KfW - Analy­sis: Compa­ny succes­si­on a burning issue in SMEs

As part of the current KfW SME Panel, the state promo­tio­nal bank KfW has found out that business succes­si­on is incre­asing­ly becoming a burning issue in the SME sector. Where­as three years ago there were “only” 530,000 small and medium-sized enter­pri­ses wanting to deal with business succes­si­on, over 620,000 compa­nies in Germa­ny are alrea­dy looking for a suita­ble succes­sor in the next three years. The propor­ti­on of German family entre­pre­neurs looking for a soluti­on for their compa­ny has thus risen to 17%. Three years ago, this figure was still at 14 %.

Alarming figures for the natio­nal econo­my, econo­mic policy and small and medium-sized enterprises.

Once again, it becomes clear that business succes­si­on in the SME sector is something that concerns every German family business owner. One cannot start early enough with the develo­p­ment of ideas for a future compa­ny succes­si­on. Accor­ding to the survey, however, not even half (42%) of the compa­nies concer­ned that are due to be handed over in the next three years are current­ly dealing with the succes­si­on process. We know two things from our every­day consul­ting work:

  1. Profes­sio­nal prepa­ra­ti­onA well-prepared compa­ny succes­si­on answers as many questi­ons as possi­ble in advan­ce for the buyer and his bank. A good exposé and a compa­ny valua­ti­on in line with the market are very helpful instru­ments in the search for a succes­sor in times of a shorta­ge of skilled workers and entre­pre­neurs. A positi­ve side effect is that the trans­fer­ring entre­pre­neur prepa­res himself optimal­ly for the upcoming negotiations.
  2. Successful Compa­ny succes­si­ons in small and medium-sized enter­pri­ses take time: We reckon with an avera­ge of 2 to 4 years. Someti­mes it is quicker. Someti­mes, however, a business succes­si­on can take consider­a­b­ly more than five years. A business hando­ver can also fail at the last moment.

Comple­xi­ty and time expen­dit­u­re of the succes­si­on process often underestimated

It is there­fo­re advisa­ble in any case to call in profes­sio­nal support for this topic, which is so existen­ti­al for the compa­ny. Besides the daily business, a profes­sio­nal and promi­sing search for a succes­sor is actual­ly impos­si­ble to realise.

More than half of SMEs plan family-inter­nal succession

It is true that more than 50 % of the entre­pre­neurs concer­ned still say they want to solve their business succes­si­on within the family. But here, too, there are clear stumb­ling blocks that need to be avoided. Often it is commu­ni­ca­ti­on problems or quali­fi­ca­ti­on problems of the next genera­ti­on that lead to a family-inter­nal genera­ti­on change not functio­ning smooth­ly. Here, too, a fair, compe­tent­ly managed hando­ver process can be initia­ted with the help of a trained business mediator.

Although the number of poten­ti­al compa­ny succes­sors has been decre­asing for years, more than half of the compa­nies survey­ed have only one hando­ver option in mind. Against the backdrop of demogra­phic develo­p­ments, an acute problem is emerging here: it is becoming incre­asing­ly diffi­cult to find a suita­ble candi­da­te to take over the company.

Number of (takeover) founders decli­nes steadily

There are also clear changes in the start-up scene. While the number of start-ups (taking over an existing compa­ny as opposed to founding a new one) was still 200,000 in 2002, it was only one third of that in 2015 with 62,000.

Digital change and lack of willing­ness to invest jeopar­di­se succession

Digital change is also accele­ra­ting the pressu­re on entre­pre­neurs seeking succes­si­on in the next few years. The questi­on of whether an invest­ment is still worthwhile today or whether it should be left to a poten­ti­al succes­sor is conside­red important by only 13% of the entre­pre­neurs survey­ed. This assess­ment can be very decep­ti­ve, becau­se a compa­ny that is not geared to the future is funda­men­tal­ly much more diffi­cult to pass on to the succes­sor generation.

Today, product innova­tions only have an avera­ge lifespan of about 5 years, where­as a few years ago it was up to 15 years. If only to be able to meet the demands of the new markets, one cannot start early enough to look for and build up a poten­ti­al succes­sor for one’s company.

Success factors of a successful business succession

The comple­xi­ty of the hando­ver process is also reflec­ted in the success factors mentio­ned by entre­pre­neurs themsel­ves for successful business succes­si­on in SMEs:

Compa­ny succes­si­on in the SME sector - a sobering conclusion

Almost every 5th German SME (17%) is planning to hand over their business by 2018, affec­ting over 620,000 SMEs. On the other hand, there are fewer and fewer founders and poten­ti­al succes­sors. Only 42% of those compa­nies aiming for a succes­si­on soluti­on by 2018 have even conside­red it so far. Thus, unresol­ved business succes­si­ons in SMEs endan­ger not only indivi­du­al compa­nies, but also the econo­mic develo­p­ment of entire regions and our prosperity.

Tips for further reading:

Prepa­ring for business succes­si­on - 3 practi­cal tips

Advice traps in the process of business succession

Selling a business: Why a pure success fee makes it diffi­cult to provi­de serious advice

Comment: Unresol­ved compa­ny succes­si­ons endan­ger our prosperity

Free webinars on business succession

Employee infor­ma­ti­on during the sale of a company