Prepare company succession: Here's how!

For a long time, company succession worked according to the principle: the eldest son or, in a pinch, the daughter, a younger son or a nephew continue to run the company if the previous company manager wanted to pass on the baton. In some companies, from large corporations to medium-sized and small businesses, corporate succession still works this way. But that is the exception. Today, entrepreneurs have to take a different approach. The search for suitable successors is extremely difficult today. Therefore, business succession can only succeed if it is planned in good time and well prepared.

Company succession: High hurdles make business transfer more difficult

Currently, there are far more companies facing succession than potential qualified successors. A DIHK study from the year 2022 and the current figures of the platform for corporate succession "next-change" come to similar conclusions: There are around 3.5 times more companies than potential successors. In some sectors, especially retail, the disparity is even greater. Experts fear that this imbalance between supply and demand for business succession will increase even further in the coming years. The reasons for this are complex.

First of all, as in so many areas, demographic change is making itself felt in the area of business succession: According to a study by the Association of German Citizen Banks, Creditreform Rating and the FOM University of Economics & Management, more than a quarter of all entrepreneurs in 2019 were already 60 years old or older. The "baby boomer" generation is now looking for business successors. However, since the generations in question have far fewer births, there are far too few potential young entrepreneurs among the senior citizens.

Another point relates to the current economic situation: the Corona pandemic, the Ukraine war and massive inflation are making generational change even more difficult. The aforementioned imponderables discourage many suitable entrepreneurial personalities from taking on responsibility for a company. They tend to choose the security of a management position within a company. Added to this is the problem of rising interest rates. This leads to the fact that the financing of the purchase is not feasible in many cases. In addition, the price expectations of the seller and buyer are often too far apart.

Overview: Forms of business succession

As already mentioned at the beginning, there are different variants of business succession: While in earlier generations the classic entrepreneurial succession, i.e. the transfer of the business to the next generation within one's own family, was the predominant form, this has changed radically in the meantime.

Donation or inheritance
This is usually the type of business succession already mentioned above within the immediate or extended family: the senior entrepreneur transfers the business to a successor during his or her lifetime by way of a donation or, in the event of death, by will, intestate succession or contract of inheritance.

Sale - with and without participation
Here, the company is transferred to the successor(s) by way of sale. The transfer takes place either in return for a one-off payment of the purchase price or through recurring payments, for example in the form of a sales annuity. For economic or emotional reasons, senior entrepreneurs sometimes reserve the right to retain (partial) control of the company for a while. The acquirer then initially acquires a minority stake.

Foundation: charitable foundation or family foundation
A foundation has neither owners nor shareholders. It is controlled by the foundation's board of directors. This board must adhere to the guidelines that have been laid down for the foundation. In this way, a company can be passed on to future generations while at the same time establishing very clear framework conditions. In addition, the continuity of the company is ensured even if the foundation's board of directors changes.

Success factor executives: Early involvement of the first management level through employee shareholdings

Regardless of which form of corporate succession a senior entrepreneur decides on, the first management team should always be involved at an early stage. This is of fundamental importance, as the acceptance of the succession plan has a direct influence on the company's success. If the succession also involves a change in strategy, the close and early involvement of management is even more important. If resistance to the company succession develops at management level, this will spread to the entire workforce.

Employee shareholdings are a modern and efficient way of retaining executives in the company and thus also laying an important foundation stone for succession. Employee shareholdings to prepare for succession are being used more and more frequently, especially in SMEs where the best potential successors have been with the company for some time. Early commitment - also emotional - can play a decisive role.

The following applies: A positive attitude on the part of the management level toward corporate succession contributes significantly to entrepreneurial success - also with the new management. Conversely, mistrust and a negative attitude can cause the company's success to falter.

Smooth transition: The most important phases in the succession process

Another success factor in the transfer of a company is compliance with the most important phases in the process of transferring the company to the successor. A planned approach to the transfer of the business is only possible if it is a planned transfer of the business. The situation is different in the case of a short-term business succession following an accident, serious illness or the death of the senior entrepreneur. Here, the essential process steps can only be adhered to if there is a contingency plan in the event of an unforeseen departure.

Important phases that determine the process of business succession:

• Orientation phase: In this phase, the owner of the company deals with the topic of company succession in the closest circle. The main task is to clarify which forms of succession regulation are possible.

• Analysis phase: The aim here is to document the initial situation. In particular, this means determining the value of the company on the one hand and the economic circumstances of the senior entrepreneur on the other.

• Assessment phase: A succession strategy can now be developed on the basis of the analysis results. In this phase, experts in succession planning should be consulted to evaluate legal, tax and economic aspects. At the end of this phase, the decision is made in favor of a specific form of succession regulation.

• Preparation phase: Now the company is prepared for succession. This usually involves optimizing the value creation potential in order to make the company as attractive as possible for potential buyers. In addition, a separation of private and company assets usually has to be made.

• Selection phase: Now it is time to look for a concrete successor. This requires a detailed business plan to make the value of the company transparent. This is the only way to draw the attention of a suitable applicant to your company. As made clear at the beginning, the supply of companies for sale is significantly larger than the market of potential buyers.

• Handover phase: The actual sale is preceded by contract negotiations. The aim here is to build up a mutual basis of trust and to work out the contractual details. This phase ends with the signing of the purchase agreement.

• Integration phase: In order to optimally support a sustainable success of the company transfer, a thorough familiarization of the successor:in must be carried out. Employees, business partners, customers and suppliers must have confidence in the successor. The senior entrepreneur acts as a coach during this phase.

Conclusion

There are many stumbling blocks on the road to successful company succession. This makes it all the more important for entrepreneurs to think about succession concepts at an early stage. The following aspects in particular should be taken into account:
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• Realistic assessment of the value of one's own company
• Acceptance that there are emotional hurdles to overcome for all parties involved when it comes to company succession
• Precise knowledge of the tax, legal and economic framework conditions
• Development of a contingency plan in the event of an unplanned, sudden business transition

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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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