Press Release from 2015-03-23 / Group
Ageing in SMEs is putting a damper on investments
- German SMEs are falling victim to demographics
- One third of SME owners is older than 55
- Older entrepreneurs make far fewer investments
- This erodes company assets and curbs growth
Demographic change is having a major impact on German SMEs. The owners of 1.3 million small and medium-sized enterprises (SMEs) – around one third of all SMEs in Germany – are aged 55 or above. As a current representative analysis conducted by KfW Research and based on the KfW SME Panel shows, the proportion of this age group in SMEs has increased four times as much since the year 2002 as it has in the general population (+16 percentage points as opposed to +4 percentage points). At the same time, in spite of the number of start-ups (including successors) rising slightly, there is simply a lack of sufficient future entrepreneurs.
The accelerated ageing process in SMEs has a negative impact on the economy as a whole, since business owners become far less willing to invest as they grow older. According to KfW’s analysis, only around every third entrepreneur over the age of 60 is still willing to make investments. The rest, meanwhile, are pulling out of developing their companies further. Not only is this jeopardising future corporate success; it is slowing down modernisation and reducing overall economic growth too. If competitiveness deteriorates, jobs are often put at risk.
Recent findings put the average age of a CEO of a small or medium-sized company at 51 years old (as opposed to 45 years old in 2002). Virtually all sectors are affected by this rapidly advancing ageing process. Small and medium-sized companies in the manufacturing industry, where business owners have an average age of 54, are falling victim to demographic change particularly swiftly. Irrespective of which branch of industry they operate in, large SMEs tend to have older owners. In large companies with more than 50 employees, the owner’s average age is 53.
As illustrated by the current KfW analysis of corporate investment between 2004 and 2013, there is no doubt that there is a definite correlation between the owner’s age and their willingness to invest, with 57% of companies whose CEOs are aged 40 or under making investments. The proportion of investors decreases drastically as the entrepreneur age rises. Indeed, only 37% of company owners aged over 60 invest in their companies.
Findings also show that the type of investment entrepreneurs make changes as they grow older. Indeed, it is less common to see them entering into high-risk projects and those that tie up capital; the investments they continue to make mainly serve to maintain capital stock levels. This lower propensity to invest has severe consequences in terms of corporate substance. Indeed, in eight out of ten SMEs with older owners, capital stock depreciation exceeds new investment volumes.
One key cause of older entrepreneurs being less willing to make investments is their short and risk-adverse planning horizon. The closer that business owners get to retirement age, they view many projects as taking too long to pay off. This is even more true of all future investments that tie up financial resources in the long term – but also strengthen competition, too.
“German SMEs are ageing very quickly,” says Dr Jörg Zeuner, Chief Economist at KfW. “Because older CEOs make far fewer investments, many SMEs face the very real threat of becoming less competitive and less appealing to new customers. This devalues companies, which owners have often devoted their entire working lives to.” He believes that this risk should also be mitigated in the interest of secure and modern jobs. Dr Zeuner goes on to add: "We should be discussing how we can preserve entrepreneurial spirit even as we age. One thing that might be worthwhile considering would be a former owner, after retiring from the company, still participating in the return of an investment made during their late phase. More entrepreneurs and early clarification with regard to succession would be another, key step towards preserving the dynamism of SMEs.”