When selling the family business, price expectations are a delicate but crucial part of the process of business transfer, and are speculated on with a lot of discretion. From within our Knowledge Network Family Businesses, we gladly offer you more insight in this theme, based on an interesting study from the Sankt Gallen University in Switzerland, among others.
Entrepreneurs strongly identify with their business and care about its success after a transfer. These emotional factors also play a role in pricing and expectations, since business leaders are often prepared to sell their company with a certain discount compared to its market value. But what does this discount amount to? That is what my colleague Kammerlander investigated in Swiss SMEs.
The research is based on a survey of 1,354 entrepreneurs who were asked to indicate to whom they planned to transfer the property of the company. They were given four options: transfer to family members, transfer to employees (MBO), transfer to an external individual (MBI) and transfer to another enterprise. The entrepreneurs were also asked to express their expected price as a percentage of the market value. The bigger the difference between both, the bigger the discount.
Expected vs. actual discount
As it turns out, entrepreneurs plan to sell their business with an expected discount of 11% on average in the case of transfer to another enterprise, an expected discount of 17% for an MBI, an expected discount of 26% for an MBO and finally, an expected discount of 50% for a transfer to family members. Hence, the closer the relationship between the transferor and the transferee, the bigger the discount.
Obviously, these are expectations, but the actual price at which Swiss SMEs have been sold in recent years was also mapped out in this study. This shows that the actual discount for a transfer to another enterprise amounts to 22%, i.e. a slightly higher discount than was initially expected. The same thing happens in an MBI: the discount amounts to anything between 26% and 30%, depending on whether the buyer is an acquaintance or a stranger. In an MBO, the actual discount is similar to the expected discount, namely 26%. Finally, the discount in transfers to family members amounts to 42%, which is slightly below the expected discount of 50%.
Age and competition
Furthermore, I would like to give you some additional interesting insights based on this study. Transferors who consider the transfer of their business an important part of their future pension, are clearly expected to allow a lower discount on the selling price. The opposite is true for entrepreneurs who want to transfer their business particularly due to old age or health reasons. They are expected to allow a higher discount on transfers.
The estimated performance of the company also influences expectations. Entrepreneurs who estimate the profitability and growth of their business is lower compared to their main competitors, are expected to allow a higher discount in case of transfer of their shares.
In short, this study shows that entrepreneurs are often expected to allow substantial discounts towards the actual market value when selling their business. On average, this implies an expected discount of 30%.
Moreover, this expected discount appears to be higher in case of a close relationship between the transferor and the transferee. Hence, it may be worthwhile for the prospective buyer to build up trust and a good relationship with the transferor.
Obviously, all this is based on a study on Swiss SMEs. But recent research in Germany and other countries that studied the discount in case of transfer, particularly to family, came to the same conclusions.
In the end everything depends on the actual market value of the enterprise, of course. If the entrepreneur overestimates this actual market value, the discounts in this study might be a lot lower in reality.
Calculating market value is something many entrepreneurs struggle with. The Knowledge Network Family Business regularly organizes inspiration nights for familiar entrepreneurs, successors and transferees to elaborate on this kind of questions. On December 11 we organize an edition where we elaborate on the current and future trends in the HR world that might shed some light on the challenges concerning staff in your business.