Company successions are an important theme for the economy. The amount of enterprises, which search for a successor, increased in the last years. Especially small and medium-sized enterprises are affected by this issue. In this case the issue arises, that no internal successor is available. That’s why external opportunities have to be considered.
Among options like foundations or management buy-outs, private equity investors are one possibility of a successor. These investors bring new equity and know how into the enterprise. On the other side, private equity firms often invest only for a defined period and focus on the return on investments. That’s why private equity firms mention in the sales contract specific rights and agreements. These rights include e.g., that other shareholder have to sell their shares, if the private equity firm wants to sell its shares. Furthermore, if the private equity firm wants to go public, the other shareholders must agree. If these rights are reflected in the sales contract, the private equity firm has the total power over the enterprise. That’s why especially in the contract phase the current entrepreneur should be alerted, what agreements are reflected in the contract. Otherwise the PE firm holds sway over the whole company. After the defined time horizon, the private equity firm leaves the enterprise. For this different exit strategies exist: An Initial public offering, a trade sale, a secondary sale or a buy back. The most interesting one for the investor is to go public, followed by a trade sale. Going public means a high return on investments for the investor.
All in all, the entrepreneur holds the strings: He can influence the future of the company, because he chooses the successor for the enterprise. If he reflects, what the enterprise needs and gets the motivation of the investor, why he wants to buy the enterprise, he can choose the right successor for his company.
Table of Contents
1. Introduction
2. Company successions – background and theory
2.1 Defining company successions
2.2 Types of company successions
3. Private equity as an opportunity of financing
3.1 Defining private equity
3.2 Investment process of private equity firms
3.2.1 Planning phase
3.2.2 Due Diligence
3.2.3 Sales contract
3.3 Exit strategies
3.3.1 Trade sale
3.3.2 Secondary sale
3.3.3 Buy back
3.3.4 Initial Public Offering
4. Opportunities & Threats of private equity firms investing in SMEs
5. Conclusion
Research Objectives & Key Themes
The primary objective of this assignment is to conduct a critical analysis of private equity as a viable financing and succession strategy for small and medium-sized enterprises (SMEs) facing the challenge of finding an external successor, while examining the associated processes, contractual implications, and strategic exit paths.
- The theoretical background and various models of corporate succession.
- The definition and mechanics of the private equity investment process.
- Comprehensive analysis of the sales contract phase, including governance and exit rights.
- Detailed evaluation of diverse exit strategies such as IPOs and trade sales.
- Opportunities and potential threats posed by private equity involvement in SMEs.
Excerpt from the book
3.2.3 Sales contract
After the corporate value is calculated, the negotiations start. Before starting the negotiations, a Memorandum of Understanding should be signed. A Memorandum of Understanding is a document, that mentions all essential issues regarding the purchase. Furthermore, it includes all details, which took part in the conversations. Figure 6 summarizes the content of a Memorandum of Understanding.
The central theme in the negotiation phase is the corporate value. Furthermore, the content, what is sold, should be reflected. This includes warranties and obligations of the seller. If several buyers are available, the entrepreneur must decide upon one buyer. In this decision, it should be mentioned, if the favourite buyer has already submitted a financing confirmation. If not, the real interest of the buyer should be queried.
In the following the sales contract is drafted. The contract includes an overview of all assets or shares, which are sold. All warranties and guarantees are considered. These are e.g., that all documents transmitted, are correct, or, that all assets currently are property of the enterprise. Furthermore, the contract contains special rights, with which PE firms get secure regarding the risk of the investment. These rights include specific rights of delegation, to have a say and information rights. Also they contain arrangements regarding the exit of the PE investor. The specific rights are described in the following.
Summary of Chapters
1. Introduction: Outlines the growing challenge of company successions in SMEs and introduces private equity as an alternative solution to be analyzed.
2. Company successions – background and theory: Defines the concept of succession and explores various internal and external transition options available to entrepreneurs.
3. Private equity as an opportunity of financing: Explains the nature of private equity, the investment process, and details the specific contractual mechanisms and exit strategies favored by investors.
4. Opportunities & Threats of private equity firms investing in SMEs: Provides a critical assessment of the impact of private equity involvement on SME sustainability and operational independence.
5. Conclusion: Summarizes the key findings, emphasizing the importance of the contract phase in securing the future of the enterprise under a new investor.
Keywords
Company Succession, SME, Private Equity, Corporate Valuation, Due Diligence, Sales Contract, Exit Strategies, Trade Sale, Initial Public Offering, Buy Out, Management Buy-In, Share-deal, Asset-deal, Investment Process, Governance.
Frequently Asked Questions
What is the core focus of this assignment?
The work examines the role of private equity as a strategic succession option for small and medium-sized enterprises (SMEs) that cannot find an internal successor.
What are the primary themes discussed?
The text covers succession types, the private equity investment lifecycle, negotiation aspects of sales contracts, and various exit strategies like IPOs or trade sales.
What is the main objective of the research?
The goal is to analyze how private equity investors function as successors and how their involvement affects the long-term value and independence of an SME.
Which methodology is applied in this paper?
The paper utilizes a structured review of academic literature and professional documentation to explain the theoretical frameworks of succession and the practical investment processes of PE firms.
What is covered in the main section of the paper?
The main part details the investment process, from the planning phase and due diligence through to the drafting of sales contracts and eventual exit scenarios.
Which keywords define this work?
Key terms include Company Succession, SME, Private Equity, Corporate Valuation, Exit Strategies, and Investment Process.
What is the function of a 'Leaver clause' in a PE contract?
A Leaver clause ensures that a private equity firm can acquire shares from managers who choose to leave the enterprise, distinguishing between 'Good Leavers' and 'Bad Leavers'.
Why is the 'Sales contract' phase critical for entrepreneurs?
It is critical because the contract contains specific rights, such as delegation and exit obligations, which can grant the private equity firm significant power over the company if not negotiated carefully.
What does 'Russian Roulette' refer to in this context?
It refers to a 'Mandatory Buy-Sell Clause' where, in companies with two shareholders, one can offer to sell or buy shares at a defined price, forcing the other to accept one of the two options.
- Arbeit zitieren
- Christin Wessels (Autor:in), 2017, Critical analysis of investment management within company successions, München, GRIN Verlag, https://www.hausarbeiten.de/document/359272
