Change management

Mittelstand firms are struggling with generational change

Mature businessman in office hitting colleague with boxing toy
Handing over. Source: Getty

Germany’s vaunted Mittelstand has the blues, as a generation of founders and managers nears retirement. These firms, defined as family-owned and employing no more than 500 staff, were already in for a hard year. They need to prepare for new European laws on data-protection taking effect on May 25, and for new online procurement standards with their contractors, to be rolled out in October. Because many of the bosses in the founding generation are getting old, however, the most vexed problem remains how to assure an orderly succession.

According to development bank KfW, around 236,000 Mittelstand companies will be looking for a successor by the end of 2019. Yet hardly any of the current owners and bosses want to look outside the family. More than half of all senior managers, 54 percent, want to see the transfer of ownership go to someone within the clan, according to a KfW. Another 25 percent consider employees or a co-owner, and 42 percent consider an outside buyer.

However, more often than not, there is no suitable or available successor in Germany’s entrepreneurial families. “For some time now, we have observed that family members are increasingly unwilling or unable to assume corporate responsibility. Not least because entrepreneurial children usually experience directly every day how the company dominates their parents’ everyday life,” says Rosemarie Kay, deputy managing director of the German Institute for Mittelstand Research, or IfM. Growing up with stressed Mittelstand parents, the children want to do something else with their lives.

Many older owners’ valuation expectations are too high.

Finding an outside management team or founder to take over the business is a  considerable challenge, said Jörg Zeuner, head economist at KfW. Selling the firm also tends to lead to disappointment. “Many older owners’ valuation expectations are too high,” said Andrej Kirschke of consulting firm Argonas Corporate Finance. Flipping the family heirloom at bargain prices can be traumatic. Mr. Kirschke has also found that if family entrepreneurs sell their company, they are often so emotionally attached that “passing it on to a stranger feels like a funeral.”

That explains why in the end only 29 percent of Mittelstand companies end up choosing a successor outside of the family, with 18 percent choosing employees who take the helm. But that solution also tends to lead to misery. “Here it is less about the purchase price, but the sting of switching from a senior role to a junior one” on the part of the retiring boss, said Christoph Reiter, head of consultant firm Reiter AG.

 

Jürgen Hoffmann writes for Handelsblatt on financial issues. To contact the author: gastautor@handelsblatt.com

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