Business Succession in the Skilled Trades: Challenges and Solutions for Licensed Enterprises

The business succession presents significant challenges for many craft businesses. Particularly in trades requiring licenses, there are special requirements that both the transferor and successor must observe. This article highlights the specific aspects of craft business succession and provides practical tips for a successful business handover.

The Current Situation in the Craft Sector

The craft sector is facing a demographic shift of historic proportions. According to the Central Association of German Crafts (ZDH), around 125,000 craft businesses are set to be transferred within the next five years. This corresponds to nearly a quarter of all craft businesses in Germany.

The challenges are diverse:

• Lack of interest from the next generation in taking over the family business
• Increasing shortage of skilled workers, affecting potential external successors as well
• Special qualification requirements, especially in licensed crafts
• Growing competition from industrial providers and online platforms
• Rising demands for digitalization and modern business models

The succession situation is particularly tense for licensed crafts, as not only entrepreneurial competence but also specific professional qualifications must be demonstrated.

Licensed Crafts: Specifics in Succession

Licensed or approval-required crafts are those that, according to the Crafts Code (HwO), may only be practiced by persons with a master craftsman certificate or an equivalent qualification. These trades include, among others:

• Electrical technicians
• Plumbers and heating engineers
• Refrigeration and air conditioning technicians
• Automotive technicians
• Hairdressers
• Opticians
• Hearing aid acousticians
• Orthopedic technicians
• Chimney sweeps
• Dental technicians

When taking over a licensed craft business, the successor must generally prove the corresponding master craftsman certificate or an equivalent qualification to be allowed to run the business. This represents a significant hurdle that considerably narrows the pool of potential successors.

Solutions for Licensed Businesses

However, there are various ways in which a licensed craft business can be taken over without holding a master craftsman certificate:

1. Operations Manager Model: An employed master craftsman acts as the technical operations manager, while the successor takes over commercial management. The operations manager must be in a social security-obligated employment relationship and have sufficient time for their duties.

2. Exceptional Permit under § 8 HwO: Under certain conditions, the Chamber of Crafts can grant exceptional permits if the successor can demonstrate special professional experience and knowledge.

3. Entrepreneurial Company with Master Craftsman: Formation of a GmbH or UG where a master craftsman acts as shareholder and managing director, while the successor joins as another shareholder and possibly managing director.

4. Lease Model with Option for Later Purchase: The business is initially leased while the successor simultaneously acquires the master craftsman qualification to fully take over the business later.

5. Partnership Model for Transition: The previous owner (with master craftsman certificate) remains in the company for a transition period while the successor acquires their qualification.

Each of these models has its specific advantages and disadvantages and must be individually tailored to the respective situation.

The Succession Process in Craft Businesses – Step by Step

A successful succession in the craft sector requires careful planning and implementation. The following steps have proven effective in practice:

1. Early Planning (3-5 Years Before Planned Handover)

• Analysis of personal and business situation
• Definition of handover goals (sale, family succession, etc.)
• Creation of a timeline and action plan
• Consultation with the Chamber of Crafts and tax advisor

2. Business Analysis and Valuation

• Determination of the business value by a professional
• Analysis of strengths, weaknesses, and future prospects
• Identification of optimization potential before the handover
• Clearing of legacy issues (legal, financial, organizational)

3. Successor Search and Selection

• Definition of the ideal successor profile considering qualification requirements
• Use of various channels for successor search (Chamber of Crafts, industry networks, specialized online platforms)
• Pre-selection and interviews with potential candidates
• Verification of professional and personal suitability

Practical Tip: On the viaductus platform, interested parties can specifically filter for craft businesses with or without license requirements. This greatly facilitates the search, as potential successors can immediately see whether they meet the necessary qualifications or need to consider alternative models.

4. Handover Concept and Contract Drafting

• Determination of the form of handover (Share Deal) or Asset Deal
• Development of a detailed handover concept
• Clarification of tax and legal issues
• Drafting of contracts by specialized attorneys

5. Financing the Succession

• Determination of financing needs
• Examination of various financing options
• Application for subsidies and guarantees
• Negotiations with banks and other capital providers

6. Handover Phase and Onboarding

• Structured onboarding of the successor
• Gradual transfer of responsibilities
• Joint meetings with customers, suppliers, and employees
• Knowledge transfer of important business processes and trade secrets

7. Post-Handover Support Phase

• Advisory support by the previous owner for an agreed period
• Regular feedback discussions
• Gradual reduction of the former owner’s influence

Specifics in Valuing Craft Businesses

Valuing a craft business differs in some respects from valuing other companies:

Value Drivers in the Craft Sector

1. Customer Structure and Loyalty: Long-standing customer relationships and maintenance contracts significantly increase value.

2. Employee Qualifications: Well-trained, loyal employees are particularly valuable.

3. Market Positioning: Specialization and unique selling points raise the company’s value.

4. Machinery and Vehicle Fleet: The condition and modernity of technical equipment influence the valuation.

5. Operational Organization: Documented processes, digital tools, and modern management systems add value.

Valuation Methods for Craft Businesses

The most common methods for valuing craft businesses are:

• Modified Earnings Value Method: Based on adjusted EBIT of the last 3-5 years with an industry-standard multiplier (usually between 3 and 6)

• Asset Value Method: Particularly relevant for asset-intensive craft businesses

• Practitioner Method: Revenue × industry factor + asset value = company value

A professional valuation should always combine several methods and consider the individual characteristics of the business.

Legal and Tax Aspects of Craft Business Succession

Choice and Structuring of Legal Form

Choosing the right legal form is especially important for licensed crafts:

• Sole Proprietorship: Simplest form, but the owner must prove the necessary qualification.

• GmbH/UG: Enables separation between shareholders and qualified management, ideal for the operations manager model.

• GmbH & Co. KG: Offers liability limitation and tax flexibility but requires appropriate qualifications of the managing persons.

Tax Optimization

There are various tax structuring options in craft business succession:

• Use of exemptions in family-internal succession
• Gradual transfer to distribute tax burden
• § 6b EStG for transferring hidden reserves
• Business splitting for optimized asset structuring
• Contribution to a partnership with subsequent share transfer

Early tax advice can bring significant financial advantages and should therefore be an integral part of succession planning.

Financing Options for Craft Successors

Financing the takeover poses major challenges for many successors. The following options are available:

Equity and Debt Financing

• Bank loans: Traditional house banks or specialized financiers for business acquisitions
• Equity participation: Medium-sized investment companies or private investors
• Mezzanine financing: Hybrid forms between equity and debt

Public Funding

Especially for craft successions, attractive funding programs exist:

• KfW Entrepreneur Loan: Favorable conditions for takeovers
• ERP Start-up Loan: Specifically for successors and start-ups
• Guarantee banks: Securing bank loans in case of insufficient equity
• Regional funding programs: Varying offers depending on the federal state

Alternative Financing Models

• Seller loan: The previous owner defers part of the purchase price
• Earn-Out: Purchase price payment linked to future company performance
• Installment purchase: Gradual takeover and payment of the company
• Leasing of business equipment: Preserving liquidity during the takeover

Digitalization as an Opportunity in Succession

Digitalization offers great opportunities for craft businesses, especially in the context of succession:

Digitalization Measures with Quick ROI

1. Digital Customer Management: CRM systems for better customer retention and more efficient processes
2. Online Appointment Scheduling: Reduction of administrative workload
3. Digital Quotation Preparation: Faster and more professional offer creation
4. Mobile Measurement: Time savings and error reduction
5. Digital Time Tracking: Transparent project billing

Long-Term Digitalization Strategy

1. ERP System: Integrated business management
2. Digital Customer Acquisition: Website, social media, online marketing
3. Networking of Machines and Devices: Efficiency increase and remote maintenance
4. Data-Based Business Models: Unlocking new revenue streams

Implementing digital solutions can significantly increase the value of the craft business and should ideally begin before the handover.

Conclusion: Success Factors for Craft Business Succession

Successful succession in the craft sector, especially in licensed businesses, is based on several key factors:

1. Early Planning: Start at least 3-5 years before the planned handover
2. Professional Support: Engage specialized advisors for legal, tax, and business matters
3. Realistic Valuation: Fair price determination based on recognized valuation methods
4. Qualification Management: Develop creative solutions for licensed crafts
5. Structured Handover: Clear agreements and sufficient onboarding time
6. Future Orientation: Use modernization and digitalization as value drivers
7. Communication: Open dialogue with employees, customers, and suppliers

With a well-thought-out strategy and the use of specialized platforms like viaductus, which specifically consider the peculiarities of licensed crafts, succession in the craft sector can be successfully managed. This not only secures the continuity of individual businesses but also contributes to strengthening the entire craft sector – an economic sector indispensable to our society.