Company succession: plan as early as possible

Company succession is a topic that is becoming increasingly explosive. The number of companies due to be handed over in the next few years continues to rise. According to studies, the main reason for this is the increasing number of companies whose management wants to retire in the next few years due to age.

Current estimate of company succession in the DACH region

Business succession in Germany

Due to a lack of official statistics, the Institut für Mittelstandsforschung IfM Bonn has been estimating the number of companies in Germany that are about to be handed over since the mid-1990s. The latest estimate comes to the conclusion that around 190,000 companies are due to be handed over between 2022 and 2026. This is 40,000 more than the estimate for the period 2018 to 2022. The highest number of handovers is therefore to be found in the business-related services sector and among companies in the 500,000 to 1 million euro annual turnover category.

Company succession in Austria

Dun & Bradstreet published a study in 2023 according to which 45,526 companies in Austria are currently facing an open succession situation due to the threat of an ageing management team. This equates to around 14.7 percent of the companies on record that will have to arrange their succession in the next few years. Of the smallest companies with 1-9 employees, as many as 22.5 percent have an open succession, while the figure is 17.2 percent for small companies with 10-49 employees and 9.0 percent for medium-sized companies with 50-249 employees.

Company succession in Switzerland

According to the study “SME Succession Switzerland 2023” by the business information service Dun & Bradstreet, 15.1 percent of companies in Switzerland currently have a looming succession problem because their owners or board members and shareholders are already over 60 years old and have not yet taken care of their succession, or have done so inadequately. This means that a total of almost 95,000 companies are affected.

Company succession: often there is no solution in sight

The topic of succession is often a difficult one. In many cases, a suitable succession plan has not yet been secured. The main reason for this dilemma is the demographic trend. While the baby boomers are gradually retiring, fewer people from the younger cohorts, who are already younger, are interested in self-employment. Those who are looking for self-employment often prefer to set up a new business.

In this situation, many business owners are putting the issue on the back burner in the hope that a solution will emerge after all.

Company succession: the time factor is underestimated

Every form of company handover takes time. It doesn't matter what form the handover takes. At least 5 years are necessary, because planning a successful company succession is a complex process that requires careful consideration and strategic planning.

Various options are available, each of which has specific advantages and disadvantages. Here are the classic options:

Intra-family business succession
Handing over the business to one or more family members is understandably often the preferred option in family businesses. This option can ensure business continuity and preserve the corporate culture. However, this solution presupposes that potential successors from within the family have the necessary qualifications and interest in managing the company.

Sale to an external third party
This can be another entrepreneur, a competitor or an investor. The advantage of this option is that it often enables a clear financial settlement. However, the sale to external parties can lead to changes in the corporate culture and strategy. This creates a lot of uncertainty and anxiety among employees.

Transfer to the management (management buy-out)
In this option, the existing management takes over the company, often by purchasing shares. This can enable a smooth handover as the management is already familiar with the company. This solution requires that suitable managers are built up and developed in good time.

Transfer to the workforce (employee buy-out)
The company is sold to the employees. This option can increase employee motivation and commitment, but usually requires complex financing models.

Company succession with a foundation solution
Transferring the company to a foundation can ensure the long-term continuation of the company and at the same time pursue social, cultural or scientific goals. However, this can lead to a restriction of entrepreneurial flexibility.

Each of these options requires careful consideration and planning to ensure that the business succession meets the entrepreneur's objectives and ensures the continued existence of the company.

Regardless of how the handover is to take place, the preparations can take years. Careful preparation by the successor and the person handing over the business therefore helps to avoid stumbling blocks and ensure a successful generational transfer.

Company handover: a critical phase

Situations of change are always critical phases. Companies in the transition phase are therefore easily vulnerable. The handover and reorientation mean hard work for both the transferor and their successor.

Strategic planning must be reconsidered and organizational structures are put to the test. Despite all the upheaval, it is important not to leave the employees out in the cold. A company handover therefore also means paying more attention to internal communication and interpersonal relationships. The decision-making and communication channels change. A new management culture takes hold. In this context, misunderstandings, conflicts and friction can easily arise.

There is no one-size-fits-all recipe for a successful handover. The companies, situations and people involved are too different. However, some rules generally apply.

8 tips for a successful company handover

Here are some important aspects to consider to ensure a successful succession:

Tip number 1: Set the course in good time
The earlier you prepare the company for succession, the better. At least 5 to 10 years should be planned so that the company, the successor and the outgoing management can prepare for the new situation. There should also be a contingency plan for unforeseeable events (illness, accident). Business closures can often be avoided with long-term planning.

Tip number 2: Define clear goals for business succession
Determine your long-term goals both for the company and for yourself personally. Do you want to pass the business on within the family, sell it to an external successor or build up an employee as a successor? Your goals will influence the planning and preparation of the succession.

Tip number 3: Approach potential successors openly
Sometimes it is tacitly assumed, hoped or wished that a family member will take over. This wish does not always come true. Younger family members often have other career plans. In this case, an open discussion can provide clarity. If you clarify the succession issue with the children at an early stage, you can explore the alternatives in good time even if the answer is “no”. Whether other family members, buyers, external managers or competent employees, all options can then be considered and discussed.

Tip number 4: Develop a successor in a targeted and structured manner
If the successor comes from within the family or the workforce, the handover can be prepared and planned step by step. You can take the time to provide the successor with the necessary technical and organizational knowledge. It is just as important to develop their personal skills and abilities, e.g. in the areas of employee management and communication. Attending a management training course can help to clarify the management styles of the transferor and successor, to recognize the effects on the employees and thus to shape the transition more consciously. Understanding what will change makes it easier to deal with the reactions and emotions of the workforce.

Tip number 5: Clarify legal and financial aspects
Succession planning also includes legal and financial considerations, such as the valuation of the company, tax issues, inheritance planning and structuring the handover process. It is advisable to work with experts such as lawyers, tax advisors and financial experts at an early stage.

Tip number 6: Develop a communication strategy
Open and transparent communication is crucial for the success of the succession. Provide information about the planned succession process in good time to minimize uncertainties and potential conflicts. Think about all stakeholder groups, for example:

• Other family members
• Employees
• Customers
• Suppliers
• Cooperation partners
• Credit institutions and financiers
• Interest groups such as chambers of trade or industry associations

Tip number 7: Learn to let go
Emotions play a major role in a company handover. Experience has shown that there are often unspoken expectations on both sides, which can lead to disappointment and misunderstandings. Understandably, it is often difficult for the senior to withdraw from a business that has been built up over many years. Clear rules and an open management of expectations therefore help all those affected. The person handing over the business and the person taking over should define the rules and timetable together in writing.

Tip number 8: Seek professional support
Given the complexity of the process, it is often helpful to seek external help. As a neutral third party, they can offer valuable support, act as a moderator and ensure that all aspects of the succession are taken into account.

Well thought-out succession planning that is initiated at an early stage is the key to the long-term success and sustainability of a company. It not only secures the future of the company, but also protects the entrepreneur's life's work.

A final practical tip for company succession
The joint attendance of a management seminar by the transferor and the successor can make a company succession much easier. The strategic realignment, the definition of the management culture and changes to the communication and decision-making processes can be discussed in peace and quiet and with external support during a training course. Misunderstandings and disappointments can thus be avoided.

We have already supported many companies during this sensitive phase. Feel free to contact us and arrange a non-binding consultation.