Over the past decade, family-owned businesses have created significantly more new jobs than DAX-listed corporations. This is according to a study by the Institute for SME Research at the University of Mannheim, commissioned by the Family Business Foundation. From 2011 to 2020, Germany’s 26 largest family-owned businesses created 837,000 new jobs worldwide, while the 26 DAX-listed companies without a controlling family created just over 390,000.
Furthermore, they have proven to be extremely resilient in times of crisis. Their performance is often above average, and they respond more quickly to industry downturns. A key factor in their success is that the owners feel personally responsible and intervene quickly when difficult times loom. Long-term thinking and a spirit of partnership are hallmarks of family-owned businesses. A look at the succession situation in Germany should therefore give us pause for thought. By 2025, an estimated 465,000 small and medium-sized enterprises are expected to cease operations because owners are reaching retirement age and cannot secure a suitable successor. This is according to the SME Succession Monitoring Report published by the KfW development bank.
Prosperity at Risk?
The main reasons are a lack of interest among descendants in taking over the business, as well as the low economic attractiveness of the respective company. This development—which poses a high risk to the economy—could accelerate even further in the coming years as more and more entrepreneurs reach retirement age. At the same time, fewer and fewer young people are planning to start or take over a business. In addition, an increasing number of younger business leaders are considering a transition to regular salaried employment due to the heavy strain caused by recent crises.
This makes it all the more important for entrepreneurs to thoughtfully plan for succession. Many processes take time. The sheer scope of intra-family considerations alone illustrates the complexity: Successors must be aware that succession requires more than simply meeting the family’s expectations. It’s about the willingness to take over the business and the motivation to become self-employed. It’s important to openly discuss one’s own goals within the owner family to lay the foundation for further succession planning. In addition to clarifying the form of the succession—whether one simply wants to become a managing director or eventually own the company outright—it is important to determine the right timing for the succession process and coordinate this with the family. Even if one has been familiar with the company for a long time, it is essential to scrutinize the corporate strategy, especially in the age of digitalization. It is essential to examine the tax, legal, and financial aspects of the transition, seeking professional guidance if necessary.
Transferring a life’s work to the next generation takes time
Unfortunately, the potential of female successors is particularly often overlooked. German family-owned businesses have very few women in leadership positions. According to a study by the Albright Foundation, the proportion in companies that are entirely family-owned is only 4.8 percent. By comparison, DAX-listed companies have 19.8 percent female board members, and publicly traded companies have 14.3 percent. The situation has hardly changed over the past two years.
Alternatives to Intrafamilial Generational Succession
At the same time, succession within the family is not always the best option for many companies. One of the biggest advantages of selling a company is financial security. Selling the business can yield a substantial sum that can secure the future of the owner family. Disputes among multiple shareholders can be avoided through a clear division of ownership.
Flexibility is another important factor. Families have the opportunity to part ways with their business and reshape their future plans without restrictions.
An external succession plan also offers the opportunity to continue running the business with professional management and experienced executives. This increases the chances of success and gives shareholders greater assurance that their business has a long-term future.
Regardless of which succession solution is being considered, it is recommended to develop a consistent understanding of the company’s value. For an initial assessment, an online business valuation calculator or the use of current industry multiples is usually sufficient. Often, an overly high valuation is a dangerous stumbling block in one’s professional and personal life strategy and in securing succession. Here, too, the value of the business can be specifically increased through timely planning.
Securing Valuable Assets
By addressing the topic of succession early on, you can stay ahead of the curve. In most cases, a brief discussion with a retired entrepreneur you know or a succession specialist (M&A advisor) is enough to get a concrete grasp of the topic. This lays the foundation for sustainably securing your life’s work and planning for life after entrepreneurship.
