Successful Business Succession—A Major Challenge in Difficult Times

High Pressure on Succession in Small and Medium-Sized Enterprises – 28 Percent Are Considering Closing Down

The situation regarding business succession in Germany is becoming more difficult. Demographic trends are compounded by a crisis-ridden economic situation and structural obstacles in the local business environment[1].

This is making entrepreneurial activity more difficult. An increasing number of business owners want to sell their businesses or even shut them down. More companies than ever before recently sought advice on this matter from the Chambers of Industry and Commerce (IHKs). For the year 2023, the IHKs reported a total of 8,276 consultations.

This compares to 2,760 individuals who sought advice because they were interested in taking over a business. Thus, in 2023, the number of businesses offered for sale exceeded the number of interested buyers by a factor of three. The situation is particularly tight in the “traditional” succession sectors, where a particularly large number of businesses are awaiting succession: In the hospitality industry, the number of businesses for sale exceeds the number of buyers by more than five times; in retail and the transportation sector, it is four times higher[2].

Twenty-eight percent of former owners who received consulting services are considering closing their businesses. In the previous year, this figure was 25 percent. By extrapolation, this means that over a quarter of a million businesses face closure in the next five years—with significant negative consequences for innovation and entrepreneurship in this country.

Of all the companies that received counseling, only 12 percent cited economic reasons for wanting to transfer ownership. This suggests that many of the companies awaiting succession are, at the very least, not facing existential economic hardship and should actually be attractive to potential successors.

Image: DIHK

Demographics and a shortage of skilled workers are causing problems for companies

Based on more than 48,000 personal contacts in 2023 alone with companies seeking successors and with potential buyers, the Chambers of Industry and Commerce (IHKs) have a wealth of diverse experience. 96 percent of the Chambers of Industry and Commerce view the shortage of successors as the biggest hurdle to continuing business operations (2022: 94 percent). The unfavorable demographic trends in Germany are having an impact. It is particularly between the ages of 18 and 40 that people decide whether they want to and are able to take on entrepreneurial responsibility. Yet these age groups are becoming smaller year by year. At the same time, more and more business owners are reaching retirement age.

Added to this is the growing shortage of skilled workers (72 percent of Chambers of Industry and Commerce, up from 61 percent the previous year). This weakens the market position of businesses up for sale and thus reduces their appeal for succession planning. The shortage of skilled workers also means that well-qualified individuals are increasingly receiving more lucrative offers for salaried positions and are therefore choosing not to pursue entrepreneurship.

Rising Uncertainty

At 59 percent, significantly more Chambers of Industry and Commerce than in the previous year (44 percent) report that uncertainty about the future of business has increased sharply in recent months for the companies they advise.

Furthermore, steadily increasing regulation and foreseeable additional burdens (such as those resulting from the EU Supply Chain Act or EU requirements for sustainability reporting) are increasingly unsettling companies (37 percent of IHK responses, up from 27 percent in 2022).

Time-consuming and costly bureaucratic obligations are dampening the willingness to acquire companies. In the hospitality industry, for example, new owners often have to invest heavily in the acquired building to meet government requirements (e.g., renovations for energy efficiency, fire safety, and building security—which often conflict with other requirements, such as historic preservation, etc.), which can deter potential buyers.

Fifty-one percent of the Chambers of Industry and Commerce (IHKs) report that businesses cannot pass on increased costs—such as those for energy, labor, intermediate inputs, and materials—and that continuing operations could result in sustained losses. Here, too, the problem is becoming more pressing—in 2022, 37 percent of the Chambers of Industry and Commerce cited this obstacle.

A Ray of Hope—More Companies Are Aware of the Challenge

The Chambers of Industry and Commerce see a ray of hope on the part of prospective buyers. Following the difficult COVID-19 period, demand is on the rise again, particularly in the service sectors. Compared to 2019, the pre-crisis year, however, the decline in interest in continuing business operations remains very pronounced.

Another glimmer of hope is that the Chambers of Industry and Commerce are seeing more participants even at widely accessible events such as succession days. It appears that efforts to raise awareness among business owners about the importance of timely preparation for business succession are succeeding.

Policy makers must act: Provide relief to businesses now and improve the framework conditions

For negotiations between sellers and buyers to take place, the business outlook must be favorable—for both parties. However, this outlook is largely weighed down by unfavorable and uncertain economic policy conditions.

At this point, it is up to policymakers to support the economy as a whole and, ultimately, business succession as well. What is needed are reliable economic conditions, greater entrepreneurial freedom through less regulation, competitive tax burdens and energy costs, and less bureaucracy. Last but not least, policymakers also have the power to promote and raise awareness of entrepreneurship as a career option more actively and intensively.

Companies and succession candidates must set the right course

Just as important as a favorable economic policy environment are the decisions that companies and potential successors make themselves. Based on their practical experience, the Chambers of Industry and Commerce (IHKs) have observed the following:

According to the Chambers of Industry and Commerce, 37 percent of retiring owners they advise demand an inflated purchase price, while 29 percent find it difficult to emotionally let go of their business. These two factors are often interrelated. For the outgoing business owners, this is their life’s work, into which they have often invested decades of effort. Many factor these sacrifices into the asking price.

At the time of their IHK consultation, 41 percent of existing business owners had not prepared in a timely manner for business succession. Many put off dealing with this emotionally challenging and tax- and legally-complicated matter.

Countdown to Business Succession – Here’s What the Chambers of Industry and Commerce Recommend:

1. Preparation is everything. About three to ten years before the planned handover, the owner should begin making the business ready for the next generation. Is the product or service offering future-oriented? Are the margins right? Is my production up to date? Do I need to make new investments? Is the company’s organizational structure sound? Do I have the right suppliers and financing partners?

2. Finding a successor. Begin the search for a buyer no later than three years in advance.

3. Handing over the business. Begin the handover process no later than twelve months in advance.

4. “Hour Zero.” After the handover, the conflicting interests of the owner, the family, the successor, and the company must be resolved.

[1] See also the DIHK Economic Survey, Fall 2024.

[2] Detailed figures in the DIHK Report on Business Succession 2024.