Being well prepared when transferring your business
Pierre Le Pahun, Senior Estate Planner and Governance Expert, and Alessandro Palagiano, Senior Private Banker at Degroof Petercam Luxembourg point to some of the challenges.
Whenever a company is sold, this is always a key moment in the life of the founding entrepreneur, owner and CEO.
Even if this moment will not come as a surprise, it is often a time of some anxiety and is rarely an easy step to take. Often it is the culmination of many years of intense personal commitment in which a project is built and developed, and success achieved. To prepare for a smooth transfer involves the successful completion of several often complex projects, including ensuring a correct valuation, finding a potential buyer, and the conducting of negotiations.
For all these reasons, it makes sense to receive good quality advice and support. Our experts at Degroof Petercam in Luxembourg have assisted several entrepreneurial families with these processes, with us working on some particularly notable transfers in recent years.
There are two main types of scenario related to a company transfer," said Mr Le Pahun. “The first is when an entrepreneur wishes to extract value from their company, either through a complete sale to one buyer, or by gradually bringing in third-party shareholders. The second scenario involves passing the business onto children or members of the extended family. Both processes are quite similar, and require a good level of planning.
An operation that requires years of preparation
Planning is undoubtedly key for any sale or transfer.
"Any such operation requires preparation, and this well before any announcement of the intention to sell or transfer. Foremost will be a desire to optimise the value of the company, and this requires the business to demonstrate its financial health, to show solid development processes and potential, and to have well drafted legal and regulatory documentation," said Mr Palagiano. “If the company is owned by several people it will also be necessary to ensure appropriate governance rules are in place, including well drafted articles of association, supplemented by a shareholder agreement. These will set the framework for the transfer and help avoid conflictual situations.”
Supported throughout the process
Once the decision to sell has been taken, the entrepreneur can define a sales strategy with their banker/advisor. Very often, structuring operations will have to be considered as a first step. This might arise when a business is being sold separately from real estate which the owner wishes to retain.
Fundamental to this will be a valuation of the business at the time of sale, as this will form the foundation of future negotiations. "Once again, this step must be well planned. The advisor works alongside the entrepreneur to prepare the ground, from the start to the end of the sales process. We are there to help this process," explained Mr Palagiano.
Facilitating the transaction
The bank uses its network to help the seller get in touch with potential buyers.
Once identified, the negotiations begin, and a key challenge is to ensure that the process goes as quickly as possible. "The sale of a business requires confidentiality, and this is important for all parties. The longer the negotiation takes, the greater the risk that a leak will jeopardise the transaction," he said. “On the seller's side, it is particularly important to prepare documentation well, gathering all the information that will be useful for the due diligence process which will be carried out by the prospective buyer. This also demonstrates the seller's willingness to be transparent, which is essential for building trust between the parties as they move to finalise the transaction.”
Being able to answer each question efficiently removes doubts in the mind of the purchaser. "Adding clarity reduces the number of questions which can be debated, thus cutting the time and complexity of the negotiations," Mr Palagiano explained.
Intra-family transfer: an equally complex operation
When transferring within a family, the process is comparable. Experience demonstrates how many of the same steps are required as when making a transaction with a third party. “There may be issues regarding assets, with legal and tax considerations needing to be taken into account," commented Mr Le Pahun. “Such an operation might be subject to fewer negotiation constraints but is often just as complicated as a transfer to a third party. The legal transfer of shares is only one aspect. Corporate governance often needs considerable work.”
As in a transaction with a third party, an intra-family transfer requires the establishment of a consensus about the valuation of the business. Being able to provide full transparency on the financial health of the business is also necessary. "If the entrepreneur has several children, the transfer may involve family governance issues or require the consideration of structuring operations that should be looked at as early as possible," said Mr Le Pahun.
Family governance and estate planning
When should donations be considered? What valuations should be used? Which rules govern shareholder decision-making? Are management processes and decisions taken in a transparent fashion, and do they allow for a healthy balance of power and the ability to challenge decisions? Are the coming generations aware of the challenges the company faces and its values? More generally, how can we ensure that the company will have a bright future, while also ensuring long term agreement within the family?
These numerous considerations are part of governance and asset planning process, and preparation must happen well before the final transfer," said Mr Le Pahun; advice which is based on extensive experience helping families deal with these challenges. “However, managers often postpone this deadline, telling themselves that the time has not yet come. Yet, long experience shows that it is never too early to think about these questions, especially as unforeseen events have a habit of disrupting best intentions.
Furthermore, having worked with the entrepreneur during the transfer, the private banking department will then be able to advise him/her on various broader opportunities. These might include the preservation and management of the sale proceeds, using a range of asset management services.
Are you planning to transfer your business within your family and/or to a third party? Does a family member want to sell their shares in the family business? You will need advice and support throughout.
Contact our experts Pierre Le Pahun, p.lepahun@degroofpetercam.lu, and Alessandro Palagiano, a.palagiano@degroofpetercam.lu to find out more about how they can help.