SME closures: around 266,000 businesses to shut down by the end of 2025

• A shortage of successors, retirement age and lack of economic attractiveness are crucial factors
• Family members increasingly less interested in taking over businesses
• Almost all micro-businesses with fewer than five employees affected
• Another 199,000 businesses at risk of involuntary closure

Some 266,000 small and medium-sized entrepreneurs, approx. 7% of all SMEs in Germany, are planning to close down their businesses by the end of 2025 instead of handing them over to a successor. This affects almost all (97%) micro-businesses with fewer than five employees. According to KfW’s latest status report on SME succession, a further approx. 199,000 entrepreneurs are looking for a successor but will likely have to prepare for failure because of insufficient planning. That means around 465,000 small and medium-sized enterprises will likely go out of business by the end of 2025, some of them voluntarily, some involuntarily. The number of closures thus exceeds the approx. 400,000 successions likely to be completed during the same period.

The KfW status report on SME succession for the first time also shed more light on the reasons for planned closures in the SME sector. It found that lack of interest in taking over the business on the part of family members and the approaching retirement age of the owner-manager were crucial factors in around half the planned business closures. In the study, business owner-managers reported facing growing difficulties organising succession within the family. The generally declining number of children per family and changing career pathways are likely to be major reasons for this.

Hardly surprisingly, retirement age also ranks high on the list of major causes for business closures in the SME sector. The number of enterprises with older owner-managers has been growing continuously for quite some time. Today, 28% of them are aged 60 or older (which amounts to well over a million), whereas 20 years ago it was only 12%. The more difficult business situation resulting from the coronavirus pandemic, among other things, often stands in the way of succession. Around 28% of all owner-managers mentioned this cause.

The study also found that companies facing imminent closure usually have below-average business activity. The annual turnover and annual profit of SMEs looking to shut down are around one fifth to one sixth of those with succession plans. Their profit margin is lower, those looking to close down are around three times more likely to suffer losses, and their average equity ratio is more than ten percentage points (19%) below the total average (30%). As a result, their current business situation often prevents them from selling and leads to closure.

KfW Chief Economist Dr Fritzi Köhler-Geib said: “Every year, around 120,000 businesses are handed over to the next generation – and this is of fundamental importance for the productivity of the economy. However, for every completed succession there are business closures. What is often forgotten is that business closures are part of the natural renewal of an economy. In the SME sector, declining interest in management succession within the family, demographic change and, truth be told, in some cases low business attractiveness play a role. Many owner-managers then make a conscious decision to give up their business. Closures of successful enterprises that abandon their succession plans despite attractive business prospects for lack of suitable candidates are a real loss to the economy. Given the demographic trend, this will happen increasingly more often. What consequences a resurgence of the coronavirus crisis or the impact of Russia’s war of aggression against Ukraine will have is currently very hard to say.”

Further information can be obtained at:
www.kfw-mittelstandspanel.de (available in German only)