KfW’s status report on SME succession: Succession plans picked up in 2021 after coronavirus delays

• 230,000 SMEs plan to transfer their business to a new owner by the end of 2022
• Preference for succession within the family has grown in the coronavirus crisis
• Low entrepreneurship rates have led to a structural succession gap

Succession management is now moving higher on the agenda again, after many businesses were forced to shift their focus on immediate crisis management and defer their plans for the future in the coronavirus year 2020. A special survey recently conducted by KfW Research on the basis of the representative KfW SME Panel 2021 shows that coronavirus-induced delays appear to be over. Some 230,000 of the 3.8 million SMEs plan to transfer business operations to new management in the short term, that is, by the end of 2022. What is encouraging is that three fourths or 170,000 of these businesses have already reached agreement with succession candidates or are in negotiations. Therefore, their chances of realising their succession plans on schedule are good.

Overall, 39% of SMEs were generally involved with succession planning in 2021. That share was a mere 33% in the previous year. The demographic trend alone means that the search for successors in the SME sector will gain importance in the years ahead. The number of older business owner-managers is growing continuously. Today 28% of them are aged 60 and over – that is well over one million.

The new analysis by KfW Research shows that in the medium term, that is, within five years, 600,000 businesses are scheduled to be handed over to a successor, or an average of around 120,000 each year. The KfW Entrepreneurship Monitor shows, however, that on average over the past five years only 60,000 businesses – half as many – were in fact taken over. In the crisis year 2020 that number even dropped to 46,000 – in step with overall entrepreneurial activity.

A rebirth of the family appears to emerge during times of crisis. Not just the share of realised intra-family business transfers has grown of late (46% in 2020 vs. 34% in 2019). Preferences also shifted among SMEs in search of successors in the course of the coronavirus crisis in 2020 and 2021. Before the crisis, 45% of entrepreneurs considered handing their company over to a family member. That share even jumped to 61% in 2020 and was still on a much higher level of 54% in 2021. Family succession is thus clearly the preferred mode of succession. A transfer to business employees is also being mentioned more often than average (35%). Only 41% continue to favour an external transfer or sale. It must be noted that intra-family succession arrangements are prepared much better with a view to the next five years than external succession considerations. Succession is then five times more likely to be already– or almost – taken care of.

“The approaching retirement of the baby boomer generation will leave executive floors empty in many SMEs. Demand for successors will grow”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “However, there is a large structural succession gap resulting from past low birth rates and currently muted entrepreneurial spirit. It will therefore become increasingly important to plan early and consider multiple modes of succession – handing the business over to a family member or selling it to employees or an external buyer. Otherwise there is reason to fear that unwanted business closures will increase noticeably.”

Unfulfilled succession plans and closures form part of the overall picture already. Around 12% of businesses (27,000) that are planning to complete their succession by the end of 2022 must be prepared for their succession plans to fail on the desired date. Their owner-managers have either not even started the process or have merely collected information.

KfW’s current status report on SME succession can be downloaded from:
www.kfw.de/fokus.

The dataset:
KfW’s status report on SME succession is based on the KfW SME Panel and the KfW Entrepreneurship Monitor. Both provide a representative database of small and medium-sized enterprises and entrepreneurial activity in Germany. The KfW SME Panel (KfW-Mittelstandspanel) has been conducted since 2003 as a tracking survey of small and medium-sized enterprises in Germany. The basic population of the KfW SME Panel includes all private-sector companies from all industries with annual turnovers of up to EUR 500 million. With a database of up to 15,000 companies a year, the KfW SME Panel is the only representative survey of the German SME sector, making it the most important source of data on issues relevant to the SME sector. The current analyses of KfW’s status report on SME succession are based on data from approx. 4,600 businesses that participated in the most recent 19th wave of the KfW SME Panel for the first time (survey period 15 February to 25 June 2021). The KfW Entrepreneurship Monitor is based on information provided by 50,000 randomly selected persons domiciled in Germany. They are interviewed by telephone on an annual basis as part of a representative survey of the population (the wave analysed here was surveyed in the second half of 2020). It covers a broad range of start-ups: full-time and part-time entrepreneurs, self-employed professionals and business owners, newly founded businesses and takeovers, etc. The KfW Entrepreneurship Monitor thus provides a representative picture of all entrepreneurial activity in Germany.