Business Succession Planning in Germany
Lifetime business succession, family company, and management buyout
Companies not only need to be build up, managed and kept on a growth path. A well-planned transfer of the company or the shareholding to future generations is also an essential part of a responsible company management.
Financial challenges of business successions
When planning a succession, the goal must always be to ensure that the company is transferred to the next generation in a financially strong and competitive condition. This requires, as a minimum, that a capable management takes over. However, that is not all.
The generational change may become a financial challenge for the company:
- Compensation claims from heirs stepping aside or disinherited family members;
- compensation claims under matrimonial property law; and
- tax obligations
can be a strain on the company's financial strength.
At the same time, it may often be worthwhile in the long term to keep the number of shareholders manageable. A very fragmented corporate structure not only leads to a company's decision-making processes becoming cumbersome. The greater the emotional distance of a shareholder from the company's fate, the greater, in many cases, the interest in profit distributions which may be a huge financial burden on the company.
Irrespective of whether a family company or a group holding company is concerned: Every entrepreneur has different interests as to how his company should be transferred to the next generation. Regardless of which are the paramount motives in the individual case, many of them may be realized by way of a careful and forward-looking planning. One option may be foundation solutions. However, there are a variety of other design options. The following are the three best-known varieties:
1. Lifetime business succession
A company may be transferred during the entrepreneur's lifetime already. From a legal point of view, this type qualifies as a gift or disposal of the share in the company. A capital increase, by which the company's successor invests in the company and thereby joins it as a shareholder, is also possible.
From the point of view of the testator/shareholder, the following is important in this context: The articles of association must entitle him to make a disposal or gift to the successor or to implement a capital increase. It must be impossible for the co-shareholders to prevent the transfer of the share. The articles of association must be worded or adapted accordingly. It may be equally important for the testator/shareholder to avoid the transfer of the company to be engraved in stone prematurely. As a consequence, the design should allow for reactions to changed circumstances. From a fiscal point of view, a lifetime company succession may be attractive in case the inheritance tax would result in a greater burden than the gift tax.
2. Family company
The term of 'family company' does not refer to any specific legal form. In fact, the term includes companies (irrespective of their legal form) that are controlled by one family. Family companies can be organized in various legal forms. By way of example, a family company may have the legal form of a corporation (often a GmbH (German limited liability company) or, less frequently, an AG (German stock corporation) or the legal form of a partnership (OHG (German general partnership), a GmbH & Co. KG (a type of German limited partnership) or a cooperative society (Genossenschaft). The internal constitution of either corporations or partnerships under German law additionally leaves room for a customized design.
As a consequence, family companies or family holdings often allow for a flexible transfer of companies/shares in companies or real property. Family companies are often chosen as a vehicle of succession when the successor is planned to gradually grow into his position. In addition, in most cases it allows for a participation of family members in keeping with their interests.
3. Management buyout
In some cases, a family has no suitable heir able to take on the management of the company. Where the company is intended to be preserved all the same, a management buyout may be an alternative. In a management buyout, the company is acquired by the management or executives of the company. A clear advantage of this solution: the buyers/managing directors know the market and the company. In many cases, the largest obstacle to a management buyout is that the buyers/managing directors cannot provide the financing. Generally, there is not enough equity to do so. Therefore, the financing must be provided by external investors. Besides banks and private equity companies, these investors may of course also be the previous owners of the company.
Your German Business Succession Attorney
Are you an entrepreneur and wish to plan your succession? Our attorneys at law and tax advisors specializing in the field of Assets, Foundations and Succession will be pleased to find a tailor-made solution for your company. Please feel free to contact us.
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