As part of our Mercuri Urval article series Finding the Way Ahead, I had an interesting conversation with Daniel Garlipp, a long-standing and important business partner of mine. Daniel is a Managing Partner at Carlsquare, a corporate finance firm with a focus on M&A, i.e. on company sales and acquisitions. He has kindly taken the time to share his views and expertise on an important topic with us: The transfer of an owner-managed company in the context of a partial or complete sale of a company.
It is best to introduce yourself briefly
Daniel: I have been working for Carlsquare since 2011 and as a partner since 2018. Carlsquare is an M&A consultancy, i.e. we advise companies and their shareholders on the sale and acquisition of companies. A large proportion of the companies we advise are owner-managed. Therefore, our work often involves handing over the company to a successor or accelerating further growth, for example by acquiring another company. Before joining Carlsquare, I worked in Frankfurt and Munich for KPMG and Roland Berger, among others, and got to know financial and commercial due diligences.
When it comes to succession planning, most people think of the founder of a medium-sized company who, due to his age, would like to see his life’s work and his employees in good hands. In which company situations is the succession arrangement also being considered?
Daniel: The situations in which succession is considered are much more diverse than one might imagine. The image of the dynastically managed family business plays less of a role. Of course, there is still the classic family-internal succession, but here too, increasing attention is being paid to whether the next generation has the necessary qualifications. Our focus is on situations in which, in addition to the (partial) withdrawal of the owners, the main question is how the basis can be laid in the M&A transaction to prepare the company optimally for the future. For example, if a merger with a competitor makes sense or if I accelerate my own growth for a few more years by taking on a private equity investor and then making a big exit. In order to have as many options on the table as possible from the seller’s point of view, it is advisable to take a proactive approach to the issue of management personnel one to two years before a sale.
When it comes to company succession, is there an ideal manager who can be considered “one size fits all”?
Daniel: Hard to say, but rather no. The owners themselves are then most likely to be the ones who show again and again how many different roles they can take on. But it is not that important to find the “one” successor. Ideally, there should be a good second management level that complements the first management team in the best possible way, for example with regard to accounting issues, sales or product development.
What role does the current owner of the company then play in a transaction?
Daniel: An entrepreneur has a very diverse effect on his business and is therefore difficult to replace. Many also find it difficult to let go. Before the transaction, they may express the wish to withdraw. But when the sales phase begins, they still hold many strings in their hands with their profound knowledge and want to have a say in the decision-making. It is, therefore, better to start building up a successor one to three years before the sale.
Is the ideal time for the current owner to withdraw from the company before or after the sale?
Daniel: Both ways have their advantages and disadvantages. Most often it is a lifetime achievement and therefore corresponding emotions are connected with it. The first candidate chosen for the succession is not always the right one. In addition to the search, familiarisation also takes a certain amount of time and if a manager leaves after half a year, the search starts all over again. Therefore, professional support in this area is of great importance. Having a suitable successor on board has an enormously positive effect on the sales value of a company. At this point, it is worthwhile to carefully examine and select. The disadvantage is that for one or two years you will have the successor on the payroll in addition to the owner and thus double the costs. On the other hand, after a certain settling-in period, one knows whether the employees and other stakeholders of the company, i.e. customers, suppliers and others, will also accept the “newcomer”. And the double costs can often be compensated for in a structured M&A process, as they no longer burden the sustainable result.
What are the problems if the previous owner remains in the company after the takeover?
Daniel: For former owners, it is of course initially an unfamiliar situation to no longer be the sole decision-maker. This can lead to problems such as rising fluctuation rates or complaints from important customers. Since potential buyers are aware of this risk, they try to bind the former owners to the company in the long term by means of earn-outs and re-investments. This usually works much better than is generally assumed. Nevertheless, it makes sense to start building a second level at an early stage in order to simply reduce uncertainty among buyers as much as possible.
What structures and processes do investors need to keep an eye on in order for a transaction to be successful?
Daniel: In addition to good M&A process management, careful due diligence is the be-all and end-all of a corporate transaction. Buyers and sellers should know exactly what they are doing when they decide to buy or sell. The subject of human resources is often still underestimated. From experience, I can say that when a transaction has gone wrong in retrospect, very often personnel problems have played a pivotal role. Every entrepreneur and every financial investor acts in his own personal way. Successful transactions are those in which it fits not only in terms of content but also on a personal level. Fortunately, this is the case in the vast majority of transactions!