Dr. Tim Bauer
May 4, 2023
With its “hidden champions,” the German Mittelstand is seen by investors worldwide as an attractive investment. But for owners and founders looking to resolve succession through a sale, the sales process holds a number of pitfalls and stumbling blocks. enomyc author and M&A expert Dr. Tim Bauer explains how to increase a company's value ahead of a sale — and what it takes to avoid a breakdown in negotiations.
According to an estimate by the Institute for SME Research (IfM), 190,000 companies in Germany will be looking for a successor by 2026. While most entrepreneurs would prefer to keep the business within the family, other arrangements are more common in practice. One option is selling the company to employees or members of management, provided they can secure the necessary financing. Transferring the company into a foundation is another option, with its own set of advantages and drawbacks.
By far the most common succession route is selling the company to a strategic investor — such as a competitor, customer or supplier — or to a financial investor.
Some entrepreneurs choose to run the sales process themselves — with mixed results. Self-managed company sales often end up falling short of the original price expectations. Or the founder's life's work is put at risk because jobs and production sites aren't preserved to the extent hoped for. Either way, it's not a good outcome.
Why do expectations and reality so often diverge dramatically when it comes to selling a company?
One of the most important reasons is narrowing the pool of potential buyers down to just a handful — often only one or two companies the owner already knows personally. In practice, it often plays out like this: an entrepreneur is proactively approached because word has spread in the industry that owner X wants to sell. What follows, in most cases, is a fairly unstructured bilateral process that lacks the broad buyer pool needed for an optimal outcome — and therefore leads to suboptimal results. What's more, in our experience, the eventual buyer isn't necessarily the one who seemed most obvious at the outset based on the company's structure; it's often a candidate who wasn't even near the top of the original long list of potential buyers.
A limited pool of interested buyers has a second major drawback: it reduces competitive pressure. If buyers — and the company being sold — don't engage in a structured process and present themselves at their best, no real competitive tension develops. The result: no bidder pushes to their financial limit, and the sale price can end up well below the company's actual potential.
Another common pitfall: the buyer lacks the creditworthiness needed to secure financing. That's precisely why checking bidders' creditworthiness is another pillar of a structured M&A process — it protects against unpleasant surprises.
Finally, the founder's or founding family's emotional attachment to the company — understandable, but unhelpful when a sale is planned — can also create problems. For example, if the M&A process drags on for years, the company can quickly earn an (often undeserved) reputation in the market as “damaged goods.” In such cases, too, a sale price far below the company's true value is likely.
For these reasons, more and more company founders and owners are opting for a structured M&A process supported by a qualified external partner. That partner should have a large, dependable network in the relevant industries in order to reach as many potential buyers as possible. If the advisor is brought on board early enough — ideally one to two years before the planned sale — they can take a range of actions that not only make the company “market ready,” but also meaningfully increase the sale price.
Among the value-boosting measures that can be implemented in advance is realigning the sales approach toward subscription models. These “X-as-a-service” models are well known from software (“software-as-a-service”/SaaS) but have long since become common practice in many other industries too. Their advantage: unlike the classic licensing model, subscription models generate regular, recurring revenue. Investors value this more highly and reward it with correspondingly higher valuation multiples. A good M&A advisor will therefore assess whether the sales team can be realigned toward such a model.
A capable reporting system is also a prerequisite for a successful company sale. If the necessary data isn't readily available, the sales process risks delays that can undermine the entire deal's momentum. In that case, the M&A advisor will recommend introducing a new system.
Another lever for maximizing value is establishing a second management tier, particularly in family- and owner-run companies. Financial or strategic investors planning an acquisition often lack the management capacity to run the company once the previous owner steps back from day-to-day operations. A leadership team established early on, ready to take over after the sale, makes the company significantly more attractive to investors.
During the actual transaction process, a disciplined approach and clear deadlines matter — but so do the required documents, including the information memorandum, teaser and process letter, which create a high degree of transparency and heighten the sense of competitive intensity felt by all potential bidders. The comprehensive presentation of the company in the information memorandum puts its strengths and potential in the best possible light, and financial figures can be adjusted for one-off and non-recurring effects. All of these measures encourage bidders to approach the transaction with as strong an offer as possible, in order to win the process on their terms.
A credible, ideally benchmarked business plan for the next three to five years also gives investors a solid basis for assessing the company's future cash flows — and therefore its value. Beyond that, an M&A advisor can support the previous owner's gradual exit through the future sale of additional shares in stages after the initial transaction (for example, via put-call option structures), while ensuring that the appropriate influence and veto rights are preserved until the very end.
As with so much in a company sale, the devil is often in the details. We've already covered some of the most common pitfalls; others tend to surface sooner or later over the course of the sales process, which can take six to nine months — sometimes longer — to reach completion. For that reason, entrepreneurs shouldn't approach the departure from their life's work without an experienced, specialized M&A advisor at their side — not only for financial reasons, but also to know their company will be in good hands going forward.
