It’s probably never easy for an entrepreneur to hand over their business—whether to an outside third party or a family member. Succession within the family often preserves tradition. But it isn’t necessarily the right path in every case, according to attorney Dr. Daniel Mundhenke.
DUB UNTERNEHMER Magazine: When it comes to succession, entrepreneurs usually think of their own children first. What are the key differences between an internal handover and a sale to a third party?
Daniel Mundhenke: Succession within the family often involves sentimental considerations: the family’s influence, tradition, and the values the company has built up should not be lost. Family members who take over the business are usually familiar with the company and its unique characteristics from childhood onward. An external successor must first build all of that up from scratch. Whether this person actually aligns with the company’s values and characteristics often doesn’t become clear until after they’ve taken over. Legally speaking, internal succession also allows for structuring options that are comparatively uncommon in an external process. Owners who hand over the business to their children often reserve the right to a share of the proceeds. In addition, they often remain involved with the business in a reduced capacity, for example as a minority shareholder, consultant, or member of the advisory board. In contrast, succession by an external buyer tends to focus on the sale, which is usually accompanied by an immediate separation.
That sounds as though succession within the family might be the better option. So is “Family First” the right decision?
Mundhenke: There’s no one-size-fits-all answer to that. The prerequisite is that there is a suitable successor in the first place. Key factors include the age, educational background, and character of the potential new owner. A common mistake: Business owners consider a family member as a successor and tacitly expect that person to gladly take on the task. But not everyone who is a potential successor is willing to do so. The business owner should therefore seek a dialogue early on with the chosen successor, as well as with the rest of the family. It is also advisable to amicably resolve, during the planning process, any inheritance-related consequences for family members that would arise from the succession should the business owner pass away. Otherwise, there is a risk of family disputes that could jeopardize the continued operation of the business.
What advice do you give to business owners who are considering transferring their business to a relative?
Mundhenke: First, they should take steps to mitigate the various legal risks. For example, things can become complicated if the business owner does not run the business alone. The transferability or inheritable nature of the ownership interest may be restricted and, under certain circumstances, may depend on the consent of the co-owner. The transfer should also be structured to minimize tax liabilities as much as possible. Second, it is important to minimize the potential for conflict within the family. If deadlocks arise within the family, it is helpful to have a mediator or facilitator guide the discussions. Finding the right successor is one of the most challenging projects in an entrepreneur’s career—and should therefore be well thought out and supported by expert advice.
About the Author
Dr. Daniel Mundhenke
The attorney and mediator is a partner at the law firm BRL BOEGE ROHDE LUEBBEHUESEN in Hamburg. His practice areas include corporate and contract law, with a focus on business succession.
