Preparing company succession with employee shareholdings

Germany as a business location is characterized by small and medium-sized enterprises (SMEs). The 3.6 million SMEs here generate around half of the gross national product. In addition, they employ around 60 % of the employees subject to social insurance contributions in Germany and are the trainers for a large proportion of German trainees. This is because eight out of ten trainees are employed by SMEs. Nevertheless, SMEs have a huge problem: company succession.
Around 25% of companies will be looking for a successor in the next five years, and more than half will hand over their business in the next ten years. A large proportion of SMEs in Germany are family businesses. However, these also often have problems finding a successor.
Therefore, the topic of company succession is becoming more important in the German economy than ever before. If there is no one in the family who wants to take over the business, the company has to look for an external company takeover. For many companies, finding a qualified and suitable successor is problematic. A company succession should be planned early for various reasons. If no family members are eligible for a company succession, there are various alternatives, such as different forms of employee ownership (e.g. ESOP, VSOP or similar). Find out here what things you should look out for when taking over a company in order to find the optimal successor.

Succession is a problem in many small and medium-sized enterprises

According to a study by KfW Bank, the generation change is progressing in SMEs and many SMEs have to think about a company succession. There are not always family members who are suitable as successors. By the end of 2025, 16% of SMEs in Germany will have to find a solution for a company successor. However, this is not quite so easy, as the results of the study show. Around 75 % of the companies surveyed in the KfW SME Panel say they have problems finding a suitable successor.
According to 40 % of the companies, one of the main reasons is finding an amicable agreement for a purchase price. Around 165,000 out of 600,000 SMEs are threatened with a delay or even closure of the business because no successor can be found.

Why do many companies have a succession problem?‍

Many companies are faced with a company succession because the owners are retiring. This mainly affects business-related services, such as retail or companies in the insurance sector. In addition, a number of other problems are causing companies to consider quitting. Keywords are high energy costs or increased raw material prices, but also inflation and problems in the supply chain have created a difficult environment in recent years.
The Chamber of Industry and Commerce reports increasing numbers for business succession consulting. The retail, service and hospitality sectors are particularly affected. At the same time, there are very few potential successors. Anyone therefore looking for a successor business outside the family has to come up with something.

‍Whatoptions are there for preparing succession at an early stage?

‍Veryoften, SMEs take care of their succession arrangements in the company far too late. This can have fatal consequences for the company - and for its employees, of course. After all, the employees also want a smooth transition - if no successor is found, it is not uncommon for the business to be shut down completely. In Germany, an average of 2,000 family businesses close because they were unable to solve the problem of succession. These include businesses that have been operating successfully for many decades and actually have sufficient liquidity and capital.
Clarifying the issue of succession at an early stage ensures that companies do not find themselves in such an unpleasant situation in the first place. Therefore, the earlier you clarify the issue of succession, the easier it is to find a solution as well. In fact, there are various ways to solve the problem of company succession at an early stage. In addition to internal family succession, for example, a sensible option would be to use employee shareholdings to find a suitable candidate who comes from within the company. There are often potential successors among the employees who are suitable and interested.
When looking for a company successor, you can use the following options.
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1. family succession
The easiest option is, of course, to implement a succession solution from within one's own family - finding an external solution is much more difficult. After all, the owner of the business very often wants his

life's work is continued by his or her daughter or son and thus the company remains in the family's possession. Due to the family ties, the successor often has a stronger connection with the company than is the case with an external company succession.
Ideally, the preservation of the company is also ensured for future generations. However, this does not necessarily have to be the case, because an internal family succession solution also has a great potential for family conflicts - especially if the company succession is not clearly regulated. Not infrequently, such transfers are responsible for disputes breaking out within the family, so that the takeover fails. Therefore, it can actually also make sense to rely on an external succession.

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2. Succession and Company Exchanges
Another option is succession exchanges, such as "nexxt-change", the DUB entrepreneur exchange or Kern's company succession platform.
The "nexxt-change" succession exchange is the largest in Germany and offers active support in the succession process. On the homepage of the company exchange, you will find a very comprehensive database with numerous offers. In addition, qualified support and advice on the subject of company succession is provided.
The platform of the DUB company exchange has meanwhile developed into one of the most far-reaching offers for the search for successors. The DUB enterprise stock exchange has a Nachfolgeberater market place with appropriate support offers, numerous specialized papers and information for the promotion of the enterprise follow-up.
a further German enterprise stock exchange is the platform of core. It is operated by a company from Bremen, which at the time itself started the succession in a family business and recognized the resulting need. The company connects succession seekers and those willing to take over on its platform.

3. Employee shareholdings
Employee shareholdings also represent a sensible option in the search for a company successor. Employee shareholdings allow you to give employees a stake in your company. There are various forms of this, which differ from one another contractually. One option, for example, is for employees to receive either a share in the company's success or an interest payment in return for investing their capital in the company. In addition, employee share ownership can, of course, also be used as a reward instrument to recruit new employees and retain old employees.
Depending on the employee share ownership model chosen, the participation can also entail participation and control rights for the employees. A GmbH employee share ownership plan, for example, is well suited. In this case, you give your employees a share in the equity of the GmbH, making them full shareholders and also giving them the associated rights and obligations. This model is particularly suitable for companies that want to use it to manage their corporate succession with internal managers.

Employee shareholdings are an efficient instrument for preparing company succession

Employee participation in your company is an efficient option for preparing a business succession. However, not all employee participation models are suitable for this. Choose a model where employees have an active opportunity to also participate in the management of the company and where there is a high equity character. A good option is employee share ownership, in which employees you see as suitable for your succession leave you capital for a fixed period. In return, employees either receive payments linked to certain defined success factors or a fixed rate of interest.
In a silent employee participation, an employee becomes a shareholder internally but does not represent the company externally. This is also a good option for effectively preparing a company succession without any external impact. Such silent partners can request a look at the annual financial statements, but have no control or participation rights. A dormant employee participation involves little effort in drafting the contract and offers you as a company quite a lot of leeway. For example, you can set term limits, which allows you to reverse the steps you have taken and decide on a business succession.
In the case of a smaller stock corporation, a particularly simple form of employee participation is possible for a business succession. This is due to the fact that no notarization is required for the participation. In addition, the transfer can take place step by step in the form of shares. This means that several potential successors can participate in the company at the same time. The competition that this creates among themselves often makes it easier to decide in favor of a particular employee.

Advantages of a company succession through employee participation

Compared to an external company succession, employee participation has various advantages. The advantages of employee participation as an instrument for business succession are:

• You can flexibly withdraw from entrepreneurial activities and day-to-day business.
• The employee benefits from a very flexible entry into the company as a shareholder.
• The ability to choose from various participation models allows you to control which participation rights and information rights the employees involved receive.
• You do not have to grant shareholder rights to the potential employee.
• A fluid succession means that the remaining employees do not suddenly have to get used to the new successor; instead, the transition takes place slowly, giving them a longer period to get to know each other.
• You do not have to decide on a candidate immediately, but can test whether he or she is suitable for company management.
• The intended successor or successors will be more committed to the company and have great motivation.
• The longer they stay with the company, the more company shares they receive.
• By having employees see the company as "theirs," there is more ownership.
• You'll benefit from being able to observe early on who is better suited for a leadership position, and you'll be able to better differentiate between entrepreneurial types and traditional employees on your team.

Conclusion: Step-by-step takeover possible through company succession

With succession planning via employee participation, you can build up the succession step by step. By binding potential employees to your company, their motivation is strengthened and you can check who is suitable for the takeover and has the corresponding leadership qualities. There is generally no patent remedy for the process of such a company succession. The initial situations are individual, and the period of time that you have until the handover is just as decisive.
Employee shareholdings can be a sensible measure for preparing and regulating your company succession. In addition, you can choose from various models and alternatives. Are you also thinking about succession in your company or are you generally interested in learning more about employee participation? We will be happy to advise you without obligation on the various options and how they make sense for your company.

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Disclaimer: The contents of the information offered at esop-direkt.de do not constitute legal advice. If you require a legal review of your individual case, please contact our specialized team: beratung@esop-direkt.de

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