Company succession planning: the earlier the better!

Planning one’s own succession is one of the most important tasks of all for family entrepreneurs and SME owners, for whom the long-term existence of their life’s work and their employees are close to their hearts.

However, it is at the same time often neglected and put off too long. The lift sector is no exception here.

By Dr Christian Bochmann and Dr Stephan Göckeler

Succession planning is often put off due to a lack of tangible options. The lack of any suitable candidate being directly available is by no means uncommon. In the next five years, succession will be on the agenda for about 540,000 family companies. However, 50 percent of these companies are still looking for a successor. Hence, the fate of more than a quarter of a million companies is currently unclear!

Consequently, the most important step in succession planning, apart from adequate emergency planning, e.g., through health care proxies, is considering at an early stage who could continue the company.

Internal family succession

These can be the founder’s own children or sometimes also grandchildren – this is then what is called internal family succession. The challenge here is on the one hand to arouse enthusiasm for the sector and its peculiarities among one’s offspring and on the other to communicate the skills and knowledge required early on. If this succeeds, a great step has been taken to successful succession.

Guaranteeing fairness between several children can also be a considerable challenge. This is because the person assuming responsibility for the company will understandably also want to run the company. He will also (rightly) claim shares in the company. Since he will then of course obtain assets – even if tied – this could result in the other children being dissatisfied.

The respective interests can nevertheless be balanced against each other with some (legal) finesse. For example, waivers of statutory shares can be agreed with the heirs who "yield"; if available, they can receive assets other than the company. But it is also possible to involve all of the children in the company. But then the one who assumes the executive responsibility receives multiple voting rights and other special rights to secure the necessary entrepreneurial freedom of manoeuvre.

Inheritance and donation tax

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A great concern of many entrepreneurs is inheritance or donation tax in the context of company succession. This is usually unfounded since the law provides for so-called exemption rules for entrepreneurial assets. To preserve the company and jobs, gratuitous company transfers, both as donations to the living as well as in the event of death, are exempted from inheritance or donation tax.

However, the law sets certain requirements here on the asset composition of the company, distributions from the company and job preservation. But with advance planning, the inheritance or donation tax in SME lift companies can normally be reduced to a very low level or even zero.

Employees as successor

The founder’s children do not always have to be the successors of course, for example, if they have other professional interests than the lift sector or do not have skills required. Employees, who want to continue the company under their own management, can also be considered.

Financing acquisition of the shares is the great obstacle here. This is because the most significant assets tied up in the company usually cannot be financed from managing director salaries and distributions – especially since these are subject to income tax before they can be used for the purpose of financing.

Loans by the donor at favourable interest rates or in part also gratuitous transfers of shares can be a solution; the latter can in turn be privileged in donation tax terms irrespective of the family relationship circumstances.

Sale should be well planned

If both versions - transfer to the family or employees - are not an option, the question of selling arises. This also requires careful consideration and good planning, since it can make a great difference especially in tax terms whether the sale occurs first and then (the money) is donated/inherited or vice versa. Moreover, a buyer has to be found who carries on the business as far as possible as the seller intended.

The authors are lawyers and partners in the firm Flick Gocke Schaumburg.
The author Dr Christian Bochmann specialises in advising family companies and entrepreneur families on all company law questions, including succession planning, from the Hamburg office of the firm. He is the director of the Family Company Centre of the Bucerius Law School and lecturer at the University of Leipzig.
The author Dr Stephan Göckeler provides advice on all company law matters from the Bonn office of the firm, specialising in M&A transactions, especially in the lift and escalator sector.

The authors will indicate in more detail what else requires special attention when selling in LIFTjournal issue 4.

More information: fgs.de