In 2004 the then SPD chairman Franz Müntefering launched the “grasshopper debate” in which “anonymous investors” were equated with grasshopper plagues. From our point of view an excessive exaggeration, but with a true core…
Since then, the term “grasshopper” has been regarded in German political usage as a devaluing animal metaphor for private equity companies and other forms of capital participation, such as in the public-private partnership model, with presumed short-term or exaggerated yield expectations, such as hedge funds or so-called vulture funds (Wikipedia). It is assumed that private equity companies acquire long-established profitable companies and overload them with debts, under which the companies later collapse. The consequences are job cuts, relocations of production or even the filleting of companies.
In concrete terms Münte said in the Bildzeitung: “We must help those entrepreneurs who have the future viability of their companies and the interests of their employees in mind against the irresponsible swarms of grasshoppers that measure success every three months, suck away substance and destroy companies when they have eroded them. Capitalism is not a matter for the museum, it’s a hot topic.”
And he continues: “Some financial investors don’t think about the people whose jobs they are destroying – they remain anonymous, have no face, fall upon companies like swarms of grasshoppers, graze them off and move on. We fight against this form of capitalism.”
Even though the metaphor is exaggerated from our point of view, it makes sense to take a closer look when choosing the buyer. Basically, strategists, i.e. buyers with a strategic interest, are not better suited to the purchase than financial investors. However, every entrepreneur should be aware of the differences between potential buyers. From our point of view, the following types of buyers can be distinguished:
Strategic buyers: Strategic buyers are companies that generally come from the same industry and combine strategic goals and the realization of synergies with the purchase of companies. A resale of the investment is not planned. Nevertheless, discrepancies may arise after the takeover: Often the brand name disappears, locations are relocated (even against the location guarantee guaranteed before the transaction), new management methods and reports are introduced – processes change on a regular basis. As a result, the identity of the acquired company may be lost, important employees may leave the company frustrated, and competitiveness may increasingly dwindle. In addition, strategic buyers often act sluggishly and inexperienced in the transaction itself, making the transaction significantly less secure than with other types of buyers.
Financial investors: Professional financial investors act quite differently. As a rule, they are quick and agile in the transaction. After the transaction, the tone often becomes somewhat rougher, i.e. the company is trimmed to yield. Nevertheless, independence (i.e. brand name and location) is maintained. In order to finance the transaction, financial investors use debt capital in addition to equity capital. This doesn’t have to be bad, although one or the other financial investor lacks a healthy sense of proportion and simply gambles away. This can then lead a company into an existential crisis.
A major disadvantage is that many financial investors have no knowledge of the industry, are pure Excel acrobats and confront management with nonsensical ideas. In general, the shareholders often know everything better – which does not necessarily make cooperation any easier. It becomes particularly difficult when discussing the content of technologies and investments – often there is a lack of understanding and willingness to invest in projects that make sense in the long term. In general, one should know: As a rule, a financial investor only participates for a limited period of time due to its own limited fund duration, i.e. a “passing on” of the company is part of the concept. Consequently, a financial investor will usually act at short notice. If you’re unlucky, you’re in bed with a partner who resembles a used car dealer: buy, make up and then resell quickly. As always in life there are of course big differences and not only black or white. Individual funds act very prudently and develop the companies very successfully.
Purchase by managers or private individuals: Many entrepreneurs wish to sell their business to a “real successor”. If there is no suitable successor in your own company (which is rarely the case), you will be searched for externally. The problem: Hardly any private person can buy a company costing several million euros. If it does, then it will often be with windy financing constructions, i.e. extremely high debts. This requires a sense of proportion and experience – a buyer should also be able to afford a share. Financing on a private level, on the other hand, is often “sewn on edge”. In addition, an operational manager rarely has experience with such complex transactions. The probability of such a construction is therefore very low.
DRS Investment is a new type of investor
DRS Investment is a hybrid buyer type consisting of strategist and financial investor, who combines the advantages of both buyer types, while trying to avoid the disadvantages:
On the one hand, DRS Investment regularly acquires companies. In addition, DRS concentrates exclusively on the purchase of software companies. Transaction security is very high. DRS is able to give feedback on the same day after the first information has been transmitted. Depending on the seller, a transaction can be completed within 12 weeks.
On the other hand, DRS acts like a strategist: we buy companies in order to maintain and develop them over the long term. Employees and job retention are very important to us. A sale is not planned. The nice thing is that since we invest in software companies in a wide variety of industries and do not want or have to realize any synergies in the operative business, the independence of each company is maintained. The value arises from access to the DRS family: the exchange at developer conferences or with DRS experts helps our companies to set the right course for the future. Since DRS invests long-term, projects can also be realized with long-term returns.
Company sellers sell your business only once in a lifetime
No matter which type of buyer is the right one in the individual case, sellers should consider which buyer suits you and your company, regardless of the evaluation. This saves nerves and usually leads to better results.
We look forward to hearing from you!