Making the best possible arrangements for corporate succession

For many small and medium-sized businesses, corporate succession is not a simple matter by any means. Indeed, according to a study conducted by the German state-owned investment and development bank KfW, around 465,000 companies in this category are facing the prospect of going out of business by the end of 2025.

The reasons behind these imminent business closures vary. According to the KfW study, around 266,000 owners are planning to go out of business without seeking to find a solution to the issue of succession. The other 199,000 owners, while interested in the continued operation of their companies following their departure, are having a hard time finding a suitable successor.

There are many reasons for this. For one thing, it is not uncommon for family members to have no interest in taking over the reins of the business after the owner decides to retire, and potential buyers have shown themselves to be rather reluctant of late. Add to this the difficult economic environment we currently find ourselves in, and it becomes clear why we at the commercial law firm MTR Rechtsanwälte stress the importance of beginning to plan for corporate succession early on.

Family-run businesses, in particular, often have an interest in dealing with succession internally. If there is a suitable successor, arrangements ought to be put in place that provide for as smooth a transition as possible, and one which typically ensures the financial security of the retiring owner. The claims of the heirs giving way must also be taken into account, which generally means providing for appropriate compensation. One also needs to be mindful of provisions in the articles of association which may conflict with the planned arrangements for succession.

Additionally, where business assets are gifted, it is also essential to take into consideration tax regulations, including rules regarding tax exemptions and relief.

In the absence of a suitable heir from within the family, another option is to sell the company to its own management or outside investors. In these instances, it is vital that the owner thoroughly prepare the sale in order to obtain a reasonable price and also to minimize liability risks that arise from selling a company.

Corporate succession presents a complex challenge, one that can only be overcome if, in addition to any and all economic considerations, due consideration is also given, in particular, to tax, company law, and inheritance aspects. In this context, there is room for maneuver that can be effectively exploited with the help of sound legal advice.