KfW’s status report on SME succession: Coronavirus crisis has foiled many SMEs’ plans for the future

• Amid pandemic-induced problems, succession planning has faded into the background
• 260,000 enterprises are planning their succession for the next two years
• The more the coronavirus crisis drags on, the greater the risk of business closures instead of successful transfers
• Coronavirus crisis has exacerbated the shortage of start-ups

In the coronavirus year 2020, Germany’s SMEs are suddenly confronted with existential challenges and putting their plans for the future on the backburner – including transferring management to the next generation. For the first time, KfW’s status report on SME succession shows that in 2020 more than half of small and medium-sized enterprises (51%) have no clarity as to whether and when to transfer business operations to a successor. In previous years significantly fewer SMEs – 41% to 45% – had no clear succession plans.

This year, 33% of the 3.9 million SMEs in Germany have succession plans (previous year: 37%). A further 16% (18%) are planning to shut down. At least in a comparison between annual data from 2019 and 2020, there is no clear evidence of a shift from succession to closure due to the coronavirus crisis, as the rates of decline are relatively similar. However, a detailed analysis provides indications that the risk of permanent closures increases the more the crisis drags on. The data after the lockdown from April shows not just an increase in uncertainty but also a shift from succession to closure plans compared with the sample from February/March. The shares of businesses with succession plans fell from 39% to 31%, while the proportion of potential closures rose from 14% to 17%. This trend towards closures is a snapshot taken on a limited data basis. Nevertheless, this pattern is likely to become more entrenched the longer the pandemic-induced downturn and turnover weakness continues.

But even if the likelihood of closures is set to increase as a result of the crisis, the current KfW status report on SMEs succession paints a predominantly positive picture in light of the current economic environment. For one thing, entrepreneurs whose departure is imminent at least remain committed to their transition plans. SMEs with a slightly longer timeframe are more likely to be putting their plans on hold. For another, succession processes already initiated remain well on track so far. Negotiations have been completed for half of the 260,000 transfers planned for the next two years, and they are ongoing for a further one third. These are top scores in KfW’s status reports on succession, and they are also attributable to good preparations in the lead-up to the coronavirus crisis.

However, the coronavirus crisis has exacerbated one fundamental problem of company succession. There is already a shortage of successors due to unfavourable demographics and lack of entrepreneurial spirit. According to the KfW Entrepreneurship Monitor, the number of takeover start-ups has already stagnated for quite some time at around 70,000 per year (2019: 67,000). Moreover, preliminary data from the current survey of the KfW Entrepreneurship Monitor give cause for concern that takeover start-ups have declined in the crisis year 2020. Takeover entrepreneurs have an above-average need for finance and are particularly susceptible to the potential risks of founding a business. Besides, they are more likely to be concerned that running a business is hard on their family life.

“So far, most small and medium-sized enterprises are likely to have stuck to their succession plans despite the coronavirus crisis, as SMEs entered the crisis well-prepared. But the more the crisis drags on, the higher the risk of closure instead of orderly succession. Successful generational transition in the SME sector clearly depends on the severity and progression of the coronavirus crisis”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “For example, putting plans for medium-term succession off for too long would diminish the chances of success. Successful business transition requires several years of planning. And even well advanced negotiations – with the finish line in plain sight – can fail if the overall environment changes dramatically.

“It is therefore essential for enterprises to be released as quickly as possible from having to deal (only) with securing their immediate survival and to be able to return to important issues of the future. The current advances in vaccine development are also very important for business succession because an economic recovery allows companies to shift their focus back on making transfer arrangements. In the meantime, government assistance that secures continued liquidity for small and medium-sized enterprises while signalling political determination on the way out of the crisis is a key building block. The second building block consists in activating and supporting potential takeover entrepreneurs. After all, the combination of unfavourable demographics and diminishing entrepreneurial spirit means that the demand for successors will outstrip the supply for years to come.”

KfW’s current status report on SME succession can be downloaded from:
www.kfw.de/fokus (available in German only).

An example of business succession in the coronavirus year 2020 can be found here: www.kfw.de/stories/wirtschaft/gruenden/hoffmann/