Growing older does not necessarily mean gaining wisdom. This is shown by this year’s analysis of the structure and development of small and medium-sized enterprises (SMEs) in Germany by the KfW Banking Group, known as the KfW SME Panel 2016. Older owners of small and medium-sized enterprises are significantly more reluctant to make investments than younger owners—thereby jeopardizing the success of their companies.
Last year, 61 percent of owners under the age of 40 made investments, but only 34 percent of owners over the age of 60 did so. What’s more: “For several years now, older business owners have been increasingly reluctant to invest any money at all,” write the authors of the study. This increases the risk that these companies will lose competitiveness and see their value erode. Applied to one’s own car, this would mean that this group would drive their tires longer than is sensible.
In terms of the business landscape: New investments exceed depreciation only for 23 percent of SME owners. The difference compared to younger owners is striking: In 47 percent of cases, the younger owners generate positive net investments for their companies. Furthermore, the proportion of small and medium-sized enterprises making so-called expansion investments—that is, investments in fixed assets such as land intended to facilitate growth—is noticeably higher among younger business owners.
The study’s authors attribute the hesitation among older owners to uncertainty about whether a potential successor would value the return on an investment as highly as they do—and whether this is factored into the purchase price. In addition, many older owners are reluctant to enter into long-term financial commitments through an investment.
A reversal of this trend is not in sight. On the contrary: business owners are aging at an ever-faster rate. Last year, 40 percent of all business owners were already 55 years old or older. By way of comparison, this represents a doubling of that proportion over the past twelve years. There is hardly any influx of younger managing partners. In 2015, 23 percent of owners were under 45 years old. By comparison, that figure was 48 percent in 2002. The average age of SME owners, at around 52, is at a record high.
At the same time, the total number of new business founders has declined sharply since the turn of the millennium. While there were still 1.5 million new founders in 2001, that number had fallen to just 763,000 last year. About one-third of these are founders taking over existing businesses or acquiring stakes in them.
The crux of the matter: There is a massive imbalance between companies for sale and founders looking to take over a business. About 15 percent of all small and medium-sized enterprises will be up for sale or planning a succession transition by 2019. In absolute terms, this means that up to 600,000 companies are looking for a successor.
Still, the KfW Banking Group’s study on German SMEs also has some positive news to report. On average, SMEs as a whole were able to increase their revenue by 3.3 percent last year compared to the previous year. The average return on sales rose slightly by 0.3 percentage points to 7.3 percent today. In 2015, only 8 percent of SMEs had a negative return on sales—a decline of four percentage points compared to 2014. By comparison, in 2009, 16 percent of all SMEs were still operating at a loss.
