Company succession

Handing over a company

Who will take over your company when you retire? What will happen to your business if you become seriously ill? These and other questions on business succession are discussed in the following.
Passing the baton: advice on company succession
Securing your life’s work and organising succession is generally difficult for entrepreneurs. For “seniors” it is necessary to clarify sensitive questions and carefully prepare the change in generation. In a situation such as this, technically expert advice in a confidential framework is very important.
For all entrepreneurs who engage with handing over their business, Hamburg Chamber of Commerce has a free consultancy offering: “Passing the baton: expert dialogue on business succession”. Based on your requirements, we will organise expert advice by external specialists in our chamber of commerce.
We invite you to attend our one-hour succession consultation to discuss all the fundamental aspects of company handover with advisors from our chamber of commerce and external specialists. Whether it’s the search for a successor, your company valuation, tax and other legal questions or aspects of financing, all the important topics can be covered in the advisory discussion. Its primary purpose is to provide orientation for the upcoming succession process.
We will ask you for some information as preparation. To this end, please complete our form (PDF file · 154 KB) with the legal information on data protection and return a signed copy to us; you are welcome to do this via email. As soon as we receive this, we will get in touch to arrange a consultation with you.
Note: You may need to download the form before you can complete it.

Company valuation

Agreeing a purchase price is one of the greatest obstacles when it comes to company succession. The person transferring the company wants to achieve the highest possible purchase price based not only on the asset value and earnings value, but also on the significant amount of hard work they have invested in the company throughout their entire working life. The buyer, on the other hand, wants to pay as little as possible. After all, they will need to pay interest and amortisation payments to finance the purchase price and also need to ensure that liquid funds are still available for the expansion of the company.
In practice, there is a range of valuation methods that can be applied, but each of them will yield a different result. Clearly then, there is no SINGLE objective company value. The valuation methods only provide a starting point for negotiating the purchase price. Ultimately, it is up to the buyer and seller to agree on a purchase price.
Initially, financing is a matter for both parties to clarify, but other stakeholders also play a role. If you are borrowing to finance the acquisition, the bank will also decide whether it views the investment as justified. In the case of a divorce, the counterparty will base their actions on their personal intentions. Relatives, the tax office and consultants will also have their own views regarding the value of a company.
If a purchase price is too high, this poses a double risk for the company.
  • On the one hand, it makes it difficult to find a successor who is prepared and able to pay the high purchase price,
  • while on the other, there is a risk that the company founder will take on a significant financial burden due to the excessive purchase price and the associated financing costs and/or that the company will exceed its debt servicing capabilities. This would jeopardise the continued existence of the company.
Nevertheless, there are a number of recognised methods for calculating the value of a company. This figure can at least be used as a starting point for consultations.
The most important valuation methods are:
  • the income approach
  • the intrinsic value method
  • the sales comparison approach
  • valuation using multiples
  • as well as various sub-forms and combinations of the above procedures.
None of these methods can be labelled right or wrong. In practice, the income (with variants) is generally used as a basis. Here, two factors are calculated: the expected future profits and the internal interest, also known as the capitalisation interest rate. In this case, it is assumed that the company has an unlimited lifespan.
It can be worth appointing a specialised business consultant, tax consultant or other expert to get an independent company valuation. They will prepare a neutral valuation report, which then serves as the basis for negotiating a purchase price between the buyer and the seller. When selecting an external consultant, their experience in the area of company valuations and their knowledge of the market and industry situation of the company to be valued are both important factors.
If you are looking for a good initial guide, the free SME calculator (KMU-Rechner) provided by Unternehmensbewertung in Deutschland (UbiD) e.V. Berlin is a good place to start. Changing the variables makes it easy to identify the factors that influence the price: kmurechner.de. Alternatively, you can use the multiples calculator provided by the German Business Exchange (Deutscher Unternehmerbörse): https://www.dub.de/kmu-multiples/. https://www.dub.de/kmu-multiples/. In any case, however, this value can only be used as a starting point and almost never reflects the price you can ultimately achieve.
We have put together some tips below to help you with selecting an advisor and drafting a contract.

Nexxt-change business exchange

For many business owners, the search for the “right” successor is one of the most difficult parts of the journey towards proper succession planning. There is often a shortage of appropriate junior staff within the company, resulting in a need to establish contact with qualified managers and potential shareholders or buyers.
Some future company founders also prefer to begin as shareholders or buyers of an existing company instead of founding a start-up. In order to do this, they need contact with corresponding parties selling shares or companies.
That is where the Nexxt-Change business exchange platform comes in. A joint initiative of the Chambers of Industry and Commerce, the Chambers of Crafts, the KfW-Mittelstandsbank and the German Federal Ministry for Economic Affairs and Climate Action,
the platform is Germany’s largest national business exchange, amalgamating and publishing all regional tenders and requests.
Through this free service, the partners behind the joint initiative aim to help secure businesses that are worth preserving.
Feel free to access our handover consultation service in advance – or get in touch by phone.

How does the Nexxt-Change business exchange work?

Tip: Before registering, have a look through the existing advertisements from the Hamburg Regional Chamber. There might already be a suitable Hamburg company or the right company successor among them.
  1. You can enter your text online quickly and easily. Advertisers can use the Nexxt-Change business exchange free of charge.
  2. Alternatively, or additionally, you are welcome to discuss you text with us in advance.
  3. The details you provide will be used for your advertisement.
  4. You can change your text at any time.
  5. Your ad will be given a box number and a location reference. This will help to guarantee your privacy.
The national Nexxt-Change business exchange contains useful tips to help you place your ad.

How is the Nexxt-Change business exchange publicised?

Regional advertisements from the Hamburg Regional Chamber:
are published in our bimonthly members’ magazine, “HW - Hamburger Wirtschaft”.
Nationwide advertisements:

How can I contact advertisers?

Contact is made with interested parties in writing (email, fax or post) via our chamber of commerce.
Important! The parties involved are solely responsible for performing mutual background checks and for all further negotiations.
After the chamber of commerce has forwarded the correspondence, the advertiser may decide whether they wish to contact the interested party. If there is no response after a reasonable length of time, it may be advisable to repeat the enquiry.
Important tips for advertisers and interested parties
  • While offers must be made directly by bidders, you may also appoint an authorised third party (consultant, agent) to represent your interests.
  • The mediation service cannot be used for the sale of property, factory equipment or GmbH (limited liability company) shells.
  • Advert materials and any correspondence not pertaining to the object advertised are not permitted.
Important! Please let us know if our mediation efforts have led to success.
You will find information on other business exchanges in the additional links provided.

Company transfer

The following section outlines the various forms the handover can take. You should discuss the different variants and their consequences with trusted advisors (e.g. tax consultants) and with your family.

1. A successor from within the family or external succession planning?

A family member is the obvious first choice when handing over the company. However, it is important to provide detailed information and facilitate a joint, open discussion among all members of the family to avoid the classic generational conflicts that such decisions may invoke.
In any case, we recommend making use of our handover consultation service.
The following forms of succession planning can be used for both internal family succession and external solutions.
  • Sale for a one-off payment
  • Sale in return for recurring benefits, e.g. pension, instalments or long-term liens.
  • Succession planning in the context of the anticipated succession
  • Gradual handover to family members through the founding of a partnership or capital company
Tip: Soon after your successor joins the family-run company, you should give them their own areas of responsibility and expand these constantly! Have confidence in your successor! Only then can they also gain the trust of their employees and business partners.

2. Sale

The sale of a company is a complex task and must therefore be prepared strategically. The more well-organised and well-structured a company is, the more easily it can be sold. The necessary preparations take time. Any shortfalls in preparation will weaken your negotiating position and negatively impact the purchase price. The time and reason for the sale are decisive factors in determining the purchase price to be achieved.
The following section outlines several forms of company sale.

Sale for a one-off payment

The company is sold to a successor for a one-off payment. In this scenario, the seller is not dependent on the successor’s entrepreneurial skill; the seller has immediate power of disposal.

Sale in return for recurring benefits

The successor does not pay the agreed purchase price in one go. Instead, the purchase price is paid over a longer period in the form of a pension, instalments or a long-term allowance. The advantage for the buyer is that they are not necessarily dependent on borrowing. On the other hand, the disadvantage is that the seller is dependent on how well their successor prospers. However, recurring benefits can also be secured by means of a mortgage.
  • When a business is sold in return for an annuity, a distinction is made between an annuity in consideration of property alienation (Veräusserungsrente) and a pension annuity (Versorgungsrente). If the annuity payment is appropriate compensation for the transferring company, this is an annuity in consideration of property alienation (Veräusserungsrente). However, if the annuity serves primarily to safeguard the livelihood of the outgoing entrepreneur, this is referred to as a pension annuity (Versorgungsrente). Both forms can take the form of a lifelong annuity (the duration is based on the lifetime of one or multiple people) or a fixed-term annuity (fixed duration).
  • If the company is sold in return for payment in instalments, the purchase price is broken down into partial amounts, making financing easier for the successor. The payments are spread over a set period, which is clearly defined in advance.
  • A long-term allowance consists of recurring payments over a minimum period of ten years. In particular, long-term allowances differ from pensions in that they do not presuppose any uniform or consistent payments. For example, they may be based on the company turnover or on the living expenses of the seller.
  • Gradual transfer through the founding of a partnership or capital company
The gradual transfer of a company to family members or persons external to the family can also take place by means of founding a partnership or capital company. The benefit of this is that the handover can occur in stages. The successor is involved with the company and becomes a co-shareholder as a result.

3. Leasing

In all cases when a company is sold and also when it is given as a gift, the property passes to the successor. If the company owner is not or not yet ready to take this step, there is the option of leasing the company. This guarantees a regular income for the business owner.

4. Renting

In the case of renting, the successors are generally only given use of the business premises for a fee. In this case, unlike leasing, this person buys the equipment and machinery, for example. From a tax perspective, however, this constitutes the termination of the company and the hidden assets must therefore be liquidated and the associated tax paid.

5. Management buyout (MBO)

If no successor is found within the family, the company may be sold to its management. The advantage: the new owner is extremely familiar with the company. This may simplify the sales negotiations and may also significantly reduce the risk of subsequent claims (e.g. warranty claims or claims of fraud). The disadvantage: less innovation can be expected in the company due to “operational blindness”.

6. Management buy-in (MBI)

When a company is taken over by external managers, this is referred to as a management buy-in. The advantage: the new owner will bring fresh momentum to the company. The disadvantage: it takes longer for the new owner to become familiar with the company. It is also possible to opt for a blend of management buyout and management buy-in. For example, this may be a practical alternative if the internal managers cannot raise sufficient capital by themselves.

7. Foundation (Stiftung)

Establishing a foundation is a suitable option where the owner wishes to maintain the company independently of their descendants. The special feature of a foundation is that it does not require any owners or shareholders. The foundation belongs to itself, so to speak. Its legal independence is defined in Sections 80 to 88 of the Civil Code (Bürgerliches Gesetzbuch (BGB)). The legal separation of the foundation’s assets from its founder and their descendants is characteristic for this scenario. The heirs are excluded from company succession; that is, they are effectively “disinherited”. The company is not divided up into individual portions for inheritance, but instead remains intact through the foundation. The foundation is a highly versatile legal form, with very few mandatory requirements defined in the relevant legislation.
One form of the foundation is what is known as a double foundation (Doppelstiftung) – a combination of a charitable foundation (gemeinnützige Stiftung) and a family foundation (Familienstiftung). If you opt for a double foundation, you will still have a say but can also minimise your inheritance tax and wealth tax.

8. Founding an employee cooperative (Mitarbeiter-Genossenschaft)

In cases where employees decide to acquire the company collectively, founding a cooperative can offer a good alternative to founding a GmbH (limited liability company). Advantages include the collective structure of accountability and the distribution of capital to individual employees. However, the condition for this option is that there must be good cohesion among the staff and a sufficient number of people willing to take responsibility.

9. Going public

When planning succession and as a means of easing the search for a suitable successor, it can sometimes make sense to dissolve the unity of shareholder and management. One option here is to change the company into an Aktiengesellschaft (public limited company). However, the public offering of a company is subject to certain minimum requirements.

Examples of successful company succession

In 2011, we interviewed a number of successors to learn from their practical experiences of taking over a company. These fascinating interviews are still highly relevant and are available here to read:
Download
The challenge of mastering company succession: 10 successful examples from Hamburg owner- and family-run companies.