3 typical mistakes of the entrepreneurs and how to avoid them

The entrepreneur knows that the process of handing over the business will bring many changes in the company. Earned and long-standing employees, with whom he feels connected and who have done their jobs reliably, suddenly have to change their way of working. Between the old owner and the new manager, the average age is often 15 to 20 years, often even more than 25 years. The new guy grew up at a different time and was culturally different. The entrepreneur and his successor face very special, completely different challenges.

Challenges for entrepreneurs and successors

What is the starting position of the new owner? He comes to a company for which he supposedly paid too much and in which usually not much investment has been made in recent years. The ideas of the old owners are often clearly too high. They have shied away from investments, since the purchase price can be adjusted upwards accordingly through higher yields. 

The successor has not “harvested” in the company for years, but is just starting, has to pay off the purchase price and compensate for investment jams. He meets employees who have become accustomed to the work of the former owner for many years, and who are of the chemistry to each other and to him, often also corresponding to something ‘antiquated’ work. Normally, he is used to working differently, has grown up with big technology leaps and feels that his way of working is normal. 

Especially here he meets with incomprehension and resistance: “We have always done so”, “The company has been healthy for years. Now this should suddenly be bad and we should do everything differently! “The successor must find his own stand in the company, carry out pioneering changes and thereby secure the backing of key players in the company so that the company succession can succeed.

The entrepreneur, on the other hand, has to release his secure position and everything he has identified with for decades in the company transfer and to make the leap into a new phase of life. In the past years he has been able to gather the most varied experiences and mastered challenging situations with flying colors. His full attention was on the company’s success he personally stood for. Not infrequently answers such an entrepreneur to the question of his well-being, as the company is currently running. 

Now, there is one task that he has not been able to practice for years: the transfer of his company and his retirement. The ‘retirement’ awaits him, a hard-to-imagine condition. The situation is unique and usually the most emotional situation the entrepreneur has ever taken entrepreneurially.

Find the right mix of experts for the business transfer

Succession arrangements often fail because of the attempt to approach the task with lawyers, accountants and tax consultants only rationally. When emotions play a role and are ignored, they often control unnoticed apparent factual dis- cussions and decisions. Errors are then particularly close. Much can and should be secured by contracts and the tax issues also play an important role. But most handovers do not fail because of these two challenges, but because of the so-called soft factors.

In addition to financial, economic, legal and tax issues, a communication and integration concept must be developed for the entire process of corporate succession. How are the partners, shareholders, executives, employees, customers, etc. informed about the withdrawal? What does it mean for processes, agreements, products, prices, etc.? What is required to maintain employee motivation and loyalty and to avoid fears? How are managers motivated to actively and constructively shape the succession process?

Lawyers, accountants and change management consultants are all ‘right’ but consider the situation only from their perspective. Lawyers see the whole situation mainly from the legal side and believe that everything can be solved with contracts. That is a fallacy. Even the multinational treaties between nations, which are then issued in two languages, are neither identical nor can they cover everything. Accountants see primarily the financial aspect and this mostly in favor of the donor entrepreneur. 

Business consultants focus on strategic aspects, but rarely understand enough of the legal and tax side. Overall, only the interaction of all three professions makes the whole thing around. All three sides are important! Relying on only one of the three often ends in disaster, in any case for the buyer. For the seller too, if he is interested in more than money.

The potential obstacles posed by soft factors of corporate succession are created by:

• employees who can not come to terms with the new situation

• executives who do not understand or understand the new strategy,

• previous owner, who still exercises too much indirect influence.

Even the new person in charge – who has to be found first – makes many mistakes, for example, because he wants to implement too much and too quickly. Gentle migration is the order of the day, not the rapid revolution. The complete realignment usually takes between three and five years. It takes time for all things to work as he imagines and until the entire new structure has been attained.

Three cardinal errors are:

  • an old owner can not let go and still exercises influence in many different ways.
  • an managers and employees do not manage to cope with the changed conditions.
  • a new owner wants to move too many aspects too fast and misses taking the executives, employees, and customers.

10 measures for the success of the company succession:

1. Search for a suitable successor / buyer:

Often there are very good solutions in one’s own ranks, it only fails because of the allegedly unreliable financial conditions. Creative and constructive solutions are required here. In principle, the requirements for the successor must be formulated, a target personality profile developed and ways to search and identification to be considered, if there is no internal solution.

2. Regulation of the contractual conditions:

Here is advice on the concrete conditions necessary: What must be observed for me and my company?

3. Regulation of financial and tax issues

What effects do possible scenarios have for the company or for my purse and that of the new owner / managing director?

4. Matching the expectations of entrepreneurs and successors

5. Development of the transfer plan

6. Preparation of the business plan of the successor:

For the implementation of the complete realignment, 3 to 5 years are to be planned.

7. Clarification of the expectations of executives and key players in the company:

What was good in the past, what could be improved?

What do you want from the new, what are your fears?

8. Clarification of the expectation of the successor to the executives and employees with presentation of the business plan

9. Acquisition of multipliers in the company

10. Implementation in at least three stages (milestone after 6 months, 3 years, 5 years – possibly accompanied by external advice)

Benefits and hurdles of external advice:

If business succession is such a unique, complex and lengthy story, why do many people not use external support for this change process? There are several reasons for that. For one, many believe that they can do it alone – even if they have never done such a project before. Also, they do not take into account that the ‘prophet in his own country’ is usually not heard. On the other hand, often scare the cost. What costs a bumpy transition or even a ‘failed’ project is 

simply not included.

How do you want to financially assess blocking employees, discussion times, rumors, misrepresentations, etc.? It is easier to calculate the costs of terminating employees and the necessary new appointments. It’s amazing how rare it is and how much you like being ‘cheated’ to calm your own conscience. In any case, you lose about a year in each position, in the meantime even more – and these costs are easy to quantify. Added to this are the search costs and the lost time for the selection process. There is no guarantee of success with the new employee, while dismissal of the former employee often has a pull effect. Often this advertises the best old colleagues from the same. In the end, the departure of a key employee costs more than the entire external support. And does it stick with one?

What can external consulting do in company succession? Through external support, the entrepreneur brings people on board who have experience with the unique situation for him. External people have the advantage of understanding the emotions associated with the situation, but even being able to look at things with more distance. You do not have to keep your day-to-day running on the side, the change process is your daily business. Through external consultants the entrepreneur gets competent sparring partners, without losing the decision sovereignty. Vonhoff Management Consulting AG (VMCG) has been assisting medium-sized companies with changes since 1998 and successfully supports their customers with succession planning.