Press Release from 2023-03-28 / Group, KfW Research
KfW’s status report on SME succession: Some 100,000 small and medium-sized enterprises look for a successor every year
- Two in three short-term successions are already in the bag
- Shortage of young entrepreneurs continues, creating a succession gap
- Demand will increase as the number of businesses with ageing owners is growing steadily
- Family succession remains the preferred pathway
Year after year, around 100,000 SME owners want to transfer or sell their companies to successors. That is around 5% of all 3.8 million small and medium-sized enterprises in Germany in 2022 and 2023 alone. Around two thirds of short-term successions (up to the end of 2023) have already been agreed, according to KfW’s current status report on SME succession.
This will be an issue of increasing urgency in the coming years, as the number of businesses with ageing owners is growing continuously. Right now, 31% of entrepreneurs are already 60 years old or older. That is around 1.2 million, or roughly three times more than just 20 years ago. Only one in ten business owners is now under the age of 40. Owners looking for a successor will have difficulty finding one even if they work hard, and some will not succeed.
The process of business succession can be bogged down by a range of hurdles or fail altogether. By far the greatest challenge mentioned by business owners is the shortage of suitable successors, which more than three fourths (79%) of SMEs are facing. This is the result of a structural succession gap which is partly due to demographic factors. The baby boomer generation is giving way to a much smaller cohort of younger workers, and there simply are not enough potential business leaders. The succession gap has also resulted from years of low entrepreneurial appetite, which in turn has resulted in low numbers of entrepreneurs. Accordingly, the shortage of interested candidates is mentioned as an obstacle to business succession more than twice as often as the second most frequent hurdle, agreeing on a purchase price (34%). This is followed by bureaucratic red tape (28%), complex legal and tax requirements (24%) and securing finance (14%).
The desire to keep a business in the family generally remains very widespread, with 53% of all SME owners favouring this solution, followed by a sale to a third party (45%) or employees (26%). However, the generally shrinking generation of potential successors and changing career pathways are proving to be a problem for family succession. Thus, the main reason for giving up a business is lack of interest on the part of younger family members. Around 190,000 SME owners plan to leave the market without a succession plan by the end of the year 2026.
“Company succession continues to be a priority topic on the executive floors of Germany’s SMEs, despite the crises of the recent past”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “The wide succession gap means that no matter how hard they try, many businesses will not find a successor. Unplanned business closures will become more common. This will presumably affect one in four succession plans in the near future. A successful handover will increasingly depend on weighing up all options early while considering different pathways.”
KfW’s status report on SME succession is based on the KfW SME Panel. The KfW SME Panel provides a representative database of small and medium-sized enterprises in Germany and has been conducted as a tracking survey of SMEs in Germany since 2003. 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 SMEs. The current analyses of KfW’s status report on SME succession are based on data from approx. 10,796 businesses that participated in the most recent wave of the KfW SME Panel for the first time. The main survey of the 20th wave was conducted in the period from 10 February 2022 to 17 June 2022.