Unfree Enterprise

Small Business, Big Problems

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Germany - a land of many busy bees or in this case, family-owned businesses.
  • Why it matters

    Why it matters

    If the German government lowered the tax and bureacratic burden on small- and mid-sized family businesses, Europe’s largest economy could grow much faster.

  • Facts

    Facts

    • Costly social programs passed this year by the German government are hurting small and mid-sized businesses.
    • More than 90 percent of businesses in Germany are family-owned, and together they generate nearly half of its economic growth.
    • Fifty-five percent of Germany’s workforce are employed at family owned companies.
  • Audio

    Audio

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Germany is by far the most important player in the European economy.

But who is the most important player in the German economy?

Typical German brands come to mind: Volkswagen and Audi (known in part by its old “Fahrvergnügen” global advertising campaign), Siemens or, back to the roots of Germany’s industrial age, Thyssen-Krupp, the steelmaker?

No, none of the above.

The correct answer: Family businesses. These are the backbone of the German economy. More than 90 per cent of all 3.5 million businesses in Germany are family-owned. The majority of them are actually still run by at least one family member.

A look at the share of German employees working for family businesses underscores this impressive role. Fifty-five percent of the German workforce are employed at companies that are family-owned. Family businesses generate almost half ― 47 per cent, to be exact ― of the German GDP.

The significance of German family businesses has a number of historic causes. The main one can be traced to the country’s economic history: German industry never went down the road of complete de-industrialization, and companies of every size recognized the need for specialization to remain competitive internationally.

Owners of family businesses are directly financially liable with their personal assets for their entrepreneurial decisions.

To understand this phenomenon, it has to be emphasized that being a family business is not a matter of size but of liability.

Family businesses must not be confused with the term small- and medium-sized enterprises, or so-called SMEs. Family businesses in Germany cover all sectors and a wide spectrum of business sizes.

At first glance, a local crafts enterprise with 10 employees, and Miele, the maker of high-quality washing machines and other appliances with €3.2 billion turnover and more than 17,000 employees worldwide, might not appear to have a lot in common.

But each would consider their respective company a family business ― and rightly so.

The concept of family businesses is defined first and foremost by a special mind-set dominated by the principle of liability.

Family entrepreneurs act very differently to traditional corporate managers.

Owners of family businesses are directly financially liable with their personal assets for their entrepreneurial decisions. They have a long-term perspective rather than being driven by the need to present optimal figures every quarter.

The blending of business decisions and personal liability is just one important quality of family businesses. These businesses are also hugely important for the regions they operate in.

Older companies especially are very deeply rooted in local structures that have often evolved over generations. The interconnectivity between a family-run company and local community is extremely high.

So most family businesses are still operating in the same location where they were founded generations ago.

Most family businesses tend to avoid bank financing more than any other types of businesses.

The deep roots of family businesses in their geographic regions are also the reason why this type of business is very directly affected by political decisions.

Family businesses cannot, and do not, want to leave the country and relocate their firms ― although they probably wish they could given how painful the current right-left ruling federal coalition in Germany is for them.

The first months of the coalition of Conservatives and Social Democrats, which was elected in September 2013, saw the adoption of one anti-business law after another.

Considering this background, it is no surprise that in Germany 85 per cent of all business successions ― where the ownership of companies change hands ― take place within a family while only a small percentage are sold to employees or external buyers.

This highlights another special feature of German family businesses: their urge to remain independent ― personally as well as financially. 

Their higher-than-average equity ratio gives them the freedom to react quickly and independently of market developments. Not surprisingly, German family businesses have proven extremely robust and resilient during the European debt crisis, especially when the crisis peaked locally in 2009.

Although most family businesses have good relations with their banks, they tend to avoid bank financing. The concept of German family-owned businesses cannot easily be transferred to other economies, but the idea of long-term thinking, solid financial planning and independence from banks very well could.

Had the government pushed through fewer measures regarding pensions, the minimum wage and renewable energy, the economy would have remained more competitive.

It could also be transferred at the political level. Had the government pushed through fewer measures such as the expensive pension reform that lowered the retirement age to 63, the new €8.50-per-hour federal minimum wage and the reform of the Renewable Energy Law, the German economy would certainly have remained more competitive and continued on its stable path of growth.

Yet the political measures listed above have hurt the economy as a whole: An unstable social security system, a restrictive labor market and rising energy costs on businesses and their employees are the consequence of these misdirected and often ideological policies.

Core tasks such as improving the country’s infrastructure or reacting to demographic changes were not tackled – although these are some of the most pressing issues. The idea of thinking in terms of generations not weeks is part of the DNA of family businesses ― yet it is often missing in the political debate.

 

To contact the author: praesident@familienunternehmer.eu

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