227,000 SMEs want to transfer ownership by the end of 2020

• Managers are increasingly aware of the need to plan their succession
• Number of secured management successions is growing
• External buyers are becoming more important
• Intergenerational transition hampered mainly by growing shortage of emerging entrepreneurs

The coming generational transition continues to be a recurring theme on the executive floors of Germany’s small and medium-sized enterprises. By the year 2020 alone, 227,000 owner-managers want to pass their company into new hands. The number of bosses who want to transfer their business to a successor within two years thus remains on a high level, according to the current analysis conducted by KfW Research on the basis of the representative KfW SME Panel (previous year’s survey: 236,000). Encouragingly, owner-managers are also becoming increasingly aware of the need to face the challenges of the coming generational transition in a timely manner. Never before have more of them been weighing the options available for withdrawal due to age (59% vs. 55%). The number of secured management successions is also growing. Nearly two thirds of SME owner-managers looking to transfer their business by 2020 have either finalised their succession or are in the process of negotiating with a specific successor. That means some 141,000 small and medium-sized enterprises have an idea of who will take over after the current owner-manager retires (previous year: 137,000).

“I am pleased that the current generation of owner-managers has made succession management a significantly higher priority on their agenda”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “Today, around four in ten bosses of small and medium-sized enterprises are over the age of 55. They will soon have to think about retirement and, hence, the continuity of their business. When we consider the weight these enterprises have for the economy as a whole, it becomes clear that a lot depends on successful generational change. The 227,000 SMEs that are ready for succession by 2020 alone employ nearly 2 million workers and 76,000 trainees and apprentices. They invest EUR 9.3 billion, which is roughly 2.4% of all business investment in Germany, and they account for around 6% of total turnover in the SME sector, or EUR 283 billion.”

Even if the share of SMEs that are due for succession within the next two years but have made few or no preparations has dropped considerably (-10 percentage points to 16%), time is running out for a substantial number of firms. So far, 36,000 owner-managers have either not even started the process or have merely collected information. An orderly succession usually takes several years of planning – even more so when the successor is not a family member. It is very likely that these managers will not be able to follow through with their previous retirement and succession plans.

While the previous years’ surveys always showed a preference for succession within the family, this is now at exactly the same level (45%) as selling the business to an external buyer such as a start-up, financial investor or another enterprise. Factors that may play a role are children’s different career choices, or the fact that more existing entrepreneurs have no children compared with previous entrepreneur generations. Unlike successions within the family, however, looking for an external successor comes with several challenges. It is more difficult for sellers and buyers to come together and involves higher transaction costs. Succession exchanges such as the online platform www.nexxt-change.org can be a helpful point of contact.

“A key bottleneck in the search for external successors is the short supply of emerging entrepreneurs. Because of the good labour market situation, the number of business founders has been declining for years. In 2017, only 557,000 people started their own business. Founders willing to take over an existing business are becoming particularly rare, and recently they numbered only 57,500 a year”, said KfW Chief Economist Zeuner. “That is nowhere near enough to meet the high need for successors in the coming years. Teaching business skills and continuing to make entrepreneurship more attractive are therefore core tasks of an education and economic policy that is oriented to the future.”

Besides the wish for orderly business succession, planned closure is the second large block in an enterprise’s view of the future. After all, not every manager who seriously ponders retirement actually has a plan for their business to continue. Today, 16% of all owner-managers see closure as the only conceivable solution. Owner-managers of micro-businesses with fewer than five employees, in particular, often consider this option (41%), while shutting down is almost not an option for large SMEs (2%). Thoughts of shutting down play much less of a role in manufacturing as well, but nearly half the owner-managers of small and medium-sized enterprises in the construction sector plan to give up their business in the future.

The full analysis by KfW Research on SME business succession can be found at:
www.kfw.de/fokus

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 2018, which has been conducted since 2003 as a postal tracking survey of small and medium-sized enterprises in Germany. 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 12 February to 22 June 2018.