Many things can be argued about. However, it is undisputed that attitude is the most important success factor.
It is also undisputed that the economy is going through phases in which it grows at different rates overall, or perhaps even contracts. The data circulating in this context give rise to confidence or caution among broad sections of the population.
However, the scary word “recession” should not intimidate anyone. Especially not entrepreneurs.
The successful entrepreneur stands out precisely because he analyzes soberly before making a decision and taking the decisive step. Ideally, the analysis should not be driven by Excel and PowerPoint or even headlines, but should be based on years of experience and intimate knowledge of the market.
This also applies to lateral entrants who have made at least one very courageous decision in their lives.
Unternehmensverkauf und -nachfolge in Boomphasen
But you can only ever draw on your own experience. I didn’t experience the 50s and 60s, which are often cited as “boom years” in German economic history. However, I vividly recall the first Internet boom and the “bursting of the dotcom bubble” around the year 2000, but at that time I was still an employee in a relatively sheltered position.
In the 15 years that I have been working in M&A consulting and in corporate finance, corporate sales and corporate succession, “boom and crisis” have always been sector-specific and the effects have been highly dependent on the entrepreneurial team.
Various sectors are successively undergoing rapid development or, just as importantly in my field, high buyer and investor demand. Some of these cycles can be relatively short, partly because cost positions can shift quickly in this “booming” market. Of course, demand behavior is also subject to short and long-term fluctuations. This also applies to the B2B segment, i.e. the sale of goods and services from company to company. Examples include digital conference solutions in the years 2020-2022 and the attitude of companies towards SaaS products, which currently (2024) appears to be undergoing a shift.
This area could be called micro-factors, i.e. issues relating to the company and its immediate environment. In addition, there are of course important macro factors, such as the key interest rate policy of the central banks, which can make credit financing easier – or very difficult – both for operating companies and for buyers and investors who like to finance the takeover – i.e. the company acquisition – with a mixture of equity and debt capital.
What is rarely talked about: selling a company in the SME sector always poses more than one challenge. The reasons usually lie more in the company itself than in the sector.
Very often, these challenges can be traced back to the question: have the owners done their homework? Although it is not for me to criticize anyone, weaknesses are gradually and increasingly mercilessly revealed in the sale of a company and in M&A processes in general. This begins with the first critical questions from buyers in preliminary talks, through to the occasional “discovery” of absolute deal-breakers during due diligence; possibly issues that the company has not had a good feeling about for a long time and which it was hoped would not be considered too serious by the buyer. Whether the buyer is a strategist or a financial investor is irrelevant as far as the rigor of the due diligence is concerned.
This leads to the first conclusion that the “boom” itself is less important than how the various market participants are positioned within this boom. Some do better than average, some not so much. The same applies to times of crisis.
Therefore, the most important thing is always whether companies are “well positioned” administratively, organizationally and strategically, which can be an incredibly high standard in the M&A environment. And only secondarily, how the industry as a whole is doing. Which hopefully sounds encouraging, because the shape of the company is more in your own hands than that of the industry as a whole.
You are a shareholder of a medium-sized company or start-up and would like to get a second opinion on your transaction project?
Company sale and company succession in a crisis
Now, I don’t know too much about the management and valuation of equity funds. But what I consider to be a truism is that fund managers are not selected according to the performance of their fund (or perhaps they are – by laymen). What is decisive is the so-called “alpha”, i.e. the difference between the performance of the fund and the performance of the market itself.
I live by this principle in M&A transactions without making much of it. The market is the market. You can worry about expected interest rates or competition from China until the end of time. What makes the difference is how you deal with these circumstances.
What does the “alpha” of my company look like, how does it differ from the performance of other companies in my sector? This is the criterion by which buyers evaluate companies (and entrepreneurs). Whether for corporate financing, a company sale or a company succession. Not least because the successful management of times of crisis suggests that the company will be all the more profitable in a boom phase.
In the M&A context, there are therefore good reasons to focus on your own company, with the market and its cycles as a framework. This leads to a much more analytical approach, which has little to do with simple sales and profit development and which some medium-sized companies shy away from. However, in discussions with a buyer and with investors, you will always find that a sufficiently thorough preparation of documents with the company’s own figures and history with details that are not included in any annual financial statements proves to be almost infinitely valuable. This is not information that investors can obtain quickly using their own methods. Unlike a lot of market data.
Consulting can do a lot in this context, but it depends on entrepreneurs understanding that companies are not real estate that you can take pictures of and sell together with a floor plan.
Of course, this also provides the opportunity to lead the discussion and draw attention to what is essential for the seller – and ultimately also for the buyer.
And the most important thing is not market cycles. It is the development cycle of the company. If you deal with companies that have a longer history, you will probably find that the company’s development has been shaped much more by its own strategic decisions than by the succession of boom and crisis periods. With examples such as investments in products or markets that turned out to be lucky or not so lucky. This results in the company’s own upswings and downswings. Companies certainly sell much worse during a downturn caused by a strategic mistake than during a recession in the industry. With implications for company valuation and transaction structuring (asset deal vs. share deal).
This means that the crisis is by no means an opportunity for sellers. But even in a crisis, there can be not only risks but also very good opportunities as far as corporate transactions are concerned.
Particularly in succession planning – assuming that this process takes many years – timing with regard to economic cycles should be considered part of the sales strategy and a decisive factor for success. A good M&A advisor will hopefully say in the right place: “better wait a little longer” (and take certain measures in the meantime).
But economic data distracts attention from the essential question. That of the company itself. The buyer is interested in the ship and not the sea on which it sails.
Irrespective of boom and crisis, it is firstly always important to present the company in all its complexity in such a way that it can be quickly understood by third parties. This probably means simplifications, which, however, do not come from omissions, but from the consideration of how complexity can be presented simply. Which in turn means work.
Secondly, companies sell themselves better if they show that good performance is due to smart decisions made by the company rather than favorable market conditions. The latter only attracts more competitors, which rarely brings joy. Ideally – but this also requires a good dose of luck – you can offer the company for sale or succession when both come together: the fruits of sensible decisions and spring air from the market.
