The German SME sector is a key driver of the M&A market. Growth strategies and optimizing the business model are just two of the issues that are driving SMEs. Then there is digitalization and the impact of the coronavirus pandemic. SMEs are being asked to reposition themselves and explore future potential. Jan Pörschmann, Partner at Proventis Partners, explains in an interview why M&A is an effective way of coping with the changes.
Mr. Pörschmann, Proventis Partners specializes in mid-cap transactions. How do you define this mid-cap market?
Pörschmann: We specialize in companies that generate annual sales of between EUR 10 million and EUR 250 million. That can be described as an upper midmarket. Academics tend to speak of medium-sized companies with a turnover of between EUR 1 million and EUR 50 million.
How many companies do you define as SMEs in Germany?
Pörschmann: According to this definition, we are talking about just under 30,000 companies, of which around 12,000 are owner-managed.
How do these companies view the topic of M&A?
Pörschmann: Age plays a major role in this context: the younger the managers, the more open they are to the topic of M&A. The first and second generation of entrepreneurs grew up in an environment in which development cycles were slower and organic growth was a tried and tested means of positioning oneself successfully.
Today, new technologies have a significantly higher penetration rate. Young managers find it easier to live with this fact – they have grown up with the pace and adapt quickly to changing circumstances. They quickly realize that M&A is an option for acquiring process and method expertise.
What other advantages does M&A bring?
Pörschmann: M&A is a powerful tool for shaping the future of a company – and is as versatile as a Swiss army knife. Every future decision made by an entrepreneur should be guided by the question “Make or buy?”. As just described: In our times of accelerated change, the buy decision is increasingly valid – especially when it comes to the issue of “time-to-market”.
M&A is often associated with 100% acquisitions and sales – what other types are there?
Pörschmann: This assessment needs to be corrected. The M&A world is colorful: in addition to acquisitions and sales, there is also the option of a participation, a cross-shareholding or the service equity model – a wide range of possibilities are opening up, for example joint ventures or partnerships with private equity companies.
Does the issue of succession continue to dominate when entrepreneurs opt for M&A?
Pörschmann: Most of the discussions we have result from the succession issue. However, we are also increasingly seeing other cases: companies in which a private equity company is invested, which in turn is pursuing a buy-and-build strategy. SMEs are generally more open to talking to private equity these days, which is continuously increasing the number of transactions in this area.
The cultural difference between private equity and SMEs no longer bothers you?
Pörschmann: This cultural difference certainly exists. The classic private equity fund with a fixed term has to achieve goals within a manageable period – this is usually not the entrepreneur’s deadline. They think more long-term.
However, there are now more and more investors who do not have maturity-linked funds, thus building the crucial bridge. In addition, many private equity companies have excellent advisory boards that are involved in the transaction teams, so that the entrepreneur knows from the outset which personalities he is dealing with.
Once you have decided to do M&A – what should the implementation look like in concrete terms?
Pörschmann: Respect for the complexity of M&A processes is usually great and often the decisive obstacle. The best way to meet this challenge is to get experts and advice on your side. On the one hand, there are the lawyers who help to negotiate the highly complex transaction agreements.
Then there are the tax consultants. There is not a single transaction where at least one tax issue does not come up.
It also requires complete process know-how, which is used to clarify the decisive questions – and which the M&A consultants contribute: How many interested parties are approached, when are investors approached? The selection of the bidder/target field is a key point. Then it’s about disclosure: When will what information be disclosed and in what level of detail? You also need a negotiator who approaches the vote calmly and does not allow themselves to be guided by their own emotions. Finally, it is about synchronizing the timing of the processes, which must be coordinated with the resources of the companies involved.
Where do you see the biggest obstacles to successful transactions in the SME sector?
Pörschmann: In the first phase, many deals fail because of the prices. This is particularly true at the moment: we are at an all-time high in terms of company prices.
Once a commercial agreement has been reached and the due diligence process begins, issues come up that were not considered in sufficient depth in the past – such as data protection. The GDPR is a classic topic.
With cross-border transactions or purchases by large corporations, there is also the issue of compliance: have you complied with all requirements, do you have business relationships with countries that are on sanctions lists? SMEs are certainly willing to meet these criteria, but are not always in the best position to fulfill all requirements.
What role do cross-border deals play in the SME sector and what impact does the AWG have on transactions with non-European partners?
Pörschmann: In the last ten years, SMEs have made around a third of their acquisitions abroad. In addition, around 50% of sales were made abroad. The AWG is mentioned time and again – but it is specific sectors that are affected, systemically relevant industries such as IT security or energy. In the SME sector, as we define it, I have not yet experienced the AWG as a deal breaker.
What is the relevance of ESG?
Pörschmann: Sustainability must be integrated into companies’ business models. A stake in the respective service provider is sometimes a good idea – the market is looked at from a more holistic perspective, which drives ESG-related transactions.
Mr. Pörschmann, thank you very much for the interesting information.
To the interview partner:
Jan Pörschmann (*1970) is the founder and Managing Partner of Proventis Partners GmbH in Munich. He specializes in transactions in the technology, software and media sectors, mostly for owner-managed companies.
This interview was first published in M&A REVIEW 03/2022.
