Family owners basically have two alternatives when it comes to company succession arrangements: hand over to somebody within the company or find an external solution.
If you choose an internal company succession arrangement, either a family member or a manager currently working for the company takes over.
External company succession can be solved by arranging a management buy-in or selling the company.
KP Tech will be happy to explain the pros and cons of the different approaches to corporate succession and advise you on the various options.
At some point, every business owner or shareholder will be faced with the issue of company succession. It is important to deal with succession planning at an early stage in order to ensure a smooth and uninterrupted continuation of the business even in the worst case scenario, such as a prolonged illness.
The benefits of early succession planning:
When it comes to company succession, various succession consultants should be involved, from the early planning of the succession to its professional implementation. In addition to lawyers, a tax consultant experienced in succession planning and a management consultant with many years of experience in company succession, it is important to appoint the best consultants for the respective specialist area. Only the combination of these succession experts will lead to the best solution for the shareholders, the successor(s) and the company itself.
In external company succession, the company value is a decisive selection factor for the successor. It should be noted that every company value is the result of a subjective assessment of the company, its sales potential, its earnings potential and its cash flow potential. There are various methods for company valuation that have proven themselves in practice. However, the company value determined in this way is always the result of an assessment of the company’s future! Contractual provisions in the purchase agreement and the so-called transaction structure have a considerable influence on the purchase price. The company value and therefore the purchase price depends to a large extent on the competition between potential buyers and is ultimately the result of the contract negotiations.
Handing over the company to an internal or external successor is a very complex and unique task for the entrepreneur or shareholders. This includes business management aspects, tax aspects and legal issues. The succession solution is also influenced by personal issues and plans, the situation within the family and, last but not least, strong emotional factors.
A foundation is set up for the long term and often exists for many decades. The aim of a foundation in company succession is therefore the long-term preservation of the company. It is therefore no longer easy to sell the company.
The key advantage of a foundation in the context of succession is the positive tax effect.
In contrast to a gift, no inheritance tax is payable in the case of a foundation. The current shareholders determine the purpose of the new foundation, which cannot be changed even after the death of the shareholders.
With a foundation, the existing shareholders continue to have a decisive influence on the corporate strategy. The existing shareholders continue to exert a major influence on the company via the advisory board.
The foundation charter is decisive for a foundation. The foundation statutes should therefore be carefully drafted by an experienced law firm together with the shareholders.
A succession plan that is resolved at an early stage improves the company’s rating and thus the conditions and opportunities for corporate financing. Banks downgrade the rating from the age of 55 of the managing partner, as an unresolved company succession entails increased risks for lenders.
For this reason, the shareholders of a company should initiate the succession process at an early stage in order to find and implement a planned and successful company succession.
From our many years of experience as succession consultants, we know that a successful handover to a successor takes at least three years. In order for the company succession to succeed, the company succession process should be planned comprehensively and in good time and implemented with an experienced succession consultant.
It’s fairly common to find that there is no suitable candidate within the family of the shareholder(s) to become a successor. In such cases, one option is to bring in a manager from outside the company. This external manager acquires a majority of up to 100% shares and becomes a member of the management board.
Buy-ins are often financed by banks or vendor loans.
Often, management buy-ins also involve the participation of private equity investors to finance the share purchase. The current shareholders then gradually step back from managing the company.
An important benefit of an MBI is the injection of energy new managers bring to the company. After MBIs, the new ideas, different outlooks and management experience from other companies tend to fuel faster growth at the company.
The biggest challenge with an MBI is the chemistry between the current shareholders (family members) and MBI candidates.
One alternative to an MBI is an MBO. With this form of corporate succession, the company shares are taken over by current employees or managers.
The advantage of management buy-outs is that candidates already have experience and knowledge of the company.
Owning a share of a company generally boosts motivation among staff and managers, who take over shares from the founders for the MBO. One advantage compared to MBIs is that it takes less time for people to familiarise themselves with the new set-up and as a result, the previous shareholders can exit the company more quickly.
The disadvantages of MBIs usually come when purchasing the shares. The company successors in management typically lack the required equity. As a result, the succession arrangement is often financed through a combination of loan capital, private equity and vendor loans.
We would be happy to support you by offering access to all areas of our expertise and our extensive experience in industry. Let’s get to know each other.
Sandra Preuss • Managing Partner
Michael Klumpp • Managing Partner
KP Tech Beratungsgesellschaft mbH
Maximilianstr. 2
80539 Munich / Germany
Further offices in Berlin, Frankfurt/Main, Duesseldorf
Munich • London • San Francisco
KP Tech has been providing consulting services for more than 20 years with a focus on company acquisitions, company sales, company succession, equity capital and company valuation. Our clients include small and medium-sized companies as well as international groups and private equity companies. Most of our clients come from the technology, services and consumer (including e-commerce) & healthcare sectors.
KP Tech is a member of the Association of German M&A Consultants (VMA)
KP Tech is part of the renowned Cornerstone International Alliance.
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