According to a recent study by KfW Research, around 560,000 companies will be facing management and ownership succession by the end of 2026. However, a third of these companies are planning to leave the market without a successor. And this high figure is not surprising. Succession has become a major challenge in many medium-sized companies.
Be it, for example …
… because there is no potential successor in their own ranks and no potential successor can be found,
… because the company is not ready for handover, i.e. it is not attractive for potential successors or a succession cannot be realised,
… because the succession process was started too late,
… or because the person interested in the succession has difficulties with financing.
The challenges are many and varied and affect the entire SME sector. Overall, the number of people interested in taking over has fallen considerably. This is partly due to demographic factors and partly to the fact that interest in entrepreneurship has been waning for years. In addition, the current economic instability and the numerous crises are hampering the opportunities for company succession. Companies that are in crisis mode and are preoccupied with securing their existence invest little time in looking after their own succession processes.
It is a key entrepreneurial task to tackle the issue of succession with a clear strategy and a sufficient time frame. This can significantly improve the prospects of a successful succession plan that is satisfactory for both the entrepreneur and the company.
The right time to develop a succession plan: now.
Succession cannot be planned early enough. Ideally, the topic of succession should accompany the company from the very beginning. However, you should allow at least three to five years for the handover. Succession and handover processes are complex – on a business, legal, tax and emotional level. The latter particularly affects succession in family businesses.
Create clarity, offer prospects: Intra-family succession
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 of the family members, questions about fair distribution between the children or a lack of clear objectives for the handover. Succession processes therefore have a strong emotional component. For the person handing over a business, it always means saying goodbye to their life’s work. The senior must be able to let go. And the junior must be prepared to take on responsibility and lead the company confidently and independently into the future. Preparation for this role requires sufficient lead time.
Once a successor has been identified within the company’s own ranks, it is important to systematically develop the skills and enable this person to fulfil current and future entrepreneurial requirements in the best possible way. A potential successor must be able to rely on a transparent transfer of knowledge in order to be optimally prepared for the management position by the transferor. The aim of the succession process is for the junior to build up important entrepreneurial skills and for the senior to transfer valuable specialised knowledge as seamlessly as possible. To avoid conflicts, it is important to discuss and agree on goals, wishes and conditions from the outset in order to create a clear basis for all parties involved. Well thought-out succession management with strategic knowledge transfer ensures the best possible framework conditions for a successful succession process and reduces the risk of disruptions in the process and in operational procedures. It also creates the basis for independent decisions and new priorities.
But what do you do if there is no potential successor – or if they are unwilling or unsuitable to take over the family business? In this case, there are various succession options to consider. It is important that companies act in good time and with foresight during the handover and takeover processes.
External management or sale: alternative succession solutions
Appointing an external managing director is a good option if there are no suitable successors in the family but the company should remain in family ownership. This succession solution also makes sense to close a gap between two generations – for example, if the successor is still too young or not yet sufficiently qualified at time X. In addition to many hurdles, the appointment of an external managing director also harbours many opportunities: an outside perspective can identify unused potential, drive innovation and give the business fresh impetus. Clear agreements and a systematic approach are important in the collaboration between the business family and the external managing director. Decisions and transactions requiring approval as well as roles and areas should be clearly defined and delimited from one another. Close coordination, continuous knowledge transfer and regular feedback between the external manager and the owner family form the foundation of a functioning collaboration.
If the company cannot be replaced within the family, the sale is another possible form of handover. The buyer can be another company, an employee (management buy-out) from within the company or a third party (management buy-in) who joins the company from outside.
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 the development of succession solutions and supports companies with a customised succession strategy. Strategic succession management, including a contingency plan, is an essential component of corporate development and management. To achieve the defined goals, we develop a concrete roadmap for the company with all the important steps in the succession process – transparently, prudently and with foresight.
Sources: DIHK-REPORT ZUR UNTERNEHMENSNACHFOLGE 2022 of the German Chamber of Industry and Commerce; Succession-Monitoring 2022 KfW Research, DER MITTELSTAND 5/2023
