Succession planning in SMEs: 8 rules

75,000 Swiss companies are facing succession planning in the next five years. Around 40 percent will be transferred within the family, in 20 percent the handover will take place within the company and in around 40 percent the company concerned will be sold to a third party. Regardless of the type of handover, an early start to the 'succession' project is of the utmost importance: "Five years in advance is the ideal time," says Thomas Zimmermann, experienced succession expert at the Raiffeisen Entrepreneur Center. When it comes to a company handover, the most important guiding principle is: "It's too important to leave it to chance." The former metal construction entrepreneur Zimmermann explains which eight rules are part of successful succession planning in SMEs.

Rule 1: Declutter and make the company lean.

A succession is similar to a move. It is an opportunity to part with what is not necessary. The company must be in optimal saleable condition on day X. Saleable means fit and lean. Fit in the sense of an internal, organizational decluttering, lean in the sense of getting rid of non-essentials: non-essential properties, participations, cooperations in other companies or family members on payrolls who do not work at all. The buyer usually does not want a general store, but a company with a clear focus on its core business. Finally, you also have to deal with the issue of liquidity at an early stage. Many companies have too much liquidity. The future buyer does not want to buy money. All the dimensions of decluttering mentioned above have tax implications. Five years before the planned handover, this issue can be addressed in a targeted manner.

Rule 2: Manage retirement planning.

With the AHV, pension fund and free assets, it should be possible to maintain the previous standard of living in retirement. Can I even afford this in the long term by selling my company? This question sounds absurd to many, but very few people deal with a neutral pension analysis at an early stage. Due to a lack of pension planning, negative surprises can occur shortly before the actual sale and the money for retirement is missing. The point is for the entrepreneur to analyze her pension provision, tap into possible coverage gaps at an early stage and pay surplus liquidity of her company into the pension fund tax-free.

Rule 3: Keep employees and technology up to date.

Entrepreneurship is in a constant state of flux - a fact that plays a central role in company handovers. Some entrepreneurs are very reluctant to invest years before the actual succession. This not only reduces the sale value, but almost more importantly the number of potential acquirers. Certain industries will find themselves in a completely changed reality in five years. You have to prepare for this today. Future acquirers want to buy a modern company, a modern and appropriate machine park and trained personnel. The further training of employees is a permanent topic - digitization in the company is an absolute obligation and not a necessary evil. Successful innovation projects are highly relevant for the ability to sell. Finally, brand value and brand awareness must also be precisely scrutinized.

Rule 4: Find, retain and empower potential successor.

Sooner or later, the crucial question arises: Who should continue to run my company? Is it my employees, is it former apprentices, is it family members or does the company have to be sold to a third party? Every form of succession has its own laws. However, one thing is clear: No succession without emotions. You have to deal with this central question in good time and get all those interested, involved and affected on board as early as possible. The management buyout (MBO) is also about binding potential acquirers to the company at an early stage. This can be done by integrating them into the management, by giving them an insight into the figures or by offering them an attractive share model. The decision regarding succession also marks the beginning of entrepreneurial training. Why? Because good specialists are rarely also trained managers.

Rule 5: From tax-optimized to transparent financial statements.

In principle, it is gratifying when a company has to pay taxes on profits. This means that it is fit and future-oriented. However, most companies tend to present their annual financial statements in a tax-optimized manner within the scope of interpretation allowed by tax law. This should end five years before at the latest, and the change to transparent annual financial statements should be made. The reason is simple: what counts first and foremost for the company valuation is a healthy earnings situation. Making hidden reserves plausible is always a matter of interpretation and leads to unnecessary discussions.

Rule 6: Develop financing models.

Financing a company takeover is a challenge for successors, because in very few cases can the purchase price be raised entirely from the company's own funds. This fact requires early planning and a weighing of the options.

• Classic bank loan: In simple terms, is dependent on the plausible, fair price and the competence of the successor. The bank usually finances 50 - 60% of the purchase price. As a rule of thumb, it should be possible to repay the loan over a period of four to seven years from free cash flow.
• Equity and a bank loan are not always enough. In such cases, a seller can facilitate the financing with an internal seller loan: Here, the buyer usually pays a significant part of the price immediately. For the remainder, the seller grants him a contractually agreed loan, which is usually subordinated in combination with bank financing.

Rule 7: Involve professionals.

The sales process is new territory for most seasoned entrepreneurs: It is advisable to get external support for the entire succession process - because the process can be managed by the external professional in a targeted and independent manner. Unprofessional preparation and execution can lead to many risks. On the emotional side, it can go so far that the family ends up at odds. And on the technical level, a family member may take over the business who either does not want it or does not have the skills to do so. The different values and lifestyles also make a smooth succession arrangement difficult. It is necessary to deal with the psychologically most important stage goals at an early stage. In almost all cases where the succession process failed, the appropriate process flow was missing. Here, a neutral, external expert offers very valuable support.

Rule 8: Analyze the corporate form.

In the end, of course, corporate law also plays a significant role in company succession. The sale or succession of a partnership or general partnership usually has tax consequences because hidden reserves have to be liquidated. Here too, early planning of a possible conversion is crucial. After the conversion of a partnership into a legal company, a company can only be sold tax-free after five years. The same lock-up period of five years applies to a spin-off of a business branch of a legal entity into a new corporation. (e.g. operating company / real estate company).

Address succession planning in SMEs in good time

These eight rules alone answer the question why early planning of succession is worthwhile. The 'life's work company' is associated with so much work and sacrifice that even the last step should be completed just as flawlessly as profitably.

Editor's note: The Successor magazine of the ORGANISATOR magazine addresses current issues relating to succession planning in SMEs on an annual basis. The 2021 edition is in preparation.