Just how urgent is this issue, anyway?
Well, quite urgent! Are you familiar with the age pyramid in Germany? Yes, here we are!
Of the more than 3.3 million family businesses in Germany, only 770,000 are even eligible for a takeover! What does “eligible for a takeover” even mean? It means that only about 1⁄4 of all family businesses have the potential to be handed over or sold because they earn more than the owner’s salary!
Of those, 190,000 business owners are at an age where they should be handing over the reins!
What could possibly go wrong with business succession?
Well, for starters, the business owners have to be willing to even address the issue.
One of my clients is almost 80 years old. He works seven days a week—not on the business, but rather in the business. He doesn’t have an email address or a computer. He has enough wealth; he could stop working at any time without financial worry.
Why doesn’t he do it? He’d fall into a void because he has virtually no hobbies. The company is his life. He knows full well that, given his age, he needs to address this. But letting go is really hard for him!
What are some possible solutions?
First and foremost, as a consultant, you absolutely must have a frank and honest conversation with the entrepreneur: Either he hands over the company, or the business will close for good if anything happens to him!
Furthermore, we should present alternatives to these entrepreneurs, who have, after all, successfully run a company for a long time. A good entrepreneur can still inspire many young entrepreneurs with his experience and knowledge, and his wealth of experience can be both inspiring and invaluable!
We’re now trying to work out the succession plan with a technical managing director from the family and a controller/commercial director.
What mistakes can be made when an entrepreneur wants to hand the business over to their children?
Well, plenty:
• The entrepreneur may formally hand over the business or bring the child into management, but continues to work as if there were no successor (see above, under “Letting Go”). At one client company, the son and daughter had already been with the firm for two years, but the daughter, for example, didn’t even have power of attorney over the accounts, even though she was practically the commercial director!
• The child isn’t cut out to be an entrepreneur or isn’t being groomed for it: Generally speaking, our schools and colleges don’t train people to be good entrepreneurs. They’re trained to be good engineers, business administrators, tradespeople, etc.—but not entrepreneurs.
Being an entrepreneur is also a mindset. A child who has long stood in the shadow of an overpowering father or mother will simply struggle with the right mindset.
• The child (finally) takes over the business—and then tries to do everything differently than their father or mother—and fails as a result. At a bakery, for example, the son wanted to radically switch all the bread to sourdough, which I forbade him to do. He made the switch gradually, and it worked out very well!
• The owner wants to set the price for their business too high, a price that the children, as successors, cannot generate from the profits and, in the worst case, cannot repay their loan.
• Employees still view the founder as the boss, or have a hard time adapting to new methods and leadership styles because they’ve been with the company for so long (“Isn’t that how we’ve always done it?”)
Are there alternatives to handing the business over to the children? Yes, of course there are!
Option 1: One or more employees of the company are able and willing to take over the business. However, the problems may be the same as those described above.
2. What other options are there? Well, selling the business!
- There are strategic investors—that is, companies within the same industry—meaning one family-owned business can acquire another. This is exactly what happened with a client company that’s well-known throughout Augsburg. The owner was 82, but a true entrepreneur (he ran the company two days a week, generating several million in annual revenue with 25 employees). It was acquired by a larger family-owned business that specifically targets such companies for acquisition—and so far, no one has noticed any negative changes!
- There are founders ( known in the jargon as MBIs, or Management Buy-Ins) who want to buy a company. These individuals often hold management positions in large corporations and now want to take the leap into self-employment. Some of them, however, fail because of financing issues (which is why our first question is always about the amount of collateral for the subsidized loan) or because they’re not used to rolling up their sleeves and doing small tasks themselves instead of delegating them.
- And then there are financial investors! What, aren’t those the “locusts” who suck the companies dry and then spit them out after three years? Well, that’s what I thought, too, before I started my own business. In the 2000s, I worked at a successful company in the heating industry whose parent company nearly went bankrupt because the owners—a private equity firm—had provided high-interest loans instead of equity capital!
However, there are many “small” investors—such as a father and son—who have raised capital and have enough experience to take over and develop a company. I just sold a very successful family-owned business (the market leader in Germany in its niche) to such an investor.
The collaboration was very respectful and open, and it culminated in a successful sale.
When should a business owner start thinking about succession planning?
Well, generally speaking, sometime in your mid-50s. Many companies (see above) are not yet ready to be handed over or sold. They must first be developed to that point: digitalization, leadership, risk management, controlling, marketing, finding and developing good employees…
So: Get started early! We and many of our colleagues can support you through every phase with a wide range of solutions—whether it’s developing and financing the next generation of leadership or key employees, shaping the company for a successful succession, exploring alternatives if a sale isn’t possible —and in identifying opportunities for the business owner for the time after the company is handed over!
