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GRP Rainer Rechtsanwälte – Assessment of suitable arrangements for business succession

April 2019 - Corporate & Commercial. Legal Developments by GRP Rainer LLP.

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A lot of small and medium-sized businesses are or will soon be faced with the issue of business succession. However, searching for a suitable successor can prove challenging in many cases.

According to a study conducted by the Kreditanstalt für Wiederaufbau (KfW), the German reconstruction loan corporation, over 500,000 small and medium-sized businesses are set to make plans for business succession in the coming years, with approximately 100,000 businesses expected to have a successor at the helm by the end of 2019. The problem, however, is that, according to the study, a successor has yet to be found in many instances.

We at the commercial law firm GRP Rainer Rechtsanwälte can report that a lot of businesses have a hard time appraising a suitable successor. A number of factors can compound the difficulty in making arrangements for business succession.

Particularly in the case of family businesses, there is frequently an expectation that the baton will be passed to the next generation. The first issue that needs to be addressed here is whether the children or other relatives are interested in carrying on the business in the first place, and whether they are suitably qualified to run the business. If a successor emerges from within the family, it is particularly important to consider the transition’s implications for tax and succession.

If a successor is not found from within the family, the next option is often to search for a buyer. However, this can prove to be challenging, as there are more company bosses looking to step down in the near future than there are potential buyers. This makes it all the more important to begin making arrangements for business succession at an early stage. Selling a business can be particularly time consuming and should therefore be planned well in advance, especially since the potential buyer will often have to grapple with the issue of financing, whereas the seller is aiming to get as good a price as possible. For this reason, the initial priority should be to evaluate the business in order to obtain an appropriate selling price. In addition to factors such as the order situation, balance sheets and existing employment contracts, claims arising from succession law should also be considered when a business is being sold. If the business has multiple shareholders, it may be beneficial to sell one’s shares to fellow shareholders.

Business succession is a complex topic that needs to be addressed in a timely manner. Experienced lawyers can ensure a smooth transition of the business.

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