The July 29, 2015 edition of the Wall Street Journal featured an article titled, “The Cost of Germany’s Graying Managers.” The subtitle was:
“At small businesses led by older bosses concerns are raised about stalled investments, succession.”
In my books, If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want)? and Buying A Business That Makes You Rich I make the following three points:
- Employees want to contribute and grow, i.e. career advancement.
- Too many (elderly) owners are coasting, just gliding along, with no thought to what coasting really means to the value of their business (to not invest and especially not have any kind of succession plan lowers value).
- Way too many businesses, especially those exemplified by point two, aren’t investing in people, equipment, or technology as they should. Short term profits look better but a smart buyer will look at the anticipated capital expenditures and adjust the price accordingly the naïve buyer will be enamored by the profits and pay the price later (pun intended).
These points directly correlate to all the statistics about how many small businesses will sell in the next decade or so as to many business owners are in their 50’s, 60’s, and early 70’s. And they’re coming to play in Germany now.
One example in the WSJ article was about Autohaus Ochs GmbH, a Volkswagen dealership. Ten years ago the business had a 69-year owner, eight employees, and hadn’t made any significant investment in years. The then 31-year-old buyer added a breath of fresh air, investment and the company now has 100 employees. Coasting owner, vibrant buyer, and now a thriving business. Talk about a buyer making a contribution!
German business-chamber association DIHK says 73% of senior managers, “haven’t assembled the basic documents needed for a handover, such as power of attorney, supplier and client information, bank-access data or a will.” If you think 73% is high, think again. When it comes to small business owners and any kind of succession plan 73% would be a great number, meaning 27% of owners had some kind of succession plan (a few years ago an M&A organization and the WSJ stated it’s about 10%).
My final example (from the article) is about the Brockhaus Group. As dad coasted, competition raged. When the son took over the business they shed operations that were half of their sales and staff. They invested in their remaining divisions and within four years sales are up 50%. While this was a family succession issue, which needed to be taken care of first, if the company was looking for an outside buyer they would have needed to implement the new strategy and investment first, shown the 50% growth, and maximized value and price.
Conclusion
A client company recently grew by acquisition by buying a direct competitor. The seller should have sold one-to-three years earlier. Given his age, family situation, and inattention to company culture the price he received was about half of what it would have been (had he acted earlier). Once stagnation hits it may not be a turnaround but it sure is a fixer-upper, and that is something all sellers need to avoid.
