Company succession in German SMEs  – internal or external succession?

The challenges of succession planning: criteria for the right choice

The most important tip that can be given for a successful business succession is: Start thinking about it in good time. After all, the more long-term the planning for the handover, the easier it will be to implement a change. In family businesses, there is potential for conflict, which is often not sufficiently taken into account.

In addition: If a succession is sought within the family, a corresponding assessment, or the family member is suitable, is never free of subjective emotions. External advice from someone who is not connected with either the family or the company is therefore highly recommended in this situation.

Various criteria play a role in selecting the right succession option. It is important to consider the specific circumstances of a company. For example, the structure and size of a company can be decisive influences. Of course, the personal goals and preferences of the current owner should also be considered. To make a well-founded decision, a careful analysis of the potential successors must also be carried out.

Internal succession option: pros and cons

Internal succession can take place both within the family and within the company. The majority of German SMEs are owner-managed family businesses. Thus, most of them would like to have an internal succession within the family. At best, a family member can be found who is interested and also personally and professionally suitable for the succession.

However, the reality is often different, which means that this project often proves to be difficult due to a lack of candidates. If there are interested family members, they often have a lack of the necessary expertise to continue to drive the company forward or to lead it into the future.

Other disadvantages include the fact that an internal family succession process can lead to tensions and conflicts. There is a high potential for dispute between parents and children in particular, especially if the ideas of both sides diverge. In this case, the so-called management buy-out (MBO), in which a member of the management or another executive takes over the company, would be a possible option.

Internal selection as a succession option has several advantages. In the company, it allows the way the company is managed and the corporate culture to be constantly continued. In addition, there is usually a certain familiarity with the successor.

Another advantage is that there is usually a long-term perspective. This is easier to continue if the person who is to take over the company is already familiar with the company values and goals.

External succession option: pros and cons

In a management buy-in (MBI), the company is taken over by an external manager who has not previously worked for the company. Through an external selection there is the possibility to bring fresh impulses into the company. Not infrequently, it is only through the new capital that the continued existence of the company can be secured.

The sale of a company is a complex process that can last from many months to one or more years and during which a lot has to be considered. Those who do not receive professional support run the risk of selling their life’s work below value. Another potential disadvantage is the fact that a gradual withdrawal is often difficult: it feels as if you have to part with your company from one moment to the next without being able to influence the future course of the company. And the emotional loss involved in selling a company should not be underestimated. There may have been the hope of being able to pass the company on within the family.

Do you need advice on the succession of your company?

Are you facing the challenge of finding a suitable company succession? Surely you have many questions. We would be happy to assist you. We have been active in the field of M&A consulting for over 20 years and look forward to finding the best possible option for you. Make an appointment for a first personal meeting.