The allure of succession buyouts in the CEE
By Wojciech Jezierski, partner, Abris Capital Partners – Why succession buyouts are a strong opportunity in Central and Eastern Europe at the moment, and why private equity is the ideal partner for the region’s SMEs, in the words of Wojciech Jezierski, partner at Abris Capital Partners.
In Central and Eastern Europe, it was not possible to start private businesses until 1989, after the freeing up of the economy. Therefore, in most cases the entrepreneurs we see today who are selling businesses are first generation: they established their businesses in the early 1990s and today, these are well-established companies – often industry leaders – and their owners are increasingly thinking about succession.
The founder’s spirit of entrepreneurship and vision, creative energy and determination to survive is part of every company during the initial phases of its development. However, as the business matures and reaches a certain scale, it is vital to introduce more formal governance and value-building processes to retain their competitive advantage and ensure continuity of operations.
The key challenges faced by family businesses that we see today include a lack of succession planning; decision-making processes being concentrated in the hands of one person; a lack of professional governance; difficulty in attracting talent; and limited access to capital.
But there is a more existential problem facing many of these businesses – finding the right successor. As the Instytut Biznesu Rodzinnego (IBR) reports, 74 per cent of founders in Poland would like to hand over their company to the younger generation, but only 8 percent of second-generation successors are interested in taking over the family business, preferring to prove themselves in their own career first. As a result, seniors often face a difficult decision: what next with the company? Increasingly frequently they decide to work with external managers, which is often a starting point for cooperation with private equity.
Covid has, if anything, accelerated this trend. The challenges we have encountered over the past year have shown that businesses need to professionalize even faster, be ready for unexpected challenges and have business continuity plans in place or access to tested managers. Today’s challenges are also an opportunity for companies which have proven management teams and have survived the past year to grow faster and became even stronger. These businesses are perfect partners for private equity funds, who can support their growth plans through operational support, M&A and by providing access to capital.
The bulk of family businesses in the CEE are not exitable without significant professionalisation due to under-developed reporting methods, governance and so on. Private equity helps to transform these processes and prepare the companies for efficient integration with a future trade investor. One of the benefits over working with this type of company is that nearly all initiatives from a typical value-creation plan are necessary. This means there is always plenty of work to do, and we can be ambitious with the speed and scale of implementation.
However, this does not mean that the role of a private equity investor is easy. The process is fraught with difficulty, particularly in managing the expectations of founders who have often built their companies up from nothing and may have the view that no one knows better than them how to manage the business. Add to this the fact that their original plans for succession may not have come to fruition, and that they are being asked to relinquish control (albeit in exchange for a sizeable investment!) and you have a potentially volatile relationship to manage.
From our experience and our investments to date, a partnership with private equity can be a bridge to a full succession, but it is hard to talk about a 100 percent acquisition of the company right away. In addition, it is a challenge to talk about valuation, because the business will have sentimental value to the owner, which is immeasurable.
A solution which we often propose is an acquisition of a majority stake, combined with a carefully drafted business professionalisation plan, the succession of the founder to the supervisory board, a strategy to significantly increase the scale of business through organic and acquisitive growth, and finally a joint exit through a sale in three to five years.
For a private equity investor, this cooperation model improves the probability of a successful succession process and has the added benefit of being able to leverage the huge market knowledge of the founder. For the entrepreneur, meanwhile, it gives comfort that they will have a significant ongoing role in the business, that their vision for the company will remain in place, but also that they will be part of something even bigger and better in the future.