Succession planning is a long process and should be well planned and structured. On the one hand, to avoid unnecessarily complicating the inherently complex process of selling the business, and on the other hand to ensure that the succession is as successful as possible. It is advisable to bring in external support right from the start. This provides both financial and legal support.
Selling and passing on your own company is an exciting and challenging project. Early planning and the involvement of experts make the process considerably easier. The field of potential buyers is diverse, starting with family members and can range from members of the management to a financial investor. This article focuses on and describes a possible succession process within the family, the management (management buy-out) or to an external person (management buy-in).
The first steps and strategies
A succession plan can be divided into three phases:
- Initialisation
- Succession process
- Handover
In the initialisation phase, the owner formulates initial scenarios and ideas for possible succession planning and identifies one or more possible succession scenarios (people or, if applicable, companies). If the owner is operationally involved in the day-to-day business, a so-called personal exit plan must be drawn up in addition to the succession planning for the company. Depending on the industry, remaining partially involved in certain projects or on the board of directors for a transitional phase is helpful for a successful transition and the continued existence of the company. Once this rough draft has been considered and, in the best case, written down, important partners such as management consultants, trustees and lawyers should be consulted for the next steps. They will advise and support you, for example, in the further process, in the valuation of the company to define a selling price and in legal matters.
Subsequently, initial informal discussions are held with one or more potential successors. Depending on the size of the company and the level of trust between the owner and potential successor, it is advisable to sign a non-disclosure agreement (NDA). In these discussions, mutual ideas and expectations are explored.
Careful planning, implementation and handover
If the successor or buyer and the owner or seller are in favour of the idea and the basic ideas are in agreement, they enter the second phase together. This marks the beginning of the actual succession process. Early and transparent communication about the idea of the purchase price and, if applicable, its financing is also essential. There are various options for the latter, which can be the subject of negotiations.
The following steps are summarised in the second and third phases:
- Situation and option analysis (due diligence)
- Staff structure analysis
- Elaboration of a development strategy (business model, processes, structures)
- Price negotiations and preparation of purchase agreement
- Signing of letter of intent
- Preparation of time and action plan with internal and external measures
- Implementation of measures and establishment of successor
- Signing of the purchase agreement
- Handover of the company
- Gradual exit of the former owner
Tax and legal aspects of succession planning
In addition to the actual succession process, succession planning also raises many tax and legal issues, such as the establishment of a holding company for the takeover, potential investment requirements for the company, the carve-out of (non-business) real estate or any liquidity withdrawals. The last two issues in particular can have a significant tax impact on the seller. Therefore, the examination of possible tax consequences and the various options should be carried out with the assistance of an expert and then recorded in a ruling with the tax authorities.
Throughout the entire process, legal protection is of central importance for both buyer and seller. Starting with private security such as marriage and inheritance contracts, a possible shareholders’ agreement through to the share purchase agreement and any purchase price financing by means of a vendor loan.
Would you like to talk to us about succession planning? At Experfina, we have in-depth expertise in all aspects of selling a company. We can actively advise you throughout the entire process.
