Wanted in Germany: Heirs for family-owned businesses – DW – 10/11/2024

Klaus Eberhardt came up with a rather unconventional idea when he was faced with the sober reality that his children were not interested in continuing to run the technology firm he once founded, iteratec. Instead of selling the firm to an investor, he called on his employees to buy out the company collectively.

“I couldn’t have looked at myself in the mirror selling iteratec just for the money,” Eberhardt, 65, told DW.

The Munich-based IT firm is now collectively owned by a cooperative of 350 members who used to be Eberhardt’s employees. The firm supplies software to clients such as carmaker BMW and Deutsche Bahn, Germany’s national train operator.

Eberhardt is not the only German business owner facing the problem of finding an heir. Nearly 70% of small- and medium-sized enterprises (SMEs) in this country see ownership succession as a great challenge, according to a recent report by the state-owned German development bank, KfW.

These companies make up the famous German Mittelstand, which includes a large number of family-owned businesses that are generally considered to be the backbone of the German economy. They are at the heart of what the slogan “Made in Germany” has long stood for: quality, reliability, and stability.

In the past, SMEs could lead entire industries. Now, they are struggling to find someone to lead them. 

Generational shift takes its toll 

What Germany is experiencing at the moment is a demographic shift coupled with a declining interest among heirs in leading family firms. With one in three business owners over 60 years of age, the baby-boomer generation at the helm of companies is retiring in sizable numbers. Traditionally, family members would take over because inheriting a business used to be a “golden ticket,” but now it seems to have become a burden. 

Carolin, whose name we’ve changed because she wanted to speak with DW only on condition of anonymity, is such a case in point.

Potentially inheriting her family’s technology firm in southern Germany, she’s deeply unsure about the future of the business that makes electronic components for auto-industry supplier Bosch. Even though the company is well-established in the market, she sees little appeal in taking over a company whose products she fears may no longer be needed.

 “We don’t know how to survive in Germany as a business. Our customers are well aware that German technology is not unique anymore,” she told DW, adding that in China the same product would be “way cheaper” to produce.

This perception of risk and diminishing competitiveness is driving many young Germans away from their family legacies. And so, neither Carolin nor her sister plans to take over when their parents retire, reflecting a scenario playing out in businesses nationwide.

According to the ifo economic think tank, more than 40% of family-led companies surveyed have not yet found a successor within their own family .  

Young generation at odds with risk?

Benjamin Schöfer is all too familiar with this. As a succession expert at the German Association for Small and Medium-Sized Enterprises (DMB), he’s been advising companies on how to organize an ownership change.

“Despite the great potential, Germany’s business environment has become less attractive for young leaders,” Schöfer told DW, pointing to adverse developments such as high corporate tax rates, rising energy costs and declining competitiveness. 

On top of that, he says, comes the “labyrinth of bureaucracy, laws, and regulations” in Germany and the European Union, which impedes long-term business planning.

“Many companies find themselves in need of hiring specialized staff just to navigate the maze of rules and finance options,” he said, describing current regulations as a “jungle,” especially when it comes to securing state-funding programs that are meant to help but are often too complex.  

In its report, the state-owned KfW bank also mentions bureaucratic obstacles as a deterrent to potential heirs. At the same time, “lack of interest on the part of younger family members” is cited as the main reason for leaving the family business. 

A lack of skills and perseverance

Moritz, who didn’t want his family name mentioned in this report, believes that most young people simply “prefer to go to university rather than getting their hands dirty.”

The 29-year-old German’s family has been in the furniture-making business for over 300 years. But unlike his ancestors, Moritz and his children were never encouraged to take over the furniture company. Always free to pursue his interests, Moritz went to university and traveled the world instead of learning the basic skills of the furniture business.

As Moritz’s uncle and current owner plans to retire any time soon, the family faces a dilemma: Moritz lacks the hands-on skills and formal qualifications needed to take over. “I’ve backpacked across continents and got a university degree, but I’ve never planed a piece of wood,” Moritz admitted self-critically. 

A silver lining on the horizon

Benny Hahn, on the other hand, didn’t hesitate when he was offered an executive role at the software company where he worked. None of the heirs of the former owner wanted the job, and Hahn grabbed the opportunity at the age of 27.

He sees himself as a “pioneer” after adopting the so-called search fund model, invented by reasearchers at Stanford University in the United States, which allows young entrepreneurs to acquire existing businesses instead of starting from scratch. 

Hahn says his biggest challenge was convincing German banks to support his effort. “Several [banks] turned me down because they couldn’t grasp our business model. They expected physical assets like machines as collateral, but our value was in software,” Hahn told DW, adding that many institutions here must shed their “we’ve-always-done-it-that-way mentality.”

But will there be enough young Germans willing and able to take on the challenge of keeping the country’s economic backbone straight and strong?

Carolin, the potential heir to the auto parts company near Stuttgart, says better guidance could be a game-changer. “If it felt less risky, I would take over the business,” she said. 

And would-be furniture maker Moritz also isn’t entirely opposed to the idea. “It would take me at least seven years to learn the wood crafting skills, plus I’d need to complete a diploma,” he said, adding that “it’s never too late.” 

Edited by: Uwe Hessler