When is the right time to start the succession process?

In companies, the succession process cannot take place overnight – not even in small companies. Experience shows that it takes between five and ten years to make the necessary changes to structures, put in place a successor and implement the relevant tax optimisation measures.

In terms of personnel, owners have to plan in sufficient time for the company to be passed on to the next generation. It may be the case, for example, that the designated successor is not suitable or they drop out during the handover process. If this happens, there must be enough time to find an alternative solution before it is too late.

Most company owners tend to be aged between 55 and 65 when they pass on their company. The ideal age to begin the succession planning process is therefore approximately 50. 

If owners begin this process too late, they often end up selling their company at less than fair value and paying too much tax when handing over the company.

Who would be a suitable successor or buyer for my company?

Experience shows that nowadays, the majority of companies are not passed on to family members, but are sold to external successors. For this type of succession process, there are a number of options:

• Sale to employees (management buy-out)
• Sale to another company
• Sale to an external management team (management buy-in)
• Sale to an investor
• Stock exchange flotation (IPO)

Company owners should carefully examine each of the different options.

How do I find the right buyer?

Experience shows that providing informative and objective sales documentation creates trust among potential buyers and lays the groundwork for a successful company sale. The need for information is especially high if the company is to be sold to an outside party.

Potential buyers will want to scrutinise every aspect of the company. If certain information turns out to be excessively optimistic, this usually results in a breakdown in trust, which could result in negotiations being broken off. There are many cases of interested parties dropping out because the seller cannot demonstrate to them the substance and profit potential of the company. 

Competitors, suppliers or customers are often considered as potential buyers, but approaching them about the matter can involve significant risks. Such conversations are frequently driven more by curiosity than a real interest in buying the company. Information is then quickly passed on which was not meant for the general public. This can cause major damage if, as a result, customers leave, business partners become anxious or employees in key positions within the company leave.

What needs to be taken into account when planning the succession process within my family?

With regards to inheritance law, planning to pass on your company within your family is particularly difficult – especially if your company forms the majority of your assets and you do not have sufficient assets to cover the statutory share to be paid to the other heirs. 

If one of your offspring is taking over the company alone, there are usually insufficient freely available assets to pass on to the other heirs. If these heirs then assert their claims under marital and inheritance law, it can lead to the company being split up. Company owners should therefore put in place a succession plan at an early stage, obtain specialist advice from experts and ensure that their instructions can also be enforced after their death.

What are the hurdles to be faced with an MBO?

The main challenges faced when selling a company to management employees at a company is agreeing on a sale price and organising financing. In these cases, the successors often have access to a very limited amount of financing. They therefore depend on a bank loan and a certain degree of goodwill from the owner.

Banks finance up to a maximum of 40 to 60 percent of the sale price, and when the company is being passed on to family members or internal management staff, many owners are prepared to lower the sale price by 20 to 30 percent. Nevertheless, successors often also require a loan from the selling party, which they will then be able to repay out of future profits after having repaid the bank loan.

Company owners have to determine early on whether they are depending on a high sale price to finance their retirement or whether they can lower the price and grant a vendor loan. A solid financial plan with a detailed income and asset forecast will show when they are dependent on which of their financial means, and how much the company sale must raise if they are to maintain their livelihood over the long term following the sale.

How can I save on taxes when passing on my company?

If an excessive tax burden were to be incurred when transferring the company, it may lead to the company not being able to survive a change of ownership. While owners of a sole-tradership or partnership benefit from privileged tax rates on liquidation profits, they may still incur taxes and social security deductions of 15 to 25 percent on the sale profits. It may therefore be worth converting a sole-tradership into an incorporated company no later than five years before any planned sale.

With a few exceptions, owners of incorporated companies do not need to pay tax on profits from the sale of their shares. However, buyers do not usually wish to acquire any assets which are not necessary for the running of the company. As such, any superfluous liquid assets and other assets not required to operate the company should be transferred out of the company in good time into the owner’s private assets in the most tax-efficient way possible.

How much is my company worth?

Most company owners think their companies are worth more than they actually are. They have put their heart and soul into the firm and would like to be rewarded accordingly. But potential buyers don’t pay anything for emotional value. Instead they focus on assessing the opportunities and risks for the company and calculating an appropriate purchase price based on this. 

Of course there are also company owners who undervalue their companies. This primarily happens when owners don’t know exactly how their company’s business and financial figures are performing compared to their competitors.

Experience shows that having unrealistic price expectations can result in the sale falling through. However, having a realistic valuation is also important when companies are passed on to a successor within the family. This helps ensure that all the heirs are treated equally in financial terms, which is usually an important goal when a company is passed on within a family.

Have I made sufficient provisions for the future?

Sufficiently provisioning for the future is vital to safeguard the financial security of owners and their family. In addition to a pillar 3a, a modern pension fund solution is a good way to do this. Company owners frequently underestimate the possibilities offered by the second pillar. With an individual solution for non-obligatory OPA contributions, they can lower their tax burden significantly and use these savings to build up additional assets for the period after they have passed on their companies.

Responsible company owners also plan for in case of emergency. They can put in place a power of attorney dictating who should take over the business if they temporarily or permanently lack capacity and can no longer take decisions for themselves. With a will or inheritance agreement, they can prevent the legal order of succession from applying, which may lead to the fragmentation of the company or disputes within the family.

Why is it worth involving experts in the process?

It makes sense to involve external experts in the process, at least when it comes to valuing the company, tax optimisation, the sale process and financial planning for retirement. Many company owners first contact their financial advisors to discuss the best way to go about selling their company. This is a good idea. It is then also worth consulting other experts, who can contribute an independent outside view to the process.

Succession planning specialists follow a professional process to value a company and know about any specific conditions within the sector, the banks providing financing and investors. A solid marketing concept, with professionally produced sales documentation and an informative company portrait, create trust among potential buyers and lays the groundwork for a successful company sale.

The search for buyers is demanding and takes a lot of time. At the same time, owners need to dedicate all their time to their operational business to ensure that they have the upper hand in price negotiations. Professionals usually have a broad network of contacts they can tap into and have the instincts required to successfully lead negotiations. 

As the succession planning process usually involves working together with these external advisors for extended periods of time, they should be chosen very carefully.