations, etc. contribute to the transparency and provide evidence of the fair value of the company. Data on the (future) development of the relevant market or industry are also of great value. Communication The success of a good business succession lies mostly in good and adequate consultation and clear communication with all stakeholders and in particular the purchasing party. It is wise to discuss how the communication during the acquisition process will take place. This with the aim of minimizing or preventing the generation of negative emotions resulting in a greater chance of a failed acquisition. An open, honest and respectful dialogue between the different parties makes the chance of a successful takeover greater. When the communication is insufficiently addressed, soon emerge the following problems:

â&#x20AC;˘ â&#x20AC;˘ â&#x20AC;˘

family members, staff, funders or other stakeholders might feel wronged family members, employees, financiers and other stakeholders interfere unsolicited with the business transfer jealousy, suspicion and frustration with relatives, employees or other stakeholders emerges

Communication is one of the most underexposed aspects in a business transfer. This is partly because a business transfer is often heavily emotionally charged. On the other hand professional guidance is often lacking. It is important to write down in detail all the agreements made during the negotiations. This avoids ambiguities that can turn into a conflict and consequently lead to a failed transfer. Coordination Entrepreneurs generally only experience a business transfer once in their life. This means that most entrepreneurs barely, and often do not have any experience at all with this matter. On the other hand, every business transfer is unique and therefore may not benefit from the knowledge you gained in a previous take-over. In order to take a step in the right direction, it makes sense to use one or more consultants during the take-over process. An experienced and dedicated advisor often has the role of director in the transfer process and is best suited as an independent person to keep track of the progress of the business transfer. Important in a business transfer is getting the right information to the right person at the right time in order to create trust with all the parties. Information, communication

and coordination are therefore key words that lead to a successful takeover.

Suggestion! Do not change too quickly. Information, communication and coordination are invaluable ingredients for changing/improving a business during the pre-transfer phase. By maintaining good communications and a good harmony in the business, you can prevent your best employees from leaving. Remember: people do want to change but they do not want to be changed. The employees in a business represent the value now and in the future. For buyers this knowledge and experience is determining for the success of the business transfer. So do not change too quickly.

16.

Buyer is shifting risks away from him

Many business owners think they can enjoy an easy life from the money they earned after the business transfer. What if after the acquisition the buyer discovers "hidden defects" in the business and files a claim with the seller? Business transfers are almost always a complex story. Due to an increasingly risk-averse attitude of buyers and an attempt to shift the risks to the seller, there will be an extra dimension that can put the success rate of a business transfer under pressure. Certainties Entrepreneurs who are transferring their business are increasingly being held accountable for the risks that the buyers are shifting to them. This means that even after the actual transfer of the business, the risks keep lingering by the seller. Many buyers of (parts of) companies require collateral for ensuring for example sales, the condition of the assets to be acquired and the company's reputation and so on. As a result, the number of corporate takeovers through a so-called earnout has grown explosive. This means that the selling price to be received is partly dependent on future earnings or other performances of the business.

Claims It is becoming more and more common that buyers submit a claim after buying a business if incorrect information was supplied by the seller, stocks that are too high were held or because overdue maintenance and investments were discovered that have negative consequences for the business and its operation. The above is a trend that gradually expands. How can entrepreneurs who want to transfer their business wholly or partly prevent these risks as much as possible? The answer is a thorough and timely preparation of the business transfer. This means in short: â&#x20AC;˘ structuring â&#x20AC;˘ optimize and â&#x20AC;˘ eliminate 'ballasts' It is important that entrepreneurs who want to sell their business have it analyzed by an experienced consultant in the merchantability of it. Experience shows that many companies are not ready to be sold and are therefore not being sold. Wishes of potential buyers By mapping the company and especially the ballasts present, timely action can be taken to make the company more attractive to buyers. In practice this often means divesting not profitable and non-core activities. In addition, it is important that sellers become aware of the wishes and needs of the potential buyer. What does the buyer really value and what does he gain by buying this business?

The fact is that without proper and timely preparation much of the smaller companies will not be sold. This has a huge negative impact on the economy, the maintaining of employment, knowledge, experience and of course on the pensions of the people concerned. Entrepreneurs who want a successful business transfer must realize that the buyer will try to shift as many of the risks as possible to the seller. Why buyers do NOT buy a business In addition to finances, there are a number of practical and often unpredictable reasons why the buyer and seller ultimately do not reach a successful agreement. • the activities do not perfectly fit with the activities of the existing business • no personal connection between 'potential' buyer and seller • the consultants advise the buyer not to buy the company • the buyer is experiencing too many uncertainties and thus risks • the buyer sees (too) many problems with the integration of the company to purchase all or part of it • the buyer experiences (too) much ballasts and thereby risks Why buyers DO buy a business Reasons for the buyer and seller to reach an agreement: • Revenue Assurance (job contracts) • valuable intangible assets (trademarks, patents, exclusive supply and distribution rights) • distinctiveness (niche markets, innovation, knowledge and experience) • breakdown of sales (customer structure, i.e. revenues not dependent on a few large customers) • No ballasts (little / no waste of labor and materials, obsolete machinery and supplies) • potential for expansion (growth potential in terms of turnover and profit) • state of the business (investment needs, state of repair of the machines) • diversification age of staff (asymmetric age pyramid)

17.

The art of war and business transfer

Both business acquisitions by relatives and third parties often lead to full on battles. In a takeover situation, the buyer and seller are often contrasted as generals in an army. The trust they feel towards each other is small and the suspicion is high. At each step one makes, a step by the other party will follow. For clarity, a (partial) takeover is not a game. A successful takeover has a nice resemblance to politics: always look for consensus. Yet still some entrepreneurs can learn from the martial arts. The Art of War by the Chinese general Sun Tzu in the sixth century BC is a beautiful example of the art of war which might help entrepreneurs. The most important piece of advice is: you should always have a battle plan as an entrepreneur. Second: who wins one battle, can lose the next one. In a situation of a business transfer, full out war is out of the question, but with some creativity a number of Tzu's strategies can be easily applicable for entrepreneurs. The ideas of Sun Tzu applied to business transfers: Reviews Here are in short the five elements that form the basis of a successful business transfer: 1. Mission, which makes my business unique? Who is the ideal buyer for my business? Why a full or a partial takeover?

2. Climate, how are the company, the sector and the economy doing? 3. Existence, is there a right of existence for the company in the future? How does the company develop compared to the competition? 4. Leadership, is the continuity of the company secured if the entrepreneur leaves? Is the business dependent on one or more key figures? 5. Methods, is all essential information recorded? Are the intangible assets recorded and transferable? What other values does my business have? Answering the questions above helps the seller of a business to gain more insight and awareness. Especially the question of who the ideal buyer for the company is, is important. As it is with battles, it is indeed important to know your opponent very well. Fighting a battle It is important to limit the duration and cost of the (partial) takeover of your business. Preparing the business transfer is the source and the power of a successful takeover. The effectiveness of the acquisition process is normally determined by consensus of the parties, not by the superiority of one party. Delivering battles is therefore strongly dissuaded. They cost a lot of time and always leave casualties! Momentum has a significant strategic advantage Use of creativity and timing for building momentum is an essential strategy to achieve a successful takeover. In addition, differing opportunities must be recognized and utilized. No takeover is in fact the same. It remains to be

customized to create a win-win situation. Weaknesses and strengths The weaknesses of a company can also create opportunities. No person or company is perfect. And this provides opportunities for improvement and advancement. It is important that both the buyer and seller come to realize this. An armed clash The dangers of a conflict are in every corner. Conflicts can usually be prevented by maintaining an open and honest communication, mutual trust and understanding. It is also important that all parties involved in the acquisition are aiming for a win-win situation. Because when it comes to a conflict, there is always a loser. Adapt to variables In a business acquisition process there are relatively a large number of uncertainties. But the seller can eliminate a lot of these uncertainties by presenting a transparent and result oriented company. Nevertheless, there is a need to be flexible. As a result, the parties can often successfully respond to changing circumstances without the takeover turning into a failure. Deployment of troops Which advisor do you deploy in the various situations in which you find yourself in a business transfer? Do you use an accountant, tax advisor, mediator, business administration, valuation specialist or even a lawyer? The use of consultants often focuses on the aim to evaluate the opposition. Sometimes this ends in a (silent) confrontation between the advisors themselves. One expert does not want to be

outdone by the other and will only fight for his client. Recognize these kinds of emotional processes that may be the case many problems to prevent a lot of damage. The terrain There are in a business transfer three distinct types of resistance: 1) Distance. Distance can be explained twofold. Distance in time; the processing of a business transfer so to speak. When one of the parties (unnecessary) is stretching time it quickly awakens irritations. The longer the acquisition process takes, the greater the potential for conflict and thus the failure of the takeover. Secondly, there is the distance that needs to be taken by the seller. Old entrepreneurs often tend to be too involved even after the acquisition. There is nothing wrong with that, but they need to recognize that there are often major changes taking place after the acquisition. Often these changes can be very difficult to accept. 2) Hazards. Each (partial) takeover has risks (financial, operational and for the people). Human risks are often the greatest; there is nothing as changeable as humans (buyer, seller, employees, customers, suppliers, banks etc.) By providing clear information and communication, and capturing oral agreements on paper, much suffering can be prevented. 3) Obstacles. In many acquisitions they arise: the unexpected obstacles. This can be an important client that leaves, a family pushing his opinion without being asked, a license for business use which is not correct, disease and so on. Therefore, a clear timeline of the acquisition, openness and a common goal

(successful takeover) is important to be able to overcome these obstacles. Attack using arson When a business transfer to someone outside the family occurs, the acquisition parties often do not know each other well. You see often that each enters the 'battleground' for themselves and that over time the setting turns into a battlefield. When the buyer and seller each want to get the bottom of the barrel there is always one who gets the lid on his or her nose. And that will add fuel to the flames! A conflict soon arises as the buyer pulls out of the seller no longer wants to work on a smooth transition after the effective takeover. Listening to and respecting each other are extremely important factors for a successful business transfer. In another chapter in this book we will discuss the role play in a business transfer and why the satisfaction of both parties is important for a successful takeover.

Advice Make sure you have a well-founded, real en financeable value of your business. Half of the buyers experience financing the business transfer as the most important roadblock they encounter during the take-over.

PRACTICE EXAMPLE My husband worked from an early age in the construction business of my father as a project manager. I did the administration. We had a profitable company with 10 employees and a good range of work from the restoration of churches, construction of houses to renovation and construction of office buildings. The intention was that my husband and I would take over the business from my father. My father was well in his sixties when I once asked him if he was starting to think about retirement. He exploded, who did I think I was! He could still go on for many years and would continue to lead the business for as long as he could. But that was not all. As a younger generation, we naturally wanted to advance by renewing. My father is of the generation where everything was calculated on the back of a cigar box. The computers that were there became increasingly obsolete. So I asked my father for the umpteenth time if it was not time to invest in new computers and a modern calculation and drawing program. The office was too small when I brought this up. The computers were not even necessary, he said. Quality of the work, that was what it was all about. That the quality of the work is the important thing I could agree with. But Iâ&#x20AC;&#x2122;m sure that quality is formed due to the proper preparation of the work! Increasingly irritations and conflicts arose between my father, my husband and me. At a certain point you just cannot take it anymore. Every morning I was reluctant to go to work. We

also saw the company increasingly moving backwards because my father did not want to invest in it. After many conversations between my husband and me , we made a difficult decision. This could not go on any longer. Not only the business relationship but also our private relationship had gone down the drain. My father was forced by us to make a decision, whether he or we are out. Given the narcissistic traits of my father, the outcome was predictable: we left the company. Fortunately we had been building up a minority stake in the company so we were not left entirely empty-handed. After a lot of back and forth bickering between our consultant and the consultant of my father, it was decided that we would continue the restoration activities in a new company. We also took three employees with us. Afterwards we look back on a lot of terrible years. What misery did we encounter. Yet we now have a great company that came forth out of the partial takeover. We have plenty of work and expand more and more. Recently, the company of my father went bankrupt. And that hurts a lot, because it was not necessary. We have seen it happen at a distance because contact with my father since the events have minimized. My mother I still speak regularly. She recognizes the mistakes of my father, but claims to have little influence on him. It is a shame that it turned out this way, but at some point you have to choose for yourself and for your own household.

18.

A deal is a deal. Or is it?

During business transactions generally al decisions are recorded. It shows that in practice, especially in business transfers, it would also be wise to record what had not been decided. Not a sure thing Recording and documenting appointments is the most normal thing in the world, after all parties can be held to the agreed details. Especially in a business transfer, it is not always a sure thing that all decisions and agreements are recorded. Afterwards there is often some disagreement caused when one of the parties believes there are additional agreements made, besides the agreements documented on paper. Many companies have an extensive inventory which in many cases is not fully documented to paper. In a business transfer, the buyer assumes that he is buying the whole company, and that the vendor has documented all assets. In retrospect, it often appears that this is not the case and that for example, the seller thinks that the stock of construction materials that are not specified on paper, can be useful for his personal use and therefore takes it with him. Or a laptop, vacuum cleaner and stepladder that might still prove handy for his home. The seller believes that these materials are not included in the sale and demands that they be returned to him. This can obviously cause irritations with the buyer of the business and makes a breeding ground for a potential conflict.

Too enthusiastic In addition to established agreements, there are also not recorded agreements which often lead to a conflict between the buyer and the seller. An example is enthusiastic oral statements made by the purchaser to be quicker with paying back the borrowed money to the vendor than was stated in the contract. Later it turns out that this well meant statement was made too quickly. The seller shall not forget this agreement at any time and will start getting annoyed by the breach of the agreement, even though it is not on paper. When the parties start confronting each other about agreements made, conflicts will be soon to come. It is clear that any explicit agreements about products, financing, etc. need to be put extensively on paper. Also, repayment schedules, interest rates, penalty clauses for late payments or repayments, etc. should be recorded. Interpretation In a business transfer emotions may run high. In a successful transfer when both parties have agreed on the terms, they are convinced of the good intentions of the other party. Many details that were verbally agreed upon may not be recorded under the guise of: it'll be fine. Especially with business transfers in the family, this is more the rule than the exception. Capturing all the agreements made in detail is essential to avoid later conflicts as much as possible. But even though everything is recorded in detail, the practice often shows that there might still be unclear agreements.

Five essentials If you have successfully run through the pre-business transfer phase your company is attractive to one or more potential buyers. What is next? Whether you like it or not, when selling your business, the legal aspects are very important in order to protect both you and the buyer. This will require a â&#x20AC;&#x2DC;Memorandum of Understandingâ&#x20AC;&#x2122; also called a contract of sale. No deal is the same, but a SME business transfer deal mostly knows a 5 stage process: 1.) Pre transfer stage agreement In this stage, before talking about the sale, it is normal that there is a confidentiality agreement signed by both parties. With this agreement parties ensure that information and details are kept confidential during and after the negotiation stage. 2.) Details of pre-sale agreement In this document both parties agree in detail to what is included in the sale. Also very important in this agreement is to document what is excluded. This agreement also contains the selling price, warranties, periods of negotiation, indemnities and all other conditions of the sale. This agreement is very important and needs to be carefully drafted. So take you time for this agreement to prevent setbacks in later stages of the transfer. 3.) The numbers (Due Diligence) The buyer and his consultant will require a due diligence investigation. In the due diligence the buyer investigates the

whole company to be sure there are no hidden deficiencies. To avoid confusion and unnecessary suspicion it is important for the seller to have all important information captured digitally or on paper and to communicate openly and honestly. In addition, it is important to have a fair and underpinned selling price. So be aware, this is the most important stage in which often a business transfer gets cancelled. 4.) Sale agreement This agreement includes all terms of the deal in detail. Because no business transfer is the same, this contract will be tailored to meet the needs of both the seller and the buyer. What is in this document? The selling price, how the price is being paid, non-disclosure, warranties, legal details and all other terms of the business transfer. But what you also should capture in the sale agreement is a “what if…” clause. A “what if…” clause is very important because when suddenly something goes wrong, knowing what to do and how to act is essential for both parties. You don’t see often a “what if…” clause in a sale agreement because both parties mostly are in a euphoric mood when closing the deal and don’t think about what can go wrong. So be aware! 5.) Warranties and indemnities agreement To avoid future claims, both parties will want warranties and indemnities from each other. But the buyer often wants warranties to avoid claims, from costumers, employers and other stake holders, from the period before the transfer. So this agreement is needed to capture the needs of both parties. For both the seller and buyer it is important to set a limitation on the maximum amount to claim, and a time limit, for potential liabilities. Therefore, reliable information in all

the business transfer stages is important to avoid future issues! So preparation, clear communication and documenting all agreements save time and (future) money in SME business transfers.

What can be documented in a transfer contract: - warranties (both seller and buyer). Financial results, flaws ... - competition clause for the buyer and optionally his / her family - guarantees to customers of deliveries before the transfer - what to do when disputes and flaws - what will be the role of the seller after the transfer - financial settlement (purchase price, interest rate, repayment schedule, penalties) - what exactly is transferred - dissolution clause for both parties The above are only examples and is not an exhaustive list. Each situation differs and therefore needs other agreements. When an American company is taking over a European company, the acquisition contracts and additional clauses are generally very extensive. When a family member, co-worker or someone in the company is the buyer of the business, there are usually a lot less agreements documented because the parties trust each other. Whether this is always desirable in practice remains doubtful.

19.

The role-play of business transfer

The human aspect in business takeovers often turns out to be the weakest link. The emotional side often wins over the rational side and that often leads to a failed takeover. What factors have the upper hand here and how does the role play between seller and buyer work? In practice, each time, the business transfer turns out to be the most emotional process that happens to an entrepreneur. Emotions are often sparked by the slightest remark, frustration or thought. Buyer and seller are often both fighting for their best interest and do not consciously think about a real win-win outcome of the takeover for both parties. In many cases one of the parties pays the price when the situation gets out of hand. Friend or foe The seller can avoid a lot of unnecessary frustration when there is a directed search for the "most suitable" successor right from the start. If the successor does not come from the family and / or staff, someone outside the company needs to be found. A successor from outside the company is a 'foreigner' and as such is also often approached and treated like one. On the other hand, a buyer from outside the company is often more critical than someone who knows the entrepreneur and the company well. This implies that the seller and potential buyer are often more enemies than friends and are both fighting for their own business, which makes creating a win-win business transfer difficult.

It is advisable for the seller to start his search for the "perfect" buyer right from the start. This is the buyer who has a genuine interest in the company, or parts thereof, and who has sufficient knowledge, experience and capital to successfully continue the company following the transfer. But with just a good candidate, you are not there yet. Both parties must also both benefit from the transfer. When one of the parties feels (seriously) wronged during the transfer negotiations, the chances are that no acquisition will take place. Or that the business transfer leads to a failed business after the take-over. Role play Especially in the pre-acquisition phase, the position of the buyer is generally stronger than that of the seller. The potential buyer can always step out of the acquisition process quite easily until the signing of the (preliminary) agreement of the acquisition. The above is not always the case, but in practice it often seems to be a reality. This often causes confusion and frustration for the seller, for example, when the buyer is overly taking his time before making decisions. The seller can provide guidance in this by providing clear and complete information to the potential buyer. In the following image you see the role play in the SME business takeover process is brought into picture.

Role-play buyer and seller before, during and after the (partial) business transfer Preperation/matching

Information transfer Acquaintance

Intention agreement Negotiations

Pre-transfer phase

Due diligence

Agreement/contract Transfer of business, information, knowledge and relations

Transfer phase

Post-transfer phase

Influence shift The position of the successor is in the pre-transfer phase on average stronger and less binding than the position of the seller!

Influence of the seller for a successful transfer is crucial and important! ÂŠ P. Regnerus MBA 2010

Irritations During the takeover process, there can quickly arise irritations about (minor) comments that are made. This often creates tensions between the parties so that the relationships are often strained and the risk of the failure of the proposed business transfer is greater. Here are some comments from buyers and sellers that can quickly lead to irritations. Irritations with the buyer: • "We have a unique business and (professional) people. You're lucky that you can buy the company”. Such a statement from the seller testifies of hubris and soon arouses irritation with the potential buyer. • "Immediately after the transfer of the business I'm gone." A potential buyer will be suspicious and will have less confidence in the acquisition. For a thorough transfer, the seller is still needed for a while. • "We work extremely efficient and result oriented." When the potential buyer inspects the premises and warehouses, he sees a lot of laying around tools and materials, cluttered workbenches and workstations. The credibility of the seller will decrease and the suspicion of the buyer will grow. Irritations of the seller: • "The selling price will need to be lowered, otherwise I cannot finance the acquisition, I'm just a poor entrepreneur!" A potential buyer who says this and does come driving in a big luxury car arouses unnecessary irritation to the seller. • "You should be happy that you can sell the business." This remark often stems from the idea of the

100

potential buyer that the price is quite high but causes irritation with the seller. The lesson to be learned: the description of the company, and the acting of the seller must comply with each other. Everything must be right! There should be no contradictions. They will lead over and over again to frustration and often to a failed takeover. Cherish the buyer In eighty percent of all the business transfers there is only one suitable buyer. 10 This means that most sellers only have one chance to transfer their business. Consideration and attention for this buyer is therefore important. Sellers therefore need to trust and cherish their potential buyer. This is very difficult, how do you trust somebody you do not know? An advisor and a confidentiality agreement can create this trust for the seller. But there is also a role for the buyer to win the trust of the seller. A great start is when both parties trust each other.

Advice Creating trust is half the battle! The seller needs the buyer to communicate openly and correctly and vice versa. Both have a vital role in a successful takeover. For those involved a takeover means often much stress and change. Through open and honest communication, confidence and trust is created and thus chances of a successful business transfer will increase.

Mandl, I. (2004) â&#x20AC;&#x2DC;Business transfers and successions in Austriaâ&#x20AC;&#x2122;, paper presented at the EISB conference, Turku, 10th September

101

20.

You can understand it, once you get it

Entrepreneurs are hardworking people who earn their living with passion. At least, that is what they try to do. A significant group of entrepreneurs is silently living below the poverty or subsistence level. There are also people who are unemployed and who instead of sitting at home try to start a business, mostly as a one man business. Many of the starters built their business from the ground up, simply because they think it will cost less money than buying an existing business. But is this right? Continuity Building a business from scratch is not an easy task for the average entrepreneur. Research shows that the average startups should invest money in the business the first three to five years before they can earn a real income. This means that the entrepreneur in all those years can hardly provide his family with an income. To this needs to be added all the investment in the company that need to be made. So there is definitely a lot of money needed to start a business. Many business owners realize this too little before the start of their business with result that more than fifty percent of the entrepreneurs has disappeared again within five years. There's a lot of chaff among the wheat. But there are also plenty of good entrepreneurs who are forced to end their business because of the lack of money. With the forced termination of companies, in many cases good ideas and knowledge is lost.

102

Poverty Surviving as an entrepreneur during the first five years does not mean that the business is financially out of danger. Figures show that many entrepreneurs after years of hard work might still live under the poverty line. Causes include: • lack of financial knowledge • lack of education / training and personal development • opportunism, many people start a business without knowledge about how to run a business • the lack of an establishment law. This law determines a minimum level of knowledge about entrepreneurship when starting a business • personal misfortune such as illness and divorce Poverty among entrepreneurs is not always recognized in time. Many entrepreneurs see their work as their hobby. These entrepreneurs are often specialists in their field, but pay too little attention to their economic skills with disastrous financial consequences. Right of existence Entrepreneurship is, now and in the future, a major challenge. The emergence of the internet is such a challenge. For example, online stores are mainly seen as a threat by entrepreneurs with a "physical" store. But you can also see this as a challenge and tune your business transfer into this trend. Looking for cooperation possibilities with an internet entrepreneur is therefore perhaps a good option. Entrepreneurs who want to survive and want to build a valuable company must adapt continuously. The economic environment of entrepreneurs is changing rapidly and

103

globalization is felt everywhere. For example, the influence of emerging economies and the products they offer on the world market. Even though the market of a company might be regional, the products from abroad are also to be found here in the shelves and therefore play a role. Taking over an existing business might be interesting Starting entrepreneurs might do wise to make a thorough analysis of the industry, strengths, weaknesses, opportunities and threats and to use this information when building a business. A good alternative to starting a business from scratch is a full or partial takeover of an existing business. In many cases, the costs of buying a existing business are more interesting than the costs incurred when a company starts at zero. An acquisition can certainly be worth considering! There's always good, better and best. As an entrepreneur, you should always strive for the best performance. The best for your employees, suppliers, customers and do not forget for yourself. A (partial) takeover can provide a jump start or growth for many entrepreneurs. It's like football legend Johan Cruyff said: " You can understand it, once you get it!" And once youâ&#x20AC;&#x2122;ve figured it out, you can earn a nice income with your business. And money is the main factor in the continuity and the existence of a business. Help with entrepreneurship by an Inqubator Incubators, accelerators, breeding places for start-ups. Nowadays, there are many local initiatives that aim to get starting entrepreneurs on track. These initiatives often provide coaching, networks and work places for starting entrepreneurs. With the coaching you can prevent many errors that are described in this chapter. With the help of an incubator, the success rate after 5 years, can be up to more than 90%. Inqubator Leeuwarden is such a breeding ground, where entrepreneurs are assisted in recognizing sales opportunities, networking, finances, avoiding traps and recognizing other new opportunities. 104

PRACTICE EXAMPLE During the first four years of the existence of our ICT business, we grew steadily each year. But my partner and I wanted to grow faster. We were particularly active in internet marketing for large companies. In addition to this, we wanted more coverage to not be too dependent on a few large customers. We decided to set up a number of web shops and generate more turnover and coverage. But we soon found out that building up a new business from scratch takes much time and more money than we expected. Therefore we decided to see if we could take-over an existing web shop from another company. Through our advisor we came in contact with a company that was offered for sale. After a conversation with the seller, it looked as if the acquisition would lead to nothing. The activities of the company were not just a shop, but also being a wholesaler. For the shop we were certainly interested, not for the wholesale part. But for the seller it was all or nothing! In retrospect, we were lucky, or should I say, the seller was lucky. We turned out to be the only interested and serious buyer there was. The seller then decided to keep working the wholesale part of the business himself for a while and to sell the web shop to us. With this partial takeover we made a jump start with our new activity. This growth would have never been achieved this quickly with starting a business from the ground up. I can therefore recommend this to every entrepreneur!

105

21.

Online matching supply & demand

Finding a suitable buyer for the company is one of the biggest barriers to a successful business transfer. The search process is perceived as difficult and unclear by entrepreneurs. It is namely not always a neighbour or a colleague who is the ideal buyer of the business. Better selling price The market for business acquisition is fairly opaque. Supply and demand of (movable) smaller businesses or business activities rarely takes places beyond their own region. This is unfortunate because a company from one part of the country could perhaps be sold for a higher price to an entrepreneur in another part of the country than to an entrepreneur from its own region. A possible solution for this might be provided by online matching platforms. On the on-line supply and demand platforms are (mostly anonymous) profiles of companies or business units. Through specialized search systems (industry, business type, region, etc.) you can find what you are looking for. More and more business owners and their advisors use these platforms to come into contact with a broader audience that might be interested in their business. Trust Due to the information asymmetry, it is important that the seller provides clear, honest and transparent information in the businessâ&#x20AC;&#x2122; profile on the corresponding online database. Besides supply and demand profiles some takeover platforms

106

also offer comprehensive information in the fields of business transfers and takeovers. With a profile on an online platform the interest of potential buyers might be awakened. The information in the profile is limited because the release of detailed information to potential buyers is not always desirable for competitive reason. The name of the party offering the business and of the searcher is often not mentioned. It is therefore not clear to the reader which company it is or where it is exactly located. In order to generate enough interest it is important to provide clear, reliable and as much specific information as possible, because the more extensive the profile is drawn, the more responses from interested potentials you will receive. What does the profile say? According to the European Commission, it is desirable to include the following information in a business profile: • information on the type of business and industry (retail chain, manufacturing, wholesale, industry, etc.) • a clear description of the activities • reason for the sale • possible willingness of the seller to stay on after the transfer • information on the geographical location • number of employees and limited turnover and performance data (e.g., the percentage of profit on turnover, turnover indicator, etc.) • strengths of the company (brand awareness, reputation, established customer base, niche market, patents, etc.) • asking price (indication) • transaction type (asset deal or share deal)

107

• •

desired transfer date or period payment preferences of the transaction. When an entrepreneur does not want to take any risks for example by a subordinated loan or instalment payments, it is useful to indicate in the profile special requirements for potential buyers (licenses, training, skills, etc.) the contact details (of a consultant)

Missed opportunity SME entrepreneurs are generally hesitant about posting information on the internet because they think the competition will recognize their business. This is a false idea that causes so many missed opportunities. A profile can indeed be drawn very anonymously and the confidentiality of the identity of the profile holder is guaranteed by the online database. Online acquisition platforms have the advantage of a greater range than the network of the entrepreneur or his advisor. This means that when a profile is being posted to an online database it is more likely to interest buyers from other regions than when only using a regional advisor. Online matching is becoming increasingly important and provides the business opportunities that do not exist when using just your own network. On the other hand potential buyers are increasingly using the internet to search for an interesting company or a business activity that is for sale. Online matching between demand and supply is becoming increasingly common and offers more chances for a successful takeover. A clear profile in an acquisition database is certainly worth considering.

108

22.

Stubborn

Thereâ&#x20AC;&#x2122;s a storm raging outside! This time it is not the weather that is fierce, but the economy. That an economic storm has major implications for smaller companies in our environment has become increasingly visible. In a transition economy a lot of old businesses models change and disappear and in return new ones come to existence. On the one hand it puts a lot of pressure on entrepreneurs to change, and to make new and smart connections. On the other hand, it promotes a rigorous economic change, which stimulates the innovative power of entrepreneurs tremendously. So a transition of the economy can cause a lot of pain, but it provides also a lot of joy in the form of new opportunities. Opportunities Many entrepreneurs continue to look on the inside of their business, even during times where the economy is changing severely. They should instead look outside their company and focus their energy on innovation. In practice, this means that often the focus of the entrepreneur is on the internal processes of the business. More specifically, this simply means for most entrepreneurs: cutting costs. There is nothing wrong with cutting costs. However, when all the attention is focused on cutting costs, this means that there is no focus on potential opportunities that might arise. And these opportunities are what can help entrepreneurs to survive the economic storm.

109

A number of possible opportunities that entrepreneurs should at least consider include: • are there markets that are less affected by the crisis that are interesting • there may be sales channels that have not yet exploited, e.g. the internet or other networks • are there other or completely new product or service combinations possible • does an opportunity to collaborate with colleagues, suppliers or industry foreign companies exist • does the opportunity exist to buy a (part of) a company or to divest a portion of its own business to perform one or more core activities

110

Help Where in economically prosperous times sometimes a consultant is hired, this is often not the case in times of economic decline. This is strange considering that in these times an objective and refreshing look at the company can be very enlightening and problem solving. Many entrepreneurs do not realise this until it is too late. And that's a shame! Many companies that get into trouble often have had opportunities to survive by example, to cooperate with other businesses or to sell a part of the business However, if a consultant is brought in at the very last possible moment, there is often nothing he can do to save the business. Stubborn Entrepreneurs in SMEs, therefore, do well to put their stubbornness to the side. Much is at stake. In the event of a bankruptcy or liquidation, you have to deal with a great loss of capital, knowledge, experience and employment. But there will always be those stubborn entrepreneurs who will not be able to save their business because they refuse to look outside. There is a reason you often hear â&#x20AC;&#x153;two know more than oneâ&#x20AC;?. So to all entrepreneurs: be open to ideas from others, in many cases even free advice is available on the Internet, through friends or government agencies. Advice A business transfer will only take place when the business or the part of the business is more valuable to the potential buyer than it is to the seller himself.

111

23.

A reliable and competent advisor

The consultancy market for business transfers is an interesting market and always attracts professional adventurers. Finding a suitable and expert consultant is very difficult for many entrepreneurs. Transparency and a clear overview of what is out there are therefore very important. Bottleneck SME entrepreneurs who are on the verge of a business transfer often ask the question: “what advisor is reliable, independent and knowledgeable enough to provide me with professional advice and guidance?” An acquisition is a complex matter that only a few entrepreneurs have experience with. In addition, changing laws and regulations cause that it is almost impossible to go through a business transfer without one or several expert advisors. And that is exactly the bottleneck: a successful business transfer can only be done once. Errors often have disastrous consequences for the client and his business. Involving experts and independent consultants is therefore no luxury. More than one consultant A business transfer consists of several stages each requiring a different discipline. 11 Entrepreneurs almost always end up with their bank or accountant for advice. Whether this is always the right choice, is highly questionable. In the preparatory phase of a business transfer there is for example often a need for a business consultant that can analyse the 11

Oudmaijer, S.C. en Meijaard, J. (2006): ‘De externe adviseur bij bedrijfsoverdrachten in het MKB.’ EIM, Zoetermeer.

112

business â&#x20AC;&#x2DC;operational side and can prepare it for the transfer. During the same preparations it is also necessary to get a good view of the financial and tax implications of the (partial) business transfer. An accountant is an important player to analyse these aspects. If no buyer is findable in the family or network of the business, a company takeover mediator is an obvious party to hire to look for a buyer. It is clear that in most business transfers there is a need for different types of advisors. However, research shows that no consultant is active in all phases of a business transfer. 12 This means that entrepreneurs need to consult several consultants in order to achieve a successful takeover. In practice, this results in a number of problems such as the (high) costs. In addition, many business owners prefer to work with only one advisor they trust so they do not have to tell their story over and over again. Attractive market Entrepreneurs are realizing more and more that a good consultant can really make the difference between whether or not a business transfer will be successful. The overview of which consultants possesses what skills and expertise is diluted more and more due to the entry of new players on this market. And this makes it increasingly difficult for entrepreneurs to make the right choice for a consultant. Opportunism The question is therefore for every entrepreneur how they can get a reliable, expert and independent consultant. Most 12

Teeffelen, L. van. (2009): â&#x20AC;&#x2DC;Adviseurs aan het woord: werk- en zienswijze bij bedrijfsoverdracht.â&#x20AC;&#x2122; Kenniscentrum InnBus, Hogeschool Utrecht en Kamer van Koophandel.

113

consultants are members of a trade association, but this says little about their expertise and experience in the field of business transfers. In practice it shows that often errors occur that can have disastrous consequences. But whose fault is this? The client his fault or the consultant his fault? A central point of contact for clients is becoming more desirable and necessary in order to address any disputes that might arise. A good accountant or lawyer is not always also a good transfer consultant. Of course there are plenty of good advisors, but it is difficult for the entrepreneur to find them. In addition, not all business owners are willing to pay for services with an open end with high hourly rates. It is therefore desirable that advisers start offering more concrete products and services at a predetermined remuneration so that it is much more transparent to the entrepreneur what end product is delivered at what price. Advice and action In practice, however, it is difficult to measure what makes a good consultant. Is someone with twenty years of experience a good consultant? This does not have to be the case if he sticks to old habits and still operates on the basis of knowledge from the past. Is a consultant with all possible trainings on business transfers a good consultant? This is also not necessarily the case because the consultant may lack a solid dose of experience. It is therefore difficult for entrepreneurs to understand and be able to rate the expertise, quality, independence and reliability of a good consultant. There is therefore a need for more transparency, who can be found where and who is doing what and at what price. By increasing the transparency of the market for transfer advisers SME entrepreneurs who want to sell their

114

business or (starting) entrepreneurs who want to buy a (part of) a company can be assisted by an expert and trusted consultant who can give the needed advice for to the business transfer.

Advice It is important for entrepreneurs to stay at the wheel during the transfer. Entrepreneurs who blindly trust the advisor(s) may pose a great risk for themselves. For monitoring the progress, it is important that the entrepreneur is closely involved in the process. Remember that most advisors have an interest themselves. It is important to have a strong connection with the consultant that you work with which is based on trust but make sure you always stay at the wheel during the process.

115

24.

No money, no â&#x20AC;Śâ&#x20AC;Ś

Financing of a (partial) business transfer is an important factor for getting to a successful business transfer in SMEs. Creative The business transfer is the most critical step for the continuity of a company. The biggest pitfall is the inability to finance the transfer. Banks are in fact very critical. Especially for successors who cannot offer collateral and for start-up entrepreneurs it is unlikely to be able to borrow money from a bank. The reluctance of banks to financing SMEs acquisitions put the parties concerned for a severe challenge. They will have to get the money in a creative and alternative way in order to finance the acquisition. Crowdfunding is such an alternative and creative way to finance a business transfer. In cases where the bank does not know the value of a certain business, there are often other parties who do see opportunities. Crowdfunding gives (private) investors the opportunity to invest in a new business that they like, trust and often comes from their own surroundings. Crowdfunding brings buyers and sellers together to achieve a successful takeover. Also investors get to gain more return on their capital and they experience fewer risks because the investment is being done by many more parties.

116

Collaborate There are several internet platforms for crowdfunding. Here, entrepreneurs can raise money from a few thousand dollars to very large amounts. Crowdfunding is a transparent and efficient way of collaboration between supply and demand of financial resources.

The added value of crowdfunding goes beyond just money. In many cases, crowdfunding automatically creates a sort of micro-economy. People from your own network are in fact often the first to sign up as an investor. A good example is a coffee shop in the Netherlands. The owner knew his expansion plans of â&#x201A;Ź 85.000 to be financed through a crowdfunding campaign within just a limited number of days. "Besides the money, this form of financing also creates awareness and commitment to our investors. When they are

117

in the neighbourhood, they usually come in for a coffee and take friends or family. In addition, many customers share their experiences through social media which gives us some more customers again. A win-win for everyone.â&#x20AC;? Crowdfunding can be a catalyst for more successful (partial) business transfers. It helps start-ups, entrepreneurs who want to grow and sellers of companies where banks fail. Cooperation between buyers and sellers, rather than every man for himself, is a great advantage to achieve more successful (partial) transfers. On the other hand through crowdfunding the money remains where it should be: with the people of the local economy! And not like it was in the past when the money remained with only a few large parties who then used it to dictate the market! But what are the risks for investors? Crowdfunding lowers the risks because the investment is being made by many parties. If anything looks suspicious, there is always someone who sees this and asks for clarification. So when the financing of the takeover is a problem, look especially for creative and alternative ways to get it. For a good company or idea there is always money available. In addition, more successful (partial) business transfers boost the local economy and employment. And remember: no money, no business transfer!

118

Buyer has more risks Who wants to sell a business usually prefers a buyer with a lot of money. But the reality is different. Often strategic buyers (colleagues and competitors) are very critical and often have an interest in just a part of the company. Many buyers do not have enough money to finance the entire business transfer. Yet in the future many 'smaller' transfers will be to a third party instead of within the family. To get the transaction in order buyers often have to be financially supported by a bank, through crowdfunding and by the seller of the business. Banks are increasingly critical so that funding should be arranged through other ways. Money borrowed by the seller often takes on the form of a subordinated loan. This means many risks for the seller. The seller therefore has every interest in ensuring that the company will continue to operate successfully after the acquisition. A growing number of business transfers happen this way. A gradual and partial transfer can provide a solution for the entrepreneur because he does not lose his influence and control over the company all at once.

119

PRACTICE EXAMPLE A very capable and entrepreneurial director was trying to take over the business where he worked for several months. The owner was not cooperating well in this process. The director therefore started to look around for another business and came across a company selling pallets. The company has a good cash flow, a competent entrepreneur but needs a coowner who intends to pursue new and innovative ideas for the company. The pallet company has several branches and is worth a hefty sum. The present owner realises that he needs another owner for the business and he is willing to share his position. And there is a connection between the two men. A creative financial deal was made where no bank is needed, and the new owner only needs to bring in a limited amount of money. By a separation of the shares of the value of the business and the owning of the company, the new owner can buy himself in with the profits made during a number of years. A clear example of a "connection" between buyer and seller. Currently, the company runs more profitable than ever and keeps growing in the conservative sector in which it operates.

120

Finally: just go for it! Why not consider a (partial) takeover and work on economic growth? Many business owners who want to sell their businesses often wait until spontaneously a suitable buyer comes along. In most cases, there will be none, and the company will in many cases be eliminated. Entrepreneurs often have many arguments when they are wonder why no one is interested in their 'unique' business. Arguments for example: my advisor could not find a suitable buyer, it is the poor state of the economy, it is difficult for buyers to finance an acquisition, buyers are currently reluctant to buy and so on. To this, there is only one thing to say: bullshit! For interesting companies and business activities there is always a market, in good times and in bad! So if there is no buyer, then the company is not attractive enough. And if the company is not attractive enough for buyers, you can only do one thing: create an attractive business! Look at the unique values and assets in your business and make them visible to buyers. And if there are no attractive features: go find them or create the. But do something! Indeed, it is quite simple: if there is no tangible value in the business, there will not be a business transfer. An entrepreneur who is seriously preparing for a business transfer should ponder at least the following questions:

121

1. Why? Why sell my business? Why is my business unique? Why is my company financially healthy? Why is my company valuable to a buyer? 2. Why not? Why not build an attractive SME company for a future (partial) takeover? Why not look with the buyer or successor to find a way to finance the acquisition Why not work with the buyer to create a win-win situation? Why not ...? 3. Why not you looking for a way to make money with a (partial) business transfer? Why not you transfer the business to maintaining employment? Why not you transfer a business to preserve knowledge and experience? Why not you ...? 4. Why not now? Now is the right time! Lots of new and growing businesses are looking for a (part of) a business to buy. So why not now? Look around you. See how the world has changed and will keep changing. This means you have to change too as an entrepreneur. Remember: for things to get better, you have to become better and for things to change, you have to change! If you have been an entrepreneur for long enough, you have experienced at least one and probably several economic crises. A crisis is necessary to change old habits. It forces us to the much needed changes in our business and our behaviour to secure the existence of the company. And that's what we all dream of: a company that lasts for generations because it adds value to people and society. Can you see all the changes coming as an entrepreneur? Of course not. In a rapidly changing economy, changes are

122

difficult to predict. But when they do present themselves, anticipate on them immediately. You do not want your business to be one of the next generations of dinosaurs right? Proper preparation of the business transfer increases both the efficiency and also the survival chances of the company. If you ignore the patterns of a business transfer long enough, you will automatically face the hard truth: an unmarketable company! So be proactive when it comes to preparing your company takeover, check out the various options and choose the best option for you and your business. Just do it and take action! Come on, go for it! Build an attractive and valuable business which is fit for exit and let the economy, innovation, employment and entrepreneurship thrive!

123

About the author Rai s ed in th e N o rth er n p art of th e N eth er lan d s b et w e en c ow s an d co rn , Pi et R eg n e ru s M BA (1 97 3 ) is an exa m p l e of so m eon e wh o l ea rn s b y tria l an d e rr or an d th en ke ep s go in g . A h ea lth y c o mm on se n s e, good l i st en in g sk il ls an d a gr eat cu r io sity a re th e tool s th at h a v e r e su l t ed in th i s b o ok. Th r ou g h se ll in g h i s o wn m eta l fab r ic ati on b u si n e s s, h e gain ed a l ot of exp e ri en c e an d in s ig h t in to th e p rep ara tion an d d y n a m ic s o f t ran s fe rr in g a b u s in e s s . Ad d i tion al ly to th i s, re su lti n g fro m r e s ear ch an d p rac ti cal e xp er ie n c e h i s v i sion o f th e p ar tia l ta keo v er an d th e gr eat b en ef it s to S ME b u sin e s s e s aros e . Pi et ad vi s e s en t r ep r en eu r s an d go v er n m en t s in st rat eg ic an d b u sin e s s is su e s wit h b u sin e s s tran s f er b ei n g h i s s p e ci alty . H e al so g i v e s l ec tu r e s an d train in g on b u s in e ss t ran s f er s an d p er son al d e ve l op m en t . With th i s b o ok, b u sin e s s o wn er s can c re at e a w are n e s s an d b e we ll p r ep ar ed to sh ap e th ei r b u s in e s s tr an s f er . By tran s f er rin g h i s kn ow le d g e Pi e t h op e s t o in sp ir e b oth en t rep r en eu r s a n d p oli cy ma ke r s.

124