KfW Research: Demographic ageing is exacerbating succession problems for SMEs

• Need for successors is growing, number of potential candidates is shrinking
• Young founders have more appetite for takeovers than older ones
• Only one in four prospective founders consider takeovers or participations first

Demographic ageing is exacerbating the problem of succession in the German SME sector in two ways. First, it is causing the number of business owners looking for successors to rise further and further. Second, it is slowing entrepreneurial activity in Germany and thereby leading to an above-average decline in the number of potential successors. After all, both the decision to found a business and the question whether to set up a new or take over an existing business is significantly influenced by age. Older entrepreneurs prefer to found a business from the ground up. An evaluation conducted by the representative KfW Entrepreneurship Monitor shows that business start-ups in the form of takeovers or active participations are more likely to be an option pursued by younger entrepreneurs.

Most start-ups are greenfield start-ups. In 2022, their share reached a new all-time high of 86 %. Start-ups based on an existing business have since become less common. In the past 20 years, their share has fallen from 30 % to 14 % of annual business start-ups. However, this shows that there are more younger founders who are willing to take over existing businesses than older ones. In 2022, this was the case for 20 % of below-30s, a much higher rate than the 10 % to 12 % of older founders.

This trend is also occurring in start-up plans, although on a more moderate level. A good one fifth (21 %) of prospective businesses are planned to be founded through a takeover or active participation. This option was the case for 24 % of prospective founders below the age of 30, a slightly higher share than the 19 % to 21 % of older ones. It was also considered much more often to begin with by younger prospective founders below the age of 30 (30 %) than by older ones (18-24 %).

In businesses to be founded from the ground up, one fourth (24 %) of prospective entrepreneurs considered takeovers or participations first. Of these, 71 % found a business that suited them, but the takeover or participation then failed because of an excessively high purchase price (33 %), too much bureaucracy (29 %) or unsuccessful in-depth appraisals (27 %). Prospective founders of businesses that did not even consider a takeover or participation in the first place (76 %) did so primarily with the aim of remaining independent of existing structures (45 %), because a takeover or active participation did not fit in with their motive for starting a business (44 %) or because of doubts around financing (27 %).

“Given the reduced entrepreneurial activity in Germany, we need to pull all the stops to enable the creation of more businesses. We need more start-ups for more competition and innovation”

, said Dr Fritzi Köhler-Geib, Chief Economist of KfW Group.

“Particularly with a view to takeovers and active participations, one possible approach is to make potential entrepreneurs more familiar with them and establish them as obvious options for starting a business. Improving the visibility of positive examples of successful takeovers can be helpful. Providing better information about financing opportunities for takeovers could also have a positive effect.”

The current study can be downloaded from:

www.kfw.de/fokus

Further information on the KfW Entrepreneurship Monitor can be found at:

www.kfw.de/gruendungsmonitor