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June 11, 2024
Is it actually easier to take over an existing business instead of starting a new one? The expected answer: It depends. Here's an overview of the advantages and disadvantages of business succession.
Those planning to become self-employed have two options: either to start a new business or to take over an existing one . A look at the figures shows that the second option has potential: the German Confederation of Skilled Crafts (ZDH) estimates that 125.000 craft businesses will be looking for a successor in the coming years . According to the Institute for SME Research, this number will even reach 190.000 by 2026 – that's 38.000 business transfers per year.
According to a 2023 report by the German Chamber of Industry and Commerce (DIHK) on business succession, approximately half of business owners would prefer to hand over their company to family members or employees . However, according to KfW Succession Monitoring, this is increasingly less likely to reflect the future plans of the next generation. The other half plans to sell the business to external parties . Therefore, it is worthwhile to examine the advantages and disadvantages of a business takeover more closely.
When starting a new business, it typically takes several years for the company to become established and generate good returns – but this gives founders time to grow with the demands. Succession, on the other hand, means jumping right in: successors must demonstrate their business acumen and technical skills from day one . In return, they take over a business that already reliably covers its operating costs. They can build on a solid customer and supplier base, a well-coordinated team, and proven processes. Premises, equipment, inventory: everything is already in place.
Taking the leap into self-employment is often linked to the desire for greater autonomy. While starting a new business offers complete freedom of choice, taking over an existing business presents more constraints : existing structures initially dictate the direction. Every workforce has established habits that are not easily changed without encountering resistance. Furthermore, succession comes with obligations: salary levels are fixed, as are supplier contracts, regulatory requirements, taxes, liabilities, and potential risks.
Operations management
Operations management
Operations management
Central contacts include the Chambers of Industry and Commerce (IHKs), industry associations, or the nexxt-change.org platform, which is supported by the Federal Ministry for Economic Affairs. Of course, the advising bank is also well informed about the circumstances of many client companies and can provide contacts.
"When buying a company, price is naturally the primary consideration for many. Taking over an existing business usually means a higher financial outlay than starting a new one. But the investment pays off in most cases – thanks to faster profitability and a higher probability of success. The purchase price is always also a matter of your negotiating skills. Be sure to seek professional advice on this." Maren Mölleken-Telinde, Head of Corporate Clients, Targobank
There are various forms of business succession: a gift , a lease , or a purchase . Gifts most often occur within families. The Ifo Institute, in its 2023 business climate survey, points to the specific features of inheritance and gift tax . Successors should seek professional advice in this regard well in advance.
Leasing is an option if the owner(s) are not yet ready to relinquish the business . In this case, the total purchase price does not need to be financed; instead, a monthly payment is made to the business owner. Ownership of the business does not transfer, but the owner retains full control and use of it.
When a company is purchased, ownership, including all assets, receivables and liabilities, transfers to the successor – either with a one-time payment or in the form of a lifelong pension payment to the predecessor.
Founders should seek advice on the specific legal and tax aspects of each transfer method. The legal form also plays an important role.
As figures from the Institute for SME Research show, business acquisitions often require more capital than new business start-ups . Owners frequently overestimate the value of their company and want to achieve a high price. Founders, on the other hand, don't want to overextend themselves financially when starting their own business. The purchase price is therefore the result of sometimes lengthy negotiations.
In a business acquisition, the bank plays a key role in providing advice and financing . Public funding must be applied for through the bank before the acquisition takes place. Subsidies typically do not cover the entire financing , which is why founders need equity capital or a bank loan . A convincing business plan is a good starting point.
✔️ What is the reputation like, what are the advantages of the location?
✔️ What is the company's customer base?
✔️ What does the market look like, what is the competitive environment?
✔️ Is the company financially sound and future-proof? Where can I save money?
✔️ What is the condition of the equipment, how much do I need to invest?
✔️ Does the purchase price match the earning power?
✔️ How many employees are there and what are their qualifications?
✔️ Do I like the company culture?
✔️ What contracts exist? Are there any legal disputes, intellectual property rights, or licenses?
Market entry pros: faster – there is already a market and customer base for the service or product; cons: introducing your own ideas and further developing the brand is often more time-consuming than with a new business.
Financing Pros: faster profitability through known earnings and track records; Cons: higher financial outlay than with a new start-up, potentially lengthy negotiations regarding company valuation and purchase price
Entrepreneurial freedom: Pros: quick overview of improvement opportunities and utilization of all competencies from day one; Cons: consideration of existing structures and corporate culture
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