Business Succession Planning in Germany

Business Succession Planning in Germany

Having built a successful business, it is often a challenge to safeguard the company and ensure that future generations can benefit from its continued growth and prosperity. Business succession planning is a vital consideration for entrepreneurs in companies of all sizes and receiving expert advice is critical when making the right decisions.

At Schlun & Elseven Rechtsanwälte, our lawyers will advise you on the options available to you, oversee the legal requirements to follow through with the desired plan and provide solutions based on your goals and your company’s characteristics. Please, do not hesitate to contact us for expert legal assistance.

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Execution of the Entrepreneur’s Will and its Impact on the Company

It is advisable to comprehensively determine the succession to the company in the event of the entrepreneur’s death. The entrepreneur’s will should create clear conditions regarding inheritance.

First and foremost, the will needs to determine who should succeed the entrepreneur in their company. This is because the provisions of statutory succession are often not very suitable for meeting the wishes for company succession.

A will can also prevent serious disputes among the heirs. If there are several heirs or the estate is extensive and complex, it may be advisable to arrange for the execution of the will. This ensures the smooth implementation of the testator’s wishes but should always be in line with the articles of association.

Careful preparation is first required to comprehensively secure the testamentary succession to the company through the will. Not only should the inheritance regulations be known.

In particular, the articles of association must also be examined comprehensively and, if necessary, adapted to the testator’s wishes. For example, it may be required to insert a succession clause to enable the heirs to succeed in the company in the first place.

It is possible that the heirs cannot immediately assume responsibility for the inherited company share, e.g. because they are still minors. It is also not uncommon for disputes among the heirs, which stand in the way of orderly succession to the company. In such cases, execution of the will is often ordered over the company share.

The executor is to enforce the testator’s will and thus ensure the company’s succession. The execution of the will can be limited to a short period and only serve to settle the estate (settlement execution). However, it can also be permanent and serve to administer the estate (administration execution). In this case, the heirs are deprived of the power to dispose of the estate for a certain period.

The admissibility of the arrangement of an execution of a will also depends on the company’s legal form. Implementation of a will is readily permissible regarding shares in a limited liability company, shares and limited partnership interests.

On the other hand, comprehensive execution of wills on sole proprietorships and GbR, OHG and general partner shares of a KG is not permitted by law. In addition, the execution of a will may also be excluded by the articles of association.

However, there are solutions for these cases as well. Under the trust solution, the executor exercises the heirs’ participation in the company as trustee for the duration of the execution of the will. Under the power of attorney solution, the heirs authorize the executor to continue the business or the partnership interest on their behalf.

Not only must the necessary arrangements be made for the execution of the will, but the testator should also carefully select the executor and discuss all details with that person. Our attorneys will be happy to assist you if you need assistance.

Business Succession by Inheritance Process

Company succession by inheritance depends mainly on the corporate form of the respective company, as the inheritability of company shares differs between partnerships and corporations.

Capital Company Shares

As a rule, there are no problems concerning the inheritability of shares in a corporation. For example, shares in a limited liability company (GmbH) are inheritable without further ado (§ 15 (1) GmbHG). The same applies to shares in a stock corporation (AG), a partnership limited by shares (KGaA) or a European Company (SE).

Partnership Shares

On the other hand, shares in partnerships are generally not inheritable. This principle can be deviated from utilizing succession clauses in the partnership agreement (Scherer, Unternehmensnachfolge, 6th ed. 2020, § 1 marginal no. 25).

A civil law partnership (GbR) is dissolved in the event of the death of a partner if the partnership agreement does not provide for a deviating regulation, a so-called continuation clause (§ 727 (1) BGB).

In the case of the general partnership (OHG), only the deceased partner ceases to exist (§ 131 Paragraph 3 No. 1 HGB). A deviation is possible apart from a succession clause and afterwards by the agreement of all partners. The share of the deceased partner accrues to the remaining partners. However, they are then obliged to pay the heirs a corresponding settlement (§§ 738, 740 BGB, § 105 Para. 3 HGB).

If a general partner of a limited partnership (KG) dies, the partnership is continued among the remaining partners, as in the case of a general partnership. However, the partnership is dissolved if it is the only general partner. On the other hand, if a limited partner dies, the KG is continued with their heirs (§ 177 HGB). In this case, the heirs do not enter the partnership as a community of heirs but individually through a special succession.

Participation in a partnership company is also not inheritable in principle (§ 9 Para 4 Sentence 1 PartGG). The death of a partner leads to their withdrawal, and the remaining partners receive the partnership share on a pro-rata basis. Succession clauses can only stipulate deviations from this for persons with the necessary professional licenses (§ 9 Para. 4 S. 2 PartGG).

Succession in Sole Proprietorship

In the case of legal succession, the sole proprietorship is included in the estate as a tangible entity. If there are several heirs, it becomes the joint property of the community of heirs (§ 2032 BGB). The heirs can then continue the company as an undivided community of heirs.

Succession Regulations in the Partnership Agreement

For good succession planning, it is essential to deal with the company’s partnership agreement, if there is one. Since the deceased partner of a partnership generally leaves, a succession clause is required in the partnership agreement to enable the continuation of the partnership with the heirs.

The simple succession clause merely stipulates that in the event of the death of a partner, the partnership share passes to their heirs. If there are several heirs, the company share is divided among them due to the so-called special succession so that each heir becomes a partner. Therefore, it does not pass to the community of heirs. If only certain heirs are to succeed the deceased partner, this can be regulated in a qualified succession clause. However, it is essential to ensure that the successors named in the partnership agreement are heirs under the statutory law of succession or testamentary disposition.

In general, it is essential to coordinate the partnership agreement and the inheritance law regulations and agreements. Our attorneys for inheritance law and corporate law at Schlun & Elseven will review the articles of association for you and assist you in adapting them to your wishes for your company’s succession.

Business Succession Planning: Essential Considerations

Successful business succession planning also allows you as an entrepreneur to make long-term strategic decisions for the company now, knowing it is in safe hands for the future. Our lawyers will support you in making the big decisions necessary. Here is advice we can offer on the issue.

Plan Early for Business Succession

Early planning ensures you can identify the right person to continue with the company. Maybe that person is within your family, an employee or someone already in a critical management position.

If no one is identified as suitable for the role, it may be worth considering selling the company.

If there are a few eligible candidates, placing them in strategically important positions and giving them greater responsibility within the company can be beneficial. This action will determine whether they are ready to handle the essential roles in the future and provide an insight into what they value.

Another benefit of early business succession planning is that the potential successor can receive mentoring and assistance in preparing for the role. It can even be worth getting input from the likely successor as to the design of the mentoring program. A suitable successor may recognise their own weaknesses and areas in which they need further development.

Should the mentoring program demonstrate that the person is a suitable successor, the entrepreneur can transition them into more significant roles with key partners and suppliers.

Early business succession planning allows the entrepreneur to timetable the transition to the successor. A plan with milestones and indicators provides the successor with goals to meet and offers further insight into their capabilities under pressure.

Setting goals and objectives stabilises the transition plan, lets the successor know that they are on course, and clarifies how much control can be relieved.

Open discussions with the successor are advisable, and the plan should not need to be “set in stone”. The business environment can change, and the plan should remain flexible. It needs to be reviewed regularly. However, clear avenues of communication are the best means of preventing conflicts, especially around the feeling of “moving the goalposts”.

Document the Business Succession Plan

Like early planning, carefully documenting the business succession ensures that it is carefully planned out and provides you with peace of mind. Working alongside the corporate lawyers at Schlun & Elseven Rechtsanwälte will ensure that there is a paper trail and that crucial considerations such as the required insurance plans, taxes, bank accounts and corporate structures are documented. Our team will help you lay the groundwork for the succession by taking care of the legal formalities.

For succession planning within a family, our inheritance law specialist, Dr Thomas Bichat, will advise you on German inheritance law requirements.

Careful documentation allows for changes and adjustments to be made when necessary. Changes in tax or inheritance law can result in specific approaches needing to be altered. Other factors, such as unexpected growth or decrease in the company and even the chosen successor no longer being able to take the role, can also lead to changes in the plan.

Working with our experienced corporate lawyers ensures that our team is ready to meet the challenge of whatever changes arise during business succession planning.

Company Succession: Inheritance Tax

From a tax perspective, there are also several things to consider regarding company succession by inheritance. For example, some special regulations for the inheritance of business assets provide for preferential inheritance tax treatment.

Under certain conditions, the transfer of a company share can be exempted from inheritance tax at a rate of 85 % as a transfer of so-called productive assets (exemption discount; §§ 13a, 13b ErbStG).

If necessary, the business assets may even be fully exempt from tax (option exemption).

If you have any questions regarding the taxation of business assets in the case of business succession, please do not hesitate to contact our attorneys

Business Succession Planning: Choosing the Successor

Determining the appropriate approach for business succession planning is crucial to its success. Picking the right person to carry on the company can often be complex and is determined by many factors. Here we will outline some key considerations when choosing the route to pursue in business succession planning.

Keeping it in the Family

Many businesses in Germany are family-run, so it can be tempting to keep it within the family. Such a move also may seem like an easier decision for business succession.

The advantage of having a family member as an heir is that entrepreneurs can prepare their family members for running the company. They can get a clearer insight into what the heir may plan for the business going into the future. The advantage of keeping it in the family is that the successor may have loyalty to the company and be determined to maintain and grow the family company.

In families with more than one possible successor, decisions will need to be made on who the successor is or how the succession will occur. Early planning and open discussions need to be considered here, as late planning or a lack of a clear plan can lead to chaos.

Determine and consult with trusted advisors about which of your family members displays the required skills and aptitude to make the big decisions and bring the company forward.

On the succession front, it may be worth considering buy-sell agreements where heirs who are not interested in running the business can be bought out by those who are keen on it. Our lawyers can advise you on all the options available when planning for family succession and oversee the paperwork to make it a reality.

Passing to a Business Partner/Business Partners

Founding business partners have already demonstrated their qualities and abilities in running the business and may appear like a safe pair of hands for future business success. With close business partners, the advantage is that you can often trust them and determine their plans for the company going into the future.

Let our team advise you on the critical considerations in such a step. We recommend communicating with family members and those who may have considered themselves potential heirs to ensure that the reasons for the decision are outlined.

Our lawyers will support you in designing the necessary agreements with your business partners. As expert negotiators, our team will ensure that your aims are at the forefront of any plan. We will also conduct the necessary due diligence when determining the value of your business for the sale of your share to your business partner(s).

Business Succession Planning: Key Employee or Management

It is not uncommon for the person most able to take the reins of the company to be within the company itself. Identifying a key employee or someone within the management structure who can continue your work can be difficult.

Key considerations should be whether they have performed at a high level for a more extended time, have a consistent drive for success, possess the necessary leadership qualities, and commit to the company’s mission and values.

Should a key employee have the essential characteristics, experience, and track record to be considered a potential successor, it is vital to provide them with the opportunity to grow and give them crucial responsibilities at the right time.

An experienced employee can bring ideas from elsewhere into the business. Having dedicated their working lives to that industry, they may be best placed to acknowledge the current trends and future opportunities. Their fresh approach may be what your business needs going into the future.

As with all aspects of business succession planning, clear communication and a detailed plan must be considered. Impartial advice from outside sources is recommendable when making such decisions.

Selling the Company

Selling the company needs to be considered should no obvious successor present itself.

Selling the company can be difficult for entrepreneurs, especially when they have dedicated themselves to the success and growth of their business. The right sale can lead to you and your family benefiting from that hard work, allowing you to plan for retirement in confidence. However, selling a business can bring its own complications and is the most unpredictable of the above options.

Our lawyers will provide the expert guidance needed when selling a company. Our team will carry out the necessary due diligence to determine the value of your business and closely examine those interested in purchasing the company. Assessing your company’s value will consider vital aspects such as intellectual property, premises, and brand.

Also, remember that plans can change. Exploring the selling option does not mean it must be set in stone. The entrepreneur can implement alternative options if a successor emerges during the process.

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Practice Group: German Succession Planning

Practice Group:
Business Succession Planning

Dr. Thomas Bichat

Lawyer | Salary Partner