Company transfer in the age of the 4th industrial revolution

Ärileht, Tallinn, 04.04.2021. This year, on 20th August, 30 years will have passed since the restoration of the Republic of Estonia. Estonian business will also be 30 years old. Entrepreneurs who were 40 in 1991 will now turn 70. For some time now, a process of transfer of companies in Estonia has been taking place, driven by the age of the entrepreneur i.e. the owner.

There are several ways to leave a company that has been your life’s work: you can continue as a family business, involving relatives and family members in the management as early as possible. The company can also be transferred to new owners in full or some of the company assets can be sold, ultimately allowing the owner to continue as financially independent. Transferring a business due to the advanced age of the owner is a natural process and should not be feared.

Generally, a company that the owner transfers or sells is over ten years old – built from the ground up. But just like developing a business, exiting one is a time-consuming process. The economic environment is volatile, and unless there is a plan to continue as a family business, leaving the company during an economic downturn is significantly more complicated and less profitable.

Thus, the owner must first find answers to many specific questions. What is the right time for a possible transaction, the form and structure of the business to be transferred, what is the fair price and format of the transaction, which obligations as well as risks remain with the entrepreneur after the completion of the transaction, who should be involved as partners in the process? Fortunately, a prudent entrepreneur can usually do all this within a reasonable self-imposed timetable.

On average, the exit process takes 6-12 months, but together with the preparatory period, in practice it can take two to three years. In addition, it must be taken into account that the previous owner often has to participate in the management of the company even after the sale of the company: in order to transfer the management smoothly and allowing the new owner to take over all business processes, skills and knowledge. Not even COVID-19 has stopped the generational change, and 2020 was an active year in terms of corporate sales, despite the health crisis. One significant sales transaction was the sale of the car dealer company Silberauto to Veho. Back in 2007, the founder Väino Kaldoja wrote that he would never sell Silberauto. In 2020 however, the transaction was suddenly done. So, what changed in the meantime, besides the owner being 13 years older? In order to analyse and understand an individual transaction, let's look at the bigger picture. The first industrial revolution began in the middle of the 18th century, when the steam engine was invented. The second industrial revolution began in the early 20th century when Henry Ford introduced conveyor lines to the automotive industry. The third industrial revolution took place in the early 1980s and can be called the beginning of the era of computer-based production. The fourth industrial revolution is currently under way, the hallmarks of which are the Internet of Things and the era of cyber-physical systems. The fourth industrial revolution is bringing rapid changes in business models and value chains. It was precisely the fact that fundamental changes in car retail sales are also expected in the coming years, which caused the owner to leave Silberauto.

The pace of change in the world is described, for example, by the fact that ten years ago the most valuable companies for Estonian investors were banks and energy companies, whereas in 2020 Skype, Bolt and Wise (Transferwise) are valuable. In recent news from taking Wise public, experts estimate the company's value to rise to billions of dollars.

Changes that took a decade in the 1960s can take place in a couple of years today. This knowledge should also give us food for thought on when it is wise to transfer our business, either in the form of a family business or to find a new owner for the business. If necessary, it is always possible to involve advisors and experts, whose recommendations combined with the business instincts of the owner make for reasonable decisions.