Good times for a management buy-out (MBO)

In the coming weeks, a decision is expected from the German Federal Constitutional Court with regards to the constitutionality of the Erbschaftsteuergesetz (Inheritance Tax Act). These circumstances have shifted the focus of many companies toward the unpopular topic of “Ensuring the succession”. After this decision, it is expected that the legislators will be required to cut the tax breaks for transferring companies. Hence the hurry with regards to a succession regulation. Because whether the tax breaks for a regular exemption or optional exemption can even be utilized is determined by the so-called administrative assets test and this requires a company assessment. If there is clarity regarding this, the donation contracts and, potentially, a usufruct have to be prepared and, if necessary, prenuptial agreements, company contracts and wills have to be adapted.

However, the decision, which can no longer be postponed, to think about the successor, has also led to some sobering realizations. This may result from the self-critical admission that no suitable successor is available in the family. This is an opportunity for management employees of the company to move up to ownership positions. The current owners may have a variety of reasons for not selling to a competitor or a financial investor. The desire to transfer the company into good hands then inevitably leads to the potential option of recruiting the successor from the company’s loyal and experienced management level. On the condition, of course, that the person in question not only has the technical skills, but also the qualities of a company owner.

The purchase price is generally paid only by means of financing. In this case, the currently extremely low interest rate offers the best prerequisites to take over the company shares, if necessary, in defined stages and at defined points in time on the basis of a loan.