Do family business owners manage their companies differently in the run-up to a sale or the handover to a successor? How do companies change after a sale? And what should the succession process look like? The IfM Bonn explored these and other questions in a major study.
The study was based on an annual survey of approximately 16,000 companies conducted as part of the Business Panel of the Institute for Employment Research (IAB). In 2012, information on business succession was also collected as part of this survey.
In the survey year, 7.9 percent of the approximately 129,000 firms with at least one employee subject to social security contributions expected a business succession to take place in the “foreseeable future.”
About two-thirds of these planned successions are in micro-enterprises with up to nine employees subject to social insurance contributions. Just under one-third of the remaining planned business successions are in small enterprises with 10 to 49 employees, and 3.3 percent are in medium-sized and large enterprises. Notably, small businesses plan a succession more than twice as often as would be expected given their prevalence in the German economy. Researchers at the IfM attribute this to a lower likelihood of being acquired.
By no means has every owner of a business ready for transfer already decided on the type of succession. About one-sixth were still considering their options at the time of the survey. Among those who have made up their minds, the majority are aiming for succession within the family. More than a quarter plan to sell the business. Only one in ten current owners plans to either hire an outside manager or lease the business. This means that management of the business is transferred, but not ownership. The smallest share consists of those who do not intend to continue the business after succession (4 percent).
Another finding of the study: Before the handover, revenue declines, while the number of employees remains constant. A change in ownership, on the other hand, does not affect revenue; however, the number of employees increases on average. The number of employees climbs steadily, particularly in the first three years following the change in ownership. According to the study, over the entire five-year period examined, the proportion of companies hiring employees exceeds the proportion of companies experiencing employee departures.
How do former owners behave in the case of succession within the family? Surprisingly, they increasingly reduce capital expenditures—the closer the handover date approaches. The researchers attribute this finding to investment projects that typically take longer to complete. In addition, immediately after the handover, the new owners would promptly make up for any neglected investments. On average, investments in the first five years following the change in ownership are highest in the year of the handover itself and then decline significantly over time. This applies in particular to the modernization of technical equipment. Another finding regarding a handover to a successor within the family: employee continuing education and training is scaled back. In contrast, the areas of training, innovation, and operational reorganization remain unchanged.
The situation is different when the previous owners want to sell their company. Spending on research and development declines, and operational reorganization measures become less frequent. The study’s authors explain this by noting that sellers cannot be certain whether their measures will be financially rewarded by the buyer. It is, therefore, simply a rational economic behavior on the part of the sellers.
