Succession or Sale: Private Equity's Role in Providing Solutions for SMEs Facing Founder Retirement in Europe

Family businesses make up more than 60% of all companies in Europe.?They range from sole proprietors to large international enterprises. Big or small, listed or un-listed, family businesses play a significant role in the EU economy. While the bundled crises of recent years, with Covid & Ukraine at the top of the list, have forced business leaders to focus on operations, issues surrounding succession are coming sharply into view. Private equity involvement can benefit SMEs in Europe by addressing many of the obstacles they face, and one of the biggest challenges and opportunities is the number of family and founder-owned businesses seeking generational transfers or sale. While this issue is well known, it is worthwhile to keep the topic front of mind as the challenges that SMEs face continue to grow.

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Europe is experiencing a decline in its workforce due to its aging population and absence of migration like the US or population growth seen in Asia (excluding Japan). However, this demographic shift also offers an opportunity for the region, particularly considering the substantial number of family and founder-owned businesses. As the founders approach retirement age, many of them are looking to transfer their businesses to the next generation. While the initial preference is often to pass the baton to another family member, the potential successors, especially descendants, may not be interested or qualified to assume the leadership role.

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Germany has emerged as a case study for the issue. The Mittelstand, considered the backbone of Germany's economy, holds a crucial position as mid-sized firms contribute significantly to the nation's economic output, employing approximately 60 percent of the total workforce. And while the adoption of new technology, trade issues and China’s drive towards self-reliance are posing a threat, business leaders are growing older. Presently, approximately 40% of Mittlestand SME owners are aged 55 or above, and in a recent survey it was revealed that the managers of 236,000 small and medium-sized enterprises are planning to pass on their businesses to successors within the next two years alone.

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However, time is of the essence for these enterprises. In many cases companies led by founders approaching retirement are yet to begin a search for a successor and finding solutions is essential given these enterprises employ approximately two million individuals. ?Options range from management buyouts to selling to competitors, but many founders still have a long-term vision for the business they would like to see implemented as part of their legacy.

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In our conversations with founders of potential acquisition targets we have heard about their struggle with finding investors that share their vision for their company. We rarely encounter retiring founders that are purely interested in the economics of the exit. They want to feel comfortable that their team, customer base and brand are left in safe hands. The key has been to match them with investors and corporates that will not only build a clear path to transition but also assure them that the future of their company and staff aligns with their values.

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We expect to see the opportunity for these types of transition investments to expand significantly. Investors that focus on how to proactively source companies in this situation and have the infrastructure and knowledge of how to deal with their issues (taxes, inheritance, transition structures, etc) will greatly benefit from building a track record in this space over time and capitalize on the growing need for outside support.

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