Changing of the guard in the German SME sector:

580,000 companies to be passed on by 2017

• Succession plans for one in six companies
• Family solutions slightly more popular
• Ageing leads to reduced investment and innovation
• Lack of up-and-coming entrepreneurs

The German SME sector is facing a significant changing of the guard. More than a third of the owners of German SMEs are aged 55 or over. The approach of retirement age raises the question of how their companies will continue to operate. As KfW Research has now found out for the first time on the basis of the representative KfW SME Panel, the bosses of around 580,000 SMEs are planning to hand over or sell their companies to a successor by 2017. That equates to one in six German SMEs. Roughly four million jobs depend on the success of these corporate handovers.

There is a slight preference for solutions within the family when planning succession. According to KfW Research, 9% of SMEs are currently looking to organise succession within the family, with 7% of current owners looking for external solutions. These include selling to an employee, another company or a financial investor. The imminent changing of the guard is affecting all sections of the SME sector. Handover plans are particularly common in the Other manufacturing industry, e.g. companies in the food or woodworking industries, as well as manufacturers of metal products.

Going forward, succession planning is likely to remain a priority issue in the management echelons of the SME sector where the effects of demographic change are accelerated. Since 2002, the proportion of business owners over the age of 55 has risen by 16 percentage points to 36%, while in the population at large this age group has only grown by four percentage points to 38%. However, the ageing of business owners has an effect even before succession planning starts. By that time, the ageing process has already been having a significant impact for some years: according to an analysis conducted by KfW, bosses scale back both investment and innovation as they age. By the time they are over the age of 60, only 37% still invest and just 38% introduce innovations. For the purpose of comparison, these figures are 57% and 46% respectively for bosses under the age of 40.

The scaling back of investment and innovation becomes even more pronounced if there is no suitable or interested internal successor. Companies stop evolving and become less competitive – the value of the company falls, and its chances of succeeding on the market decline. In the case of handover planning within families, on the other hand, investment activity is noticeably higher.

"Demographic change will significantly impact the ability of German SMEs to compete in the medium term by hampering both investment and innovation" said Dr Jörg Zeuner. "We have to respond and create incentives now in order to mitigate the long-term consequences!" One option would be to stimulate the willingness of older business owners to invest, for example by allowing them to participate in the returns from their investment even after they have retired. "As a rule it is important for a business owner to plan succession early. However, we see a critical bottleneck approaching when it comes to external succession. Germany lacks up-and-coming entrepreneurs. One key measure would be to reinforce efforts to teach economics and business skills. We also have to make it easier to start a company in order to mobilise the available potential," Zeuner continued.

You can access the full study by KfW Research on the subject of "Demographic change in the SME sector" and other press materials (including videos, photos, diagrams etc.) at

www.kfw.de/demografie.