Solving the question of succession, or, if there is no successor, choosing the proper buyer is a difficult task. Help from professionals is advised for selling the company, and if it succeeds, the question arises: what to do with the money? Or what to do with ourselves?
What chances does an entrepreneur have for selling his or her business? – asked the question Attila Tóth, president of Navigator Investments on the conference on SME financing organized by Privátbankár.hu. The number of businesses in the region with at least 1 million euro revenue may even be about 2-3 thousands. Many companies were established at the beginning of the ‘90s, majority of them now facing the issue of succession. About 70% of family businesses survive the first generation change, and this ratio is not getting any better with further successions.
40% of the owners are thinking about selling the company within five years, but 80% of the businesses offered for sale are never sold. Those companies are the most easiest to sell that are the most prepared to be sold, and have the best price-value ratio.
Stock market? Competitor?
The stock market is not suitable for exit in itself, only companies with a proper management are able to appear on the stock exchange. A new management cannot be built up by selling the company on the stock market – said Attila Tóth, who was the vice president of the Budapest Stock Exchange for several years.
The business might be sold to one of the competitors, but it is a very sensitive issue, and it can turn out to be a failure as the competitor may misuse the information acquired during the negotiation process, and it may want to buy up the market, not the company.
Buy in? Buy out?
Selling the company to its own management might be a solution (management buy-out), but management buy-in can be also an option, where a new management appears for the purpose of buying the firm from the owner. There can be situations when there is a management with no money, or when there is no proper management, but when there is a proper management, it is not necessarily a good option to sell the company. According to Tóth these are very difficult to coordinate.
Navigator Investments buys, manages and improves companies, and provide their own management for them. Who should do the selling process of the company? How should I advertise it, while keeping it a secret at the same time? “Everyone hates consulting firms, but without them it is basically impossible to sell a company. Professional help is needed” – said Tóth, who also consideres selling a company is a new industry, a new profession.
War and selling a company
Think with the head of the buyer. Why it wants to purchase my company? – recommended Tóth and Sun Tzu, recommending his book, The Art of War. Map our possibilities and the risks, and let’s not forget about the financing either. However, at the end, “everything is worth what someone is willing to pay” – says the infamous wisdom.
It is also worth considering what we are going to do after selling the company. Doing work might be missed after a while. There are people who start to get bored after two months of sailing – said the expert.
A world without interests
Péter Schuszter, CEO of Generali Alapkezelő held a presentation on what can be done with the money coming from the sale of the company. The owners usually want to keep it safe, and don’t want to take risks. Everyone wants to achieve high returns with the lowest possible risk, and they also want have easy access to their money – these three cannot be executed together, one has to be given up.
There aren’t high interests and investments with certain 10% returns anymore, the interest rates offered by the banks are at around zero percent. Since the financial crisis more than 600 interest reductions took place all over the world, and 30% of the treasury bonds are traded at negative interest rates. Central banks have poured huge amounts of money onto the markets.
Gold? Bond? Share?
After the default of Lehman Brothers stock markets experienced massive downturns, but compared to that they are now high in the clouds. According to Schuszter’s figure, if one’s family were invested 1 dollar into gold at around 1800, she or he would have 4.5 dollar today in real terms. By investing in treasury bonds or stock, one would now possess 200 and 700,000 dollars, respectively. Shares generally have higher returns in longer term, but it is a question whether we can wait this time, which means 10-20 years – says Schuszter.
Thousands of unprepared successors
Who will take over my business? – asked the question György Antall, co-owner of Réti, Antall & Partners. Tens of thousands of local businesses – founded at the times of the regime change – are now facing the issue of generation change. Succession has to be arranged, or if it is not possible, a decision has to be made on the sale of the company.
The question may arise that how to prepare the new generation (if viable) for succession, and how to protect the family’s fortune. According to a survey by PwC Global, 69% of the businesses survive the first generation change, whereas only 30% survives the second.
The family should make a constitution
There are plenty of issues in relation to a family business and wealth that cannot be expressed with legal terms, so the expert suggests the introduction of a ‘family constitution’. This mutual statement could ‘regulate’ the decision making of the family, the criteria of taking part in the business, and the expectations towards the upbringing of the adolescents. It could also control the monetary issues related to marriage and the transfer of ownership.
Naturally the family constitution worth only what can be enforced in it. According to the lawyer it also depends on how it is written. The family constitutions made by the current generations will only have a very limited effect on later generations.
Broker and social worker at the same time
The trust company, also referred to as family office, usually operates as the weird combination of a broker, psychologist, and a social worker – says György Antall. This legal institution appeared in Hungary a few years ago, and wealth is heavily protected by the law.
The three actors – namely the grantor, the trustee, and the beneficiaries – are separated; the wealth is hermetically separated from the creditors of the trustee, and the grantor cannot access it either. The ownership and trustee functions are also detached from each other, but at the same time the trustee will become interested in the growth of the family wealth. The trustee is emotionally a neutral person, who can make difficult decisions due to his or her knowledge of the situation.