Germany's retiring Mittelstand owners struggle to find successors

By Maria Martinez

BERLIN (Reuters) -Rudolf Kiessling would like to retire after years spent building his heating, ventilation, and air conditioning business. But he faces a challenge common to many German company bosses: finding someone to take over.

The 62-year-old is among thousands of owners of small and medium-sized enterprises (SMEs) - some 99% of German firms, known collectively as the Mittelstand - who may have to wind up their businesses if they cannot find a successor. 

The issue is a growing risk to Europe's largest economy, already suffering its longest downturn since World War Two.      

"I have no one. I have a son, but he can't do it because he has done something completely different professionally," Kiessling told Reuters. "Some employees may have interest, but they are a bit afraid of the responsibility."

A survey by state-run development bank KfW showed around 231,000 SME owners planning to close their companies by the end of this year - 67,500 more than a year ago. 

Age is a major factor: demographic data show more than half of Mittelstand owners are over 55 years old, up from 20% 10 years ago. And they are ageing faster than the population as a whole - 39% of them are 60 or older, compared with 30% of Germans overall.

"Never since we began to monitor business successions have so many small and medium-sized enterprises considered giving up their operations," said KfW's Mittelstand expert Michael Schwartz. 

SMEs account for more than half of Germany's economic output and almost 60% of jobs, and are an engine of private investment.

The succession problem "not only threatens jobs but also weakens Germany's economic position overall," Marc S. Tenbieg, head of the DMB Mittelstand association, told Reuters.     

Although the new government wants to boost investment with an infrastructure fund, corporate tax cuts and advantageous depreciation options, businesses may be reluctant to commit without clarity about their future leadership.

Carsten Brzeski, global head of macro at ING, cited studies showing under-investment of 400 to 600 million euros ($457-686 million) in Germany over the last decade.

"Investments are held back as business owners cannot find adequate succession planning," Brzeski said.

TALENT POOL

Before February's election, the Commission for Business Succession of another Mittelstand association, BVMW, made recommendations to address the problem, including tax incentives for business transfers and ways to improve financing conditions.

"The new government plans very little on this issue according to the coalition agreement, where the term 'business succession' does not appear at all," said Benno Packi, chairman of the commission.

A economy ministry spokesperson said the government has been supporting business successions with numerous measures, such as nexxt-change.org, a free website to match owners with potential buyers, and loan offers with reduced interest rates. 

A smaller pool of internal candidates can make it hard to find talent, especially if larger companies offer more competitive packages, said Oliver Stettes, head of labour economics at the IW economic institute. Germany already has an acute shortage of skilled workers. 

But the succession squeeze also has an impact on bigger firms, nearly all of which have small companies as suppliers that would be hard to replace. 

Candidate scarcity can make what is often an emotional transition more challenging, said Holger Wassermann, an expert in company successions. 

"Psychology makes up at least two-thirds of the considerations in Mittelstand business sales," Wassermann said. "For many entrepreneurs, their company feels like a body part - selling it can feel like losing an arm."

The average age of those handing over increased to 63 years from 61.5 years last year, while the age of those taking charge was static at 38 years, according to a Successions Monitor in which Wassermann participates. 

Marcel Krieb is an outlier.     

At just 25, he became managing director of pretium associates, a financial consultancy for SMEs established in 2003, after working on a project with its founder. 

"He asked me at the right time if I could somehow succeed him in his company," Krieb told Reuters.

"Many young people prefer the security of a steady paycheck and predictable future, rather than the uncertainty that comes with being self-employed." 

FAMILY BUSINESS

Many Mittelstand companies are family-owned but nowadays fewer sons and daughters are prepared to take over. A survey by the Ifo Institute found 42% do not have a family member lined up to succeed.

Jacob von der Decken was 30 and his father 68 when Jacob took over the family's agricultural business in northern Germany last year, having discussed it periodically since he was 14. 

"It's a lot of responsibility going on your shoulders," said von der Decken, who studied agricultural economics and had been working on renewable energy projects at a fintech company.

"In agriculture, your family lends you the farm for one generation, and then you pass it on to the next generation. You have like 30 years of bringing it forward and making sure that it also lasts the next decades." 

While his father's generation prioritised efficiency, he is focusing on diversification and leveraging AI for data collection through a startup, Tunen Agronomy.

Private equity takeovers, often mooted as a solution, are really only an option for larger Mittelstand firms, said Michael Wolff, an M&A expert at investment bank Stifel who specializes in transactions for companies valued at 100-500 million euros. 

"For the craftsman with 10 people or 20 workers ... So far there hasn't been a solution that systematically helps these people," Wolff said. 

And the Mittelstand's problems ripple widely.

"With each small piece that breaks away, the foundation of the German economy becomes a bit more fragile," said pretium's Krieb.

($1 = 0.8877 euros)

(Editing by Matthias Williams and Catherine Evans)