Business succession in the skilled trades - what you should bear in mind

The topic of business succession is increasingly becoming a major challenge for skilled trades businesses. It is estimated that around 600,000 small and medium-sized businesses in Germany are thinking of a business succession by the end of 2025. However, around 165,000 businesses are threatened with closure due to a lack of suitable successors. Yet the skilled trades sector not only has proverbial golden soil, but actually has very good opportunities for growth. And succession offers a decisive advantage over starting a new business: company successors usually also take over a loyal customer base.

Fewer and fewer young people are interested in self-employment or business succession.  Many also shy away from the bureaucratic effort involved in fulfilling information and reporting obligations (e.g. land registry, commercial register, chambers and professional associations) as well as the legal and tax complexity of a business succession. And finally, there are the not inconsiderable problems of the purchase price and payment modalities as well as the financing of the business succession.

The desire to find a suitable business successor within one's own family remains strong in German companies. However, it is not always possible to find a suitable candidate within the family. An obvious alternative is to hand over the business to an experienced employee who not only has industry knowledge, but is also already familiar with the structures and processes within the business.

Depending on the legal form in which the craft business is operated, such a transfer can take the form of an asset deal or a share deal. While in a share deal the company is transferred as a whole and thus a universal succession takes place while retaining the business, in an asset deal only the assets of the company are transferred individually. In contractual terms, a share deal is generally simpler because only shares in a company are transferred and not its assets. However, a share deal is not possible if the craft business is operated as a sole proprietorship and there are therefore no company shares.

Sales tax

A good thing is that if a company is sold as a whole, no sales tax is incurred. Less good is the fact that, depending on how the business is organised and how the sale ultimately takes place, income tax will be incurred. What this means will be explained here as an example for the sale of a GmbH and a GmbH & Co. KG.

Sale of a craft business GmbH & Co. KG

If a private entrepreneur sells his shares in a GmbH & Co. KG by way of a share deal or the ongoing operation of the company, i.e. the individual assets of the company, in the form of an asset deal, income tax is also payable on the capital gain. 

The taxable profit is calculated from the sale price less costs such as consultancy fees or notary fees and the book value for tax purposes. The hidden reserves of the business are realised and taxed upon sale. The profit from the sale of the business calculated in this way is then taxed at the entrepreneur's individual income tax rate of up to 42 % (even 45 % in the case of the ‘wealth tax’).

The German Income Tax Act (Einkommensteuergesetz - EStG) provides some tax benefits for the sale of a GmbH & Co. KG. For example, a tax-free allowance of up to EUR 45,000 applies to the sale of a smaller business, but this is reduced from a capital gain of EUR 136,000. Due to this melting effect, the tax advantage is completely cancelled out from a capital gain of EUR 181,000.

For business succession in larger craft businesses organised as GmbH & Co. KG, a seller who has already reached the age of 55 receives a tax reduction of 56 % of the average income tax rate (Section 34 (4) EStG). However, this only applies to capital gains of up to five million euros. It should also be noted that the minimum tax rate here is 14 %.

A further tax privilege in favour of the seller of the company can be the one-fifth rule, which leads to a reduction in progression.

Finally, the profit of a co-entrepreneur - i.e. an entrepreneur who is not the sole owner of the company - can be exempt from trade tax if the entire co-entrepreneur share, including the special business assets, is sold. Particularly in the case of GmbH & Co. KG, it must be taken into account that the shares in the general partner GmbH constitute special business assets and should also be sold. If the seller does not wish to sell his special business assets, such as a property, appropriate tax planning is required beforehand.

Sale of a craft business GmbH 

If, on the other hand, the craft business is operated in the legal form of a GmbH and all GmbH shares are sold, the decisive factor for tax purposes is whether the shares were held as private or business assets of the company.

If the shares are held as private assets, the so-called partial income method applies in the case of a share deal. This means that 60 % of the sales profit is taxed at the entrepreneur's individual income tax rate, provided the seller holds at least 1 % of the GmbH. The partial income method also applies if the GmbH shareholding is not held directly by the seller, but indirectly via a partnership (e.g. seller has a shareholding in a limited partnership (KG), which in turn holds the GmbH shareholding). If, on the other hand, the seller holds a small stake of less than 1 %, the flat-rate withholding tax generally applies, whereby the capital gain is taxed at 25 % plus solidarity surcharge and, if applicable, church tax.

However, if the seller holds the GmbH shares as business assets, the capital gain is again subject to the partial income method. The seller's profit is then subject to 60 % income tax and possibly trade tax. At the level of business assets, however, it does not matter how high the seller's shareholding is; there is no withholding tax here.

However, if the craftsman holds an indirect interest in the operationally active Handwerksbetriebs (craftsman’s business)-GmbH via another GmbH (e.g. a family holding GmbH), the shares in the Handwerksbetriebs-GmbH are legally sold by this parent GmbH. In this case, the capital gain is tax-exempt due to the intercompany privilege in accordance with Section 8 b of the German Corporation Tax Act (Körperschaftsteuergesetz - KStG). The capital gain is then only subject to a non-deductible operating expense of 5 %. 

Sale of the assets of a GmbH trading business

If the trading business is transferred in such a way that all of the GmbH's operating assets, i.e. land, vehicles, employment relationships, are transferred individually to the buyer (asset deal), the GmbH's capital gain is subject to normal corporation and trade tax. The capital gain generated from the purchase price is therefore taxed as current profit of the GmbH (i.e. at around 30 % in total). The hidden reserves in the sold business of the GmbH are also disclosed and are taxable for the GmbH. This also applies to the sale of a part of the GmbH's business.

If the profit resulting from the purchase price is now distributed by the selling GmbH to its shareholders (the craftsman), this profit distribution is subject to the entrepreneur's income tax at 60 % of the respective individual tax rate as part of the partial income procedure.

Conclusion

In order to overcome all the challenges and hurdles associated with business succession, the search for suitable candidates should begin at least three years before a planned business transfer. All the advantages and disadvantages of a family-internal or external takeover should be weighed up first. The tax implications should also be examined to ensure that a succession solution is chosen that is as favourable as possible for the company from a tax perspective and places as little burden as possible on private and business assets.