The German Chambers of Industry and Commerce (DIHK) and the KfW warned back in 2014. Now the renowned consulting firm EY (formerly Ernst & Young), in cooperation with the University of St. Gallen, has also found out that family entrepreneurs in German-speaking countries have a problem with young talent. This is because juniors are afraid to take on responsibility as successors in the family business.

Back in 2014, the Institute for SME Research in Bonn found that only 13% of all family businesses succeed in the transition to the third generation. What is the reason for this? The recently published study provides some plausible answers to this question.

For many entrepreneurial children, a career as an employee with regular working hours, income and holidays seems much more attractive than a 24/7 entrepreneurial career in the family business. Often these young people have experienced with their parents that the company is always at the table as the smallest child and requires a lot of attention. Especially in smaller and medium-sized companies, the next generation of entrepreneurs often does not want to do this to themselves. Children have studied according to their inclination, got a good job at a large company or even ended up as employees or civil servants in the public sector.

What does this mean for family businesses?

Whereas in earlier years succession was virtually regulated by birth, the “parents & children GmbH” is increasingly becoming a discontinued model. Instead, today’s family entrepreneurs must do more than ever to ensure the continuity of their business within their own family. The persuasion work to be done in the family is essentially comparable to the negotiation effort required for an external succession solution. The regulatory effort is often even higher.

Furthermore, the question of the future viability of the business model and thus the future earning capacity has always been part of the catalogue of questions for a successor from outside the family. However, family entrepreneurs will have to get more and more used to their own sons and daughters asking them the same question. After all, taking on entrepreneurial responsibility also entails taking on many risks. From a risk perspective, a well-paid employee or civil servant sleeps more soundly. Especially against this background, an entrepreneur must question his business model until the day of the handover, adapt it to the current market situations and, above all, also invest in the future of his company.

Emotional component is often underestimated

In addition, the emotional component plays a special role, especially in the case of succession within the family. When there is a generational change in a family business, it is not only the former owner who talks to his successor, but also part of the parents’ generation with their children. Open communication between the generations would be desirable here, but is by no means practised everywhere. Professional business mediators help here to get communication going in a goal-oriented way and to keep it going. In doing so, they identify and solve problems in communication at an early stage and protect or maintain family peace. The main goal of succession in a family business should be the preservation of the family system, followed by securing ownership of the business in the family as a secondary goal. After all, those involved still want to look each other in the eye at family celebrations even after an intra-family business succession has taken place.

Good succession planning pays off

In our daily practice I very often experience that the succession is insufficiently planned and prepared. I have heard more than once from senior entrepreneurs: “Come by once with your prospective buyer, then I’ll show you everything and we’ll take a look at the figures”. Such an approach does not usually lead to success. This is because very few SMEs are monopolists in their sector, freed from the forces of the market. Rather, they have to face the challenges of competition on a daily basis. This also applies to the organisation of succession planning.

An entrepreneur should prepare and implement the handover of his company just as meticulously as the development and market launch of a new product. In most cases, the costs of structured support by a consultant with transaction experience pay off many times over. Because with a well-prepared generation change, many of the successor’s questions are already answered in advance. This accelerates the succession process within the family as a whole or, in the case of a succession outside the family, a potential buyer for the company is found more quickly. Practice shows that good preparation often pays off in significantly higher valuations and thus - in the case of an external succession - achievable purchase prices for the life’s work of an entrepreneur. That should be worth it to him.