Two trends in business succession are becoming increasingly clear. According to the current DIHK Report on company succession, 150,000 company bosses will be looking for a successor by 2022. And the concerns of German family entrepreneurs are clearly increasing. Because fewer and fewer people want to be entrepreneurs.
Below we look at the five most important trends in business succession in 2019:
Trend 1: Economic uncertainty makes business successions more difficult
After years of growth, German entrepreneurs are spoiled: the order books are still full. The figures are still right. However, more and more dark clouds are gathering over Germany’s family businesses. Two major developments threaten the successful German economic model:
Demographic development
For example, the current demographic development is a cause for great concern: Germany’s cohort of entrepreneurs with the highest birth rate will celebrate its 55th birthday in 2019. That is why the DIHK recommends that bosses of this age prepare for the generational change. By 2022, # 60% of all entrepreneurs older than 55 years of age.
DIHK: ‘A serious problem for the location is gradually emerging Germany. This is particularly true for structurally weak regions.?
This is because of the 150,000 company heads affected by succession, only just under 6,700 entrepreneurs found their way to one of the 79 German Chambers of Industry and Commerce. In contrast, the interest of those taking over the business is clearly waning. IHKs throughout Germany advised only about 4,200 potential company buyers. This is 50(!) percent less than in 2009.
An older study by KfW shows that older family entrepreneurs tend to invest less. This increases the investment backlog and reduces competitiveness. The hesitant approach of family businesses to digitalisation is just one example.
Foreseeable economic stagnation
Every entrepreneur can remember the dramatic economic crisis of 2008 to 2010. Orders collapsed and financing became more difficult. The economy, which was accustomed to success, is now facing a similar threat again.
The reasons are manifold:
- Radical change of entire industries: Examples include the retail trade, energy production and the automotive industry. The radical upheavals have an impact on suppliers, their employees and families.
- Increasing protectionism: The trade wars, Brexit and the increasing foreclosure of foreign markets threaten the German export economy. This is also having a negative impact on individual businesses.
- A shortage of skilled workers becomes a shortage of unskilled workers: The shortage of skilled workers is increasingly becoming a shortage of unskilled workers. In addition to highly qualified positions, it is increasingly difficult to find staff for simple jobs. This further limits the flexibility of companies.
Trend 2: More company sales in times of economic uncertainty
The economic uncertainty and their increasing age leads to many questions among company heads: ‘Should I quit?’ or ‘Is there a successor in the family?
However, succession within the family is now not always the appropriate choice: the children are still too young or have other interests. A general trend in business succession shows that entrepreneurial children are the Shy away from family succession.
Only 20 years ago, the family-internal generation change was the determining succession model. According to the DIHK, the children of entrepreneurs are increasingly going their own way outside the parental business. Consequently, an “automatism” of family-internal succession exists in fewer and fewer companies.
Entrepreneurs must therefore increasingly look for external successors. Many do so too late. Because a good third of entrepreneurs find it difficult to emotionally let go of their life’s work.
Thus, in the future we will see more companies looking for a successor in economically difficult times.
Trend 3: Buyers determine business succession trends
For company buyers, the ageing of society results in an increasingly better negotiating position. The cohorts of 25-45 year-olds are thinning out, while more and more company bosses are retiring.
After all, many sectors are already acquirer markets. In other words, corporate buyers are already choosing from a variety of offers. This is true for many Crafts enterprises, the Tradethe construction industry, the service sector and the hospitality industry. The compulsory master craftsman’s certificate in many trades makes the search for successors even more difficult.
In the past five years, we have also seen a clear trend towards more professionalism on the part of potential buyers. This is why company buyers expect professionally prepared and coherent information even before they get to know the seller for the first time. Poorly prepared transferors and exaggerated price expectations thus cause projects to fail early on.
Fortunately, women are increasingly interested in taking over a company. The share of potential Business successors in counselling sessions has increased by almost 58% since 2010.
Trend 4: Unrealistic price expectations reduce prospects of success
According to a DIHK study, more than 40 percent of all entrepreneurs expect an inflated purchase price at the beginning of a sales project. The value of a company is not the value of all past investments or the imputed sum of all the boss’s “overtime”.
Rather, the purchase price of a company expresses the future profit expectations of a buyer. Therefore, a valuation prepared by specialists helps Business valuation according to a recognised procedure when determining the purchase price. A change of perspective helps you to assess your own purchase price expectations. Ask yourself how much money you would pay for your own company.
If, on the other hand, a company succession is delayed too long, the value of the company is more likely to decline, warns the DIHK.
Trend 5: Opportunities for family businesses and start-ups
For start-ups and SMEs on a growth course, this development in business succession offers a whole range of opportunities.
Family businesses as strategic investors
For example, we are seeing greater consolidation in certain sectors, which is also driving smaller family businesses. For example, craft businesses are increasingly acting as strategic investors. Such companies often look specifically in neighbouring regions for takeovers in their own sector. Over the last few years, small craft or trade businesses with few employees have become larger companies with many locations.
Start-ups minimise risks
Moreover, the takeover of a company offers a particularly attractive Start-up quite a few opportunities. From my own experience, I know how difficult it is as a start-up to reach the right target group and achieve the first sales. By taking over an existing company, a founder invests in an existing customer base and functioning process. This strategy avoids a longer investment and set-up phase, facilitates financing and reduces risk.
What can entrepreneurs do concretely?
I would answer this question from two directions.
Younger entrepreneurs and start-ups
Years of opportunities lie ahead of you. Because a significant increase in the supply of attractive companies can be expected in the future. Attractive opportunities will arise especially for well-capitalised SMEs and management buy-in candidates (MBIs).
As a general trend in business succession, we expect a significant increase in offers on public marketplaces such as Nexxt-Change. As of the beginning of January 2019, almost 6,600 offers from a wide range of sectors and company sizes are advertised here.
However, this is only the tip of the iceberg. For the majority of deals will continue to be invisible below the surface. These successions will continue to be organised via informal networks, associations or M&A specialists as well as non-public platforms.
Therefore, for success, a clear strategy and a clear Profile for the company search crucial. Consequently, the resilient networks specialists with transaction experience invaluable when searching ‘below the water surface’.
Senior bosses in search of successors
As a senior entrepreneur looking for a successor, you are in a battle for the best minds.
That is why a multi-stage preparation of the business succession pays off for you. Because good preparation avoids the risk of expensive mistakes and project abortions.
After all, the basic question is: ?What I want to hand over When to Whom.? In preparation for this important life decision, you as an entrepreneur should answer these questions:
- How fit is my company for a generational change or a company sale?
- What preparatory work do I need to do to increase the value of the company?
- How well would my business continue if I were to be out for 3 months?
- Do I have my Corporate emergency kit packed?
- When do I plan to hand over my business to a successor?
- In what form do I want to accompany my company successor after the handover?
- Should I have an experienced specialist accompany me in this important task?
Because no entrepreneur can escape a trend of business succession. Like everyone, we have to let go of our professional task at some point or hand it over in advance.
Tips for further reading:
Free webinars on business succession
Interview: Preparing the succession within the family well
Successfully selling IT companies
3 practical tips for preparing a business succession
The trends of an ageing society and a coming stagnation of the economy make business succession more difficult. This also includes the rising shortage of skilled workers, disruptive changes in entire industries and increasing protectionism. In addition, there is a decline in generational changes within the family.
The trends increase the pressure on the seller’s side, as many companies are looking for a successor. Buyers, on the other hand, have a high choice of suitable companies and expect meaningful and conclusive information right from the start.
First of all, family businesses have good opportunities to take over other companies in their sector. In addition, start-ups can considerably reduce their entrepreneurial risk with the purchase of a company and do not have to laboriously build up their business first. After all, they take over existing customers and tried and tested processes.
