New founders follow successors from the rank
According to KfW, around 620,000 entrepreneurs are seeking succession planning from 2017 to 2019. On the other hand, however, the number of potential successors is decreasing. That makes it difficult to find a suitable successor. Therefore, German small and medium-sized enterprises are not only resigned to demographic change, as the decommissioning of companies threatens, but also before the zest for action of young entrepreneurs.
In 2016, more than 380,000 entrepreneurs pushed new business ideas into the entrepreneurial world. In 2015, start-ups accounted for 75% of all company formations, while succession accounted for only 8%. Two years later, in 2017, there were already about 90% start-ups. But why are so many entrepreneurs venturing to market with new business models and ideas instead of “simply” continuing and optimizing existing ones?
What problems can arise both with start-ups and with company takeovers? In contrast to company successors, start-ups have the advantage that they can develop completely independently and are not tied to existing contracts and regulations of an original owner. However, this entails the risk that founders overestimate their business model and, in some cases, do not have enough practical experience to build a successful business. This can mean failure for the new founders. For this purpose, suitable employees must be found, with whose energy the company’s success can be advanced. In addition, there is no customer or supplier base at the beginning. Here, they only have to gain market share and generate trust through marketing strategies. The latter aspect leads to the question of the competitiveness of start-ups.
Customers take quicker confidence in companies that have been established in the market for years and are rather skeptical about start-ups. However, it should be noted that just under 15% of start-ups in Germany enter the market with a product or service that can be classified regionally, nationwide or globally as a novelty. This offers the opportunity to close market gaps and create new jobs. Although there is hardly a competition problem in this case, however, start-ups are at risk of encountering negative market resonance.
Whether an entrepreneur dares to start a new business or forward an existing business depends on various aspects. Capital is one of them. Starting a business does not require a lot of seed capital. In most cases, no more than 10 KEUR is expected. When taking over an existing company, however, successors often have to provide more than 50 KEUR. For this, the successor takes over already existing operational and process sequences, the employee base, business assets, existing growth potentials etc. Whereas, however, new founders have to build up their business and generate potential.
Difficulties in company takeovers are also different, often contrary attitudes of business owners and successors regarding the development and reorganization of corporate processes, action structures and future potential. For the current owner, intensive training and the maintenance of existing processes as well as customer and supplier relationships are important. On the other hand, the successor pursues his own plans, such as optimizing the operations through modernisation and digitisation.
Another problem is accompanied by expectation management. However, studies show that successors often can not fulfill them. A study by founder and entrepreneurship researcher Harald Habermann shows that the performance of medium-sized companies after the change of ownership initially even worsened. Only after a period of adjustment, in which the successor works into all existing processes and structures, can potential for improvement be better identified and exploited.
It should be noted that especially entrepreneurs who do not find a potential successor in the family, should deal with the issue of succession with increasing age. The succession finding is increasingly difficult and takes a considerable amount of time. In many cases, a piecewise exit is recommended. Thus, a consultancy role or even further (re) participation in the owner’s business after the transaction provides security to the workforce, as well as to customers and other business partners, and signals confidence in the future of the business. The earlier the owner deals with the issue of “succession planning”, the greater scope for action results for him. He is not under time pressure and can proceed in a structured manner. To start the business succession as soon as possible is the first step. Consistent action in the sales process is the second step in making the change of ownership efficient. The issues listed above only highlight a variety of potential hurdles that a corporate sale can bring. Creating incentives for young entrepreneurs can foster interest in acquiring existing businesses, such as subsidies backed by the federal government. In the case of companies that have proven their worth for decades, both economic and know-how as well as medium-sized prosperity remain secure. It is desirable that the percentage of new start-ups and the share of takeovers approach each other. Follow-up owners can also incorporate new ideas into an existing company, often under the premise of willingness to compromise, and even expand and grow the business. Successors and owners must rationally weigh to what extent existing structures and processes can be optimized and modernized, or even new business areas can be developed. Important for the economy, however, is the continued existence of companies through company successors.