According to a recent study by KfW Research, around 560,000 companies face succession in management and ownership by the end of 2026. Yet a third of these companies plan to leave the market without a successor. That high figure is no surprise. Succession has become a major challenge in many mid sized companies.
Whether, for example ...
... because there is no potential successor within the company's own ranks and none can be found,
... because the company is not ready for handover, in other words not attractive to potential successors, or because succession cannot be realised,
... because the succession process was tackled too late,
... or because the person interested in taking over has difficulties with financing.
The challenges are wide ranging and run right through the mid market. Overall the number of people interested in taking over has fallen considerably. That is partly demographic, and partly because interest in entrepreneurship has been declining for years. On top of that, the current economically unstable situation and the many crises make succession harder. Companies in crisis mode, occupied with securing their existence, invest little time in looking after their own succession processes.
It is a central entrepreneurial task to tackle succession with a clear strategy and a sufficient time frame. That significantly improves the prospects of a succession arrangement that is successful and satisfying for both the entrepreneur and the company.
The right moment to develop a succession concept: now.
Succession cannot be planned early enough. Ideally the topic accompanies the company from the very beginning. But at least three to five years should be allowed for the handover. Succession and handover processes are complex, on a commercial, legal, tax and emotional level. The last of these applies above all to succession in family businesses.
Creating clarity, offering prospects: succession within the family
Succession in family businesses is often a multi layered process: the triad of entrepreneurial family, family business and ownership presents many hurdles in the succession process. These can be unclear or differing expectations among family members, questions of fairness in the distribution between children, or missing clear objectives for the handover. That is why succession processes have a strongly emotional component. Handing over a company always means saying goodbye to your own life's work. The senior generation has to be able to let go. And the junior generation has to be ready to take on responsibility and lead the company into the future confidently and independently. Preparing for that role takes sufficient lead time.
Once a successor has been identified within the company's own ranks, what matters is developing their competences systematically and putting them in a position to meet current and future entrepreneurial demands as well as possible. A potential successor has to be able to rely on a transparent transfer of knowledge in order to be prepared for the leadership position by the person handing over. The goal of the succession process is for the junior generation to build up important entrepreneurial competences and for the senior generation to pass on valuable specialist knowledge as completely as possible. To avoid conflict, it is important to discuss and agree goals, wishes and conditions from the start, so that everyone involved has a clear basis. Well thought through succession management with a strategic transfer of knowledge secures the best possible conditions for a successful succession process and reduces the risk of disruption in the process and in day to day operations. It also creates the basis for independent decisions and new priorities.
But what to do if there is no potential successor, or if that person is unwilling or unsuited to take on the legacy of the family business? In that case various succession options come into question. What matters is that companies act in good time and with foresight in handover and takeover processes.
External management or sale: alternative succession solutions
Appointing an external managing director is a good option when there are no suitable successors within the family but the company is nevertheless to remain in family ownership. This succession solution also makes sense for bridging a gap between two generations, for instance when the successor is still too young or not yet sufficiently qualified at a given point in time. Alongside many hurdles, appointing an external managing director also brings many opportunities: an outside view can spot untapped potential, drive innovation and give the business fresh momentum. In the collaboration between the entrepreneurial family and the external managing director, clear agreements and a systematic approach are important. Decisions and transactions requiring approval, as well as roles and areas of responsibility, should be clearly defined and delineated. Close coordination, a continuous transfer of knowledge and regular feedback between the external manager and the owner family form the foundation of a working partnership.
If the company cannot be handed on within the family, a sale is another possible form of transfer. The buyer can be another company, an employee from within the business (management buy out) or an outside person (management buy in) who comes into the company from elsewhere.
Whether the company is passed on within the family or another succession solution is chosen depends on individual factors. The important success factor remains a clear definition of the owners' objectives and a strategic, logical approach.
THE MAK'ED TEAM is an experienced partner in developing succession solutions and accompanies companies in shaping an individual succession strategy. Strategic succession management including an emergency plan is an essential part of business development and business steering. To reach the defined goals, we develop a concrete roadmap for the company covering all the important steps in the succession process, transparently, prudently and with foresight.
You can find more on succession here.
Sources: DIHK report on business succession 2022 of the Association of German Chambers of Industry and Commerce; Succession Monitoring 2022 by KfW Research, DER MITTELSTAND 5/2023
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