3 June 2024

The Ticking Time Bomb: Germany's Mittelstand Succession Crisis

Germany's Mittelstand, the backbone of its economy, faces a critical succession crisis.

Written by Felix Engelhardt, CFA

The Ticking Time Bomb: Germany's Mittelstand Succession Crisis

Germany's Mittelstand, often hailed as the backbone of the nation's economy, is facing a looming crisis that threatens its very foundation. This crisis is not one of market competition or technological disruption, but rather a generational shift that could see many of these small and medium-sized enterprises (SMEs) struggle to survive. The issue at hand is the succession crisis, where a significant number of business owners are approaching retirement age without clear plans for who will take over their businesses.

The Importance of the Mittelstand

The Mittelstand is a term used to describe the small and medium-sized enterprises (SME) that form the core of Germany's economy. These businesses are characterized by their family ownership, long-term focus, and significant contributions to employment and innovation. According to the Federation of German Industries (BDI), the Mittelstand accounts for the largest share of the country's economic output, employing about 60 percent of all workers and providing crucial training opportunities. These companies are often deeply rooted in their local communities, contributing to both the economic and social fabric of the nation.

The Succession Crisis

A report by the Financial Times, cited by Business Insider, highlights the severity of the succession crisis. Over the next five years, the heads of approximately 840,000 businesses are set to retire, necessitating the need for successors. This generational gap is particularly pronounced in family-owned businesses, where the current owners are often well over 55 years old. The KERN study confirms that 51% of all company leaders are already older than 55, and this number is expected to rise, affecting over 1.5 million jobs in Germany.

Demographic Shifts

The aging population is a primary driver of the succession crisis. A significant number of business owners are over 60, and the pool of younger entrepreneurs is insufficient to fill the gap. KfW's research indicates that by the end of 2026, about 560,000 businesses will be seeking successors, with 190,000 planning to exit the market without a succession plan.

Lack of Prepared Successors

Many SMEs are family-owned, and the traditional approach has been to pass the business to the next generation. However, fewer young family members are willing or prepared to take over. A survey by the ifo Institute found that 42% of family businesses do not have a management successor lined up from within the family. This reluctance is often due to differing career aspirations and the perceived burden of running a family business.

Economic and Technological Challenges

In addition to demographic issues, Mittelstand companies face economic and technological challenges. Many are underinvesting in digital technologies, which is crucial for maintaining competitiveness in the modern market. The need for modernization adds another layer of complexity to the succession process.

Impact on the Economy

The potential impact of this succession crisis on the German economy cannot be overstated. The Mittelstand is not just a collection of businesses; it is a critical driver of innovation and economic stability. These companies are often leaders in their respective niches, known for their high-quality products and services. A failure to successfully transition these businesses to the next generation could lead to closures, loss of jobs, and a decline in economic output.

The Ticking Time Bomb: Germany's Mittelstand Succession Crisis

Solutions and Strategies

Addressing this crisis requires a multi-faceted approach. The German government and business associations are already taking steps to mitigate the impact. The Federal Ministry for Economic Affairs and Energy (BMWi) has emphasized the need for policies that support the competitiveness and resilience of the Mittelstand. This includes promoting digitalization, attracting qualified professionals, and creating an environment conducive to long-term business growth.
Moreover, there is a call for a new era of entrepreneurship in Germany. Encouraging young people to start their own businesses and providing them with the necessary support and resources can help bridge the generational gap. Professional preparation and sufficient time for succession planning are crucial to ensure a smooth transition.

The Role of Mergers and Acquisitions (M&A)

Mergers and acquisitions (M&A) play a key role in addressing the succession crisis in the Mittelstand. M&A firms offer specialized services that enable and facilitate the succession process. Ensuring a seamless transition of leadership and ownership is crucial for the continued success and growth of any company and thus SME’s. M&A firms provide comprehensive advisory services that cover all aspects of the transaction, from initial planning to final execution. Here are the top benefits you will receive:

  1. Expert Guidance: M&A specialists bring extensive experience and expertise to the table, helping Mittelstand companies navigate the complex process of succession. They provide strategic planning services, helping business owners understand their succession options, current market position, future growth potential, finding the right successor and guide the whole process financially and legally to the end. This strategic roadmap is essential for a smooth transition in this highly complex transaction, ensuring the company’s legacy and market position are preserved.
  2. Finding the Right Successor: One of the most challenging aspects of succession is finding the right buyer or successor who aligns with the company’s values and vision. This is crucial for maintaining employee morale and preserving the company's legacy. M&A firms leverage their extensive networks and industry contacts to identify potential buyers or partners that enhance the company's competitive edge. For instance, a strategic merger with a company that has complementary strengths can lead to synergies and improved market positioning.
  3. Negotiations: M&A experts bring extensive market knowledge, analytical expertise, negotiation skills, and strong relationship management to the table. Their ability to provide an objective mediation ensures that the negotiation process is smooth and efficient. Mostly important their knowledge about comparable transactions, tactics and strategies that work best in different situations, make them experts in price negotiations. This comprehensive support is crucial for the success of any M&A transaction.
  4. Safe Process: M&A transactions are complex, involving multiple legal, financial, and operational considerations. M&A firms offer a structured approach to succession planning, ensuring that all legal, financial, and operational aspects are carefully handled, safe, secure and confidential. They conduct due diligence to ensure the potential candidates are financially capable and strategically suited to take the business forward. This reduces risks and disruptions to ensure a smooth transition.
  5. Access to Capital: For companies looking to expand or diversify, M&A can provide access to additional capital. This is particularly beneficial for businesses that need to invest in new technologies or enter new markets.
  6. Higher Succession Success Rate: Companies that engage in M&A activities often experience a higher success rate in succession planning. This is because M&A firms help in systematically planning for leadership continuity, ensuring that the most qualified candidates are placed in key positions, and maintaining a balance between business strategy implementation and minimizing disruptions.

Conclusion

The succession crisis in Germany's Mittelstand is a ticking time bomb that requires immediate attention. The future of these businesses, and by extension the German economy, depends on finding effective solutions to this generational challenge. By fostering a new generation of entrepreneurs and implementing supportive policies, Germany can ensure that its SMEs continues to thrive and contribute to the nation's prosperity.
Mergers and acquisitions offer a viable solution to the succession crisis, providing Mittelstand companies with the expertise, structure, and resources needed to ensure a successful transition. With the right strategies in place, there is hope that these businesses will navigate the succession crisis successfully, securing their legacy for future generations.

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