This video was made at GREIF VELOX in Lübeck, a BPE portfolio company acquired in an MBO in 2018.

Solving succession

Types of investment

Management Buy-out (MBO)

Internal succession planning

In a Management Buy-out (MBO), 100% of a company’s shares are sold to a newly founded holding company. BPE owns a majority stake in this holding company, while the existing executives or management members of the respective company take over a minority stake. Other key employees of the company might also get the option to acquire a rather small stake in the company. Generally, these are influential and meritable employees who hold management positions in either development, production or sales. Of particular interest to these managers and/or other employees is the fact that they can acquire their shares at preferential conditions, or so called “sweet equity”.

In this type of succession planning, the existing management team and further selected employees (if any) become entrepreneurs themselves. Thus, the entrepreneur is replaced by one or more “new entrepreneurs”. The “Mittelstand” company culture and the continuity in the management are preserved, which experience has shown to be a reassuring sign of confidence for the whole workforce. This concept also allows the retiring entrepreneur and other existing shareholders to (re-)invest in a minority stake in the company if they so wish and thus remain connected to the company in the long term.

Management Buy-in (MBI)

External succession planning

A Management Buy-in (MBI) is essentially the same as a Management Buy-out, the only difference being that the manager comes from “outside” and has not yet worked for the company. This becomes relevant if there is no management in the company that is qualified or motivated to take on entrepreneurial responsibilities. In this case, succession planning becomes a “real” succession problem. With the BPE MBI-Initiative, BPE has specialised in solving such succession problems by developing a small, exclusive network of managers who are interested in becoming entrepreneurs. The BPE MBI-Initiative focuses on the decisive investment criterion of “management quality”. Thus, a strictly selected, limited circle of potential operational managers is identified who can be specifically deployed as MBI-Candidates. Through BPE’s alliance with these MBI-Candidates, the succession of the shareholding (through BPE) and operations (through the MBI-Candidate) can be resolved.

The BPE MBI-Initiative

as a “real” succession solution

If no suitable operational successor is available in the company, succession planning becomes a “real” succession problem.

The solution is a so-called Management Buy-in (MBI).

Drivers of external succession

BPE estimates that the importance of succession planning and, in particular, external succession solutions will continue to increase in German ”Mittelstand” companies. This assessment results from the following considerations, which in turn are based on current predominant trends:

Demographic change

Baby boomers in Germany (1955-65) will increasingly reach retirement age in the next few years. However, the generation following the “baby boomers” is comparatively small and thus reduces the choice of successors within the family.

“Silver Society” and individualisation

An improved personal work-life balance and a new under­stand­ing of age (down aging) tend to lead entrepreneurs to want to retire earlier. In addition to and apart from the purely quantitative effect of a lower number of children, plurality and free personality development as transformed values of a younger generation make family-internal succession arrangements more difficult. Following in the footsteps of the parent has long since become a less natural choice for a generation that values independence and personal freedom.

Finally, the positive net balance of start-ups in Germany, as determined by the IfM, has led to a steadily increasing number of companies and, by extension, will naturally lead to a larger number of future succession planning.

Owners Buy-out (OBO)

Asset diversification
and initiation of succession planning

Increasingly, company owners are thinking about their succession at a relatively early age. Simultaneously, company owners feel the need to diversify their assets, which are usually heavily tied up in their company. This can be done by means of a so-called Owners Buy-out (OBO). In this case, the entrepreneur sells the company to a newly established holding company.
The holding company owns a majority stake in this company and the entrepreneur acquires a minority stake from the previously realised purchase price. In this way, the entrepreneur can realise a significant portion of the company value, but remains a shareholder and is still involved in company operations. In the course of an Owners Buy-out, consideration can also be given as to whether to extend the circle of shareholders by including existing, suitable and talented second managers as shareholders. Such a process can be the cautious initiation of a succession planning as well as the beginning of a dynamic expansion strategy.

Buy-and-Build, Add-on

Buy-and-Build strategies
and Add-on acquisitions

 

Expansion via external growth

The economic structure in Germany is characterised by a pyramid: The total amount of “Mittelstand” companies significantly decreases with increasing sales. Consequently, there are far less investment opportunities in the large cap segment compared to the small or even micro cap segment. This immediately validates the strategy of either merging a group of smaller, possibly complementary companies into a larger unit (Buy-and-Build strategy), or acquiring these smaller companies through a larger unit and integrating them into it (add-on), in order to grow a company inorganically through acquisitions or to broaden company competence. In addition to the classic advantage of economies of scale, the integration of smaller company units can lead to other highly synergistic effects for a company.

As companies grow in size, their stability, visibility and attractiveness for qualified employees, financing partners, customers and suppliers increases. These advantages are regularly reflected not only in absolute terms, but above all in relative terms in the form of a higher company value. Additionally, smaller individual companies can be merged into a more resilient corporate unit. For example, in the field of measurement and control technology, BPE aggregated four companies between 2007 and 2010. All four were succession plannings and were successfully merged to form a powerful, highly innovative and profitable measurement and control technology group. Between 2016 and 2019 a similar strategy was implemented in the Software/IT segment by aggregating four individual complementary companies into one group.

Management Buy-out (MBO)

Internal succession planning

In a Management Buy-out (MBO), 100% of a company’s shares are sold to a newly founded holding company. BPE owns a majority stake in this holding company, while the existing executives or management members of the respective company take over a minority stake. Other key employees of the company might also get the option to acquire a rather small stake in the company. Generally, these are influential and meritable employees who hold management positions in either development, production or sales. Of particular interest to these managers and/or other employees is the fact that they can acquire their shares at preferential conditions, or so called “sweet equity”.

In this type of succession planning, the existing management team and further selected employees (if any) become entrepreneurs themselves. Thus, the entrepreneur is replaced by one or more “new entrepreneurs”. The “Mittelstand” company culture and the continuity in the management are preserved, which experience has shown to be a reassuring sign of confidence for the whole workforce. This concept also allows the retiring entrepreneur and other existing shareholders to (re-)invest in a minority stake in the company if they so wish and thus remain connected to the company in the long term.

Management Buy-in (MBI)

External succession planning

A Management Buy-in (MBI) is essentially the same as a Management Buy-out, the only difference being that the manager comes from “outside” and has not yet worked for the company. This becomes relevant if there is no management in the company that is qualified or motivated to take on entrepreneurial responsibilities. In this case, succession planning becomes a “real” succession problem. With the BPE MBI-Initiative, BPE has specialised in solving such succession problems by developing a small, exclusive network of managers who are interested in becoming entrepreneurs. The BPE MBI-Initiative focuses on the decisive investment criterion of “management quality”. Thus, a strictly selected, limited circle of potential operational managers is identified who can be specifically deployed as MBI-Candidates. Through BPE’s alliance with these MBI-Candidates, the succession of the shareholding (through BPE) and operations (through the MBI-Candidate) can be resolved.

The BPE MBI-Initiative

as a “real” succession solution

If no suitable operational successor is available in the company, succession planning becomes a “real” succession problem.

The solution is a so-called Management Buy-in (MBI).

Drivers of external succession

BPE estimates that the importance of succession planning and, in particular, external succession solutions will continue to increase in German ”Mittelstand” companies. This assessment results from the following considerations, which in turn are based on current predominant trends:

Demographic change

Baby boomers in Germany (1955-65) will increasingly reach retirement age in the next few years. However, the generation following the “baby boomers” is comparatively small and thus reduces the choice of successors within the family.

“Silver Society” and individualisation

An improved personal work-life balance and a new under­stand­ing of age (down aging) tend to lead entrepreneurs to want to retire earlier. In addition to and apart from the purely quantitative effect of a lower number of children, plurality and free personality development as transformed values of a younger generation make family-internal succession arrangements more difficult. Following in the footsteps of the parent has long since become a less natural choice for a generation that values independence and personal freedom.

Finally, the positive net balance of start-ups in Germany, as determined by the IfM, has led to a steadily increasing number of companies and, by extension, will naturally lead to a larger number of future succession planning.

Owners Buy-out (OBO)

Asset diversification
and initiation of succession planning

Increasingly, company owners are thinking about their succession at a relatively early age. Simultaneously, company owners feel the need to diversify their assets, which are usually heavily tied up in their company. This can be done by means of a so-called Owners Buy-out (OBO). In this case, the entrepreneur sells the company to a newly established holding company.
The holding company owns a majority stake in this company and the entrepreneur acquires a minority stake from the previously realised purchase price. In this way, the entrepreneur can realise a significant portion of the company value, but remains a shareholder and is still involved in company operations. In the course of an Owners Buy-out, consideration can also be given as to whether to extend the circle of shareholders by including existing, suitable and talented second managers as shareholders. Such a process can be the cautious initiation of a succession planning as well as the beginning of a dynamic expansion strategy.

Buy-and-Build, Add-on

Buy-and-Build strategies
and Add-on acquisitions

 

Expansion via external growth

The economic structure in Germany is characterised by a pyramid: The total amount of “Mittelstand” companies significantly decreases with increasing sales. Consequently, there are far less investment opportunities in the large cap segment compared to the small or even micro cap segment. This immediately validates the strategy of either merging a group of smaller, possibly complementary companies into a larger unit (Buy-and-Build strategy), or acquiring these smaller companies through a larger unit and integrating them into it (add-on), in order to grow a company inorganically through acquisitions or to broaden company competence. In addition to the classic advantage of economies of scale, the integration of smaller company units can lead to other highly synergistic effects for a company.

As companies grow in size, their stability, visibility and attractiveness for qualified employees, financing partners, customers and suppliers increases. These advantages are regularly reflected not only in absolute terms, but above all in relative terms in the form of a higher company value. Additionally, smaller individual companies can be merged into a more resilient corporate unit. For example, in the field of measurement and control technology, BPE aggregated four companies between 2007 and 2010. All four were succession plannings and were successfully merged to form a powerful, highly innovative and profitable measurement and control technology group. Between 2016 and 2019 a similar strategy was implemented in the Software/IT segment by aggregating four individual complementary companies into one group.

BPE’s types of investment

Average number of potential transactions (from 2010)

0 %
Management Buy-in
0 %
Management Buy‑out
0 %
Owners Buy-out
0 %
Add-on