Generational change in German SMEs is gathering pace

• 236,000 enterprises are looking for a successor by the end of 2019 and another 275,000 by 2022
• A further 331,000 business owners plan to shut down within five years
• Regional differences in succession planning across the country
• Clarity on succession stimulates investment

The generational change in German SMEs is accelerating fast. Some 40% of SME owners are currently over the age of 55. They will soon have to think about retirement and business continuity. A special survey was recently conducted by KfW Research on the basis of the representative KfW SME Panel. It has revealed that the managers of 236,000 small and medium-sized enterprises are planning to transfer their business to a successor in the next two years alone. Time is running out for 100,000 of them because they have either not yet found a successor or the owner has not even begun to search for one. These enterprises have considerable importance as some two million jobs and around 89,000 trainees and apprentices depend on a successful business transfer.

A look a few years into the future shows the full extent of the imminent generational change. Another 275,000 senior managers want to hand over their business by 2022. A handover within the family is the preferred choice across all sectors and size classes (54%). An external buyer is conceivable for 42% while an employee or previous co-owner is considered as a successor much less often (25% and 27%).

But not all executives considering retirement plan to continue their business at all. Some want to close it down. The owners of 331,000 active SMEs are currently planning to give up their business within five years. These enterprises employ 1.63 million workers. The question of whether to hand over or shut down a firm clearly depends on size. For large enterprises with more than 50 employees, shutting down hardly appears to be an option and only 5% are considering this. Micro-enterprises with fewer than five employees are eight times more likely to close (41%). Company owners in retail, construction and the services sector have quite similar plans: They want a successor for slightly more than half of the enterprises in these sectors. In manufacturing this figure is even higher, at three fourths.

Generational change in SMEs is not an equally pressing problem in all parts of Germany. There are surprisingly large regional differences. In Schleswig-Holstein almost half (46%) of all SME owners are already 55 and older, in Thuringia (44%) and Baden-Württemberg (41%) the proportions are also above average. These are the states where the search for successors is most widespread. The situation is different in Hamburg, Rhineland Palatinate, the Saarland and Mecklenburg Western Pomerania, for example. There are significantly fewer older SME executives here, with a share of around 30% each, and much fewer successions are imminent.

As the analysis by KfW Research shows, an imminent generational transfer of ownership paired with a high age of the company owner significantly influences the propensity to invest. If the succession is unclear, investment becomes less likely. Conversely, clarity on succession strengthens the propensity to invest even if the company owner has reached a high age. This effect is most pronounced in companies where succession is imminent within two years. When the succession is secured it triggers additional capital expenditure of 40% on average.

“As a consequence of demographic change, German SMEs face substantial structural transformations. The bosses of 842,000 enterprises will be retiring within the next five years – with or without a successor. This affects one in five SMEs,” summarised Dr Jörg Zeuner, Chief Economist of KfW Group. “Given the extent of this transformation, adverse impacts on competitiveness cannot be ruled out – particularly if the executives are too slow or reluctant to tackle the issue of business continuity. There is a danger that enterprises stop evolving, that their value declines and, with it, the chance to hold their ground in the market. Generational change must therefore be one of the main issues on the executive floors of SMEs and one of the top items on the economic-policy agenda in this country”, said Zeuner. He continued to say that an orderly succession usually takes several years of planning – especially when the successor is not a family member. “We have been observing growing constraints to external succession as a result of declining numbers of business founders. This means not just an insufficient number of young entrepreneurs in Germany but fewer founders willing to take over an existing firm. The most recent figure was a mere 62,000 in 2016. At the same time, the number of persons who are at least participating financially and actively in an existing business has also dropped. Ultimately, these are much too few to meet the need for qualified successors for existing enterprises”, said Zeuner. “A key challenge is therefore to make entrepreneurship more attractive again. A major step in this direction would be to deliver more education in economics and business skills in the school system.”

The current analysis by KfW Research entitled “Generational change in SMEs” is available (only in German) at: Generationenwechsel im deutschen Mittelstand

Details about the database:

KfW Research has monitored the impacts of demographic change on small and medium-sized enterprises for many years. The current analysis is based on a special evaluation of the representative KfW SME Panel 2017, which has been conducted since 2003 as a postal tracking survey of small and medium-sized enterprises in Germany. In order to account for the growing importance of generational change in the SME sector, the collection of relevant data was restructured and expanded significantly from the year 2017. The basic population of the KfW SME Panel includes all private-sector companies from all industries with annual turnovers of up to EUR 500 million. The main survey was conducted from 13 February to 23 June 2017.