2020 - The year that could unlock mittelstand entrepreneurship
Updated: Jul 30, 2020
by Oscar Hong
Iconic German companies like Dr. Oetker, Farber-Castell, Haribo and others have dominated their industries and maintained customer loyalty for hundreds of years. These companies have a rich history and have gone through various challenges in the past and have persevered through all of that with their strong sense of community, quality, resilience and innovation. The current world scenario, exacerbated by COVID-19, by many accounts, represents the biggest challenge the German economy and the Mittelstand has faced since World War 2.
An unprecedented challenge
The current conditions pose special challenges for all areas of society and the economy, including private and family businesses. Nine out of ten German companies are family businesses and range from small craft shops and retailers to internationally active companies. In Germany, family businesses are the most formative type of company and have found themselves at the confluence of multiple developments that have, with Covid-19, created an existential crisis for them. They are being challenged from multiple directions, including financial, operational and a skilled labor shortage.
The German Mittelstand is under pressure with limited liquidity and shortages at all levels. In two thirds of family businesses, activity has fallen by an average of 50 percent. These companies are drastically losing revenues, while costs are increasing. The majority of the companies surveyed believe that their liquidity is not sufficiently secured under the current conditions. As the following chart shows, 26 percent believe that revenues will decrease between 25-50% and another 26% believe that the revenue will decrease more than 50%.
Survey on the revenue forecasting of German family businesses
All in all one third of family businesses will have to shut down in eight weeks if they do not receive any form of support from the government.
It's interesting to note that 87% of those affected stated that the shortfall was mainly due to the demand shock, i.e. the closure of sales outlets. Eleven percent report a shortage of staff members or missing preliminary products. Six percent complain about limited or no availability of, while seven percent of the companies currently have no access to transport facilities.
An opportunity to renew the socio-economic contract
Covid-related insolvencies can only be avoided if the state pays out liquidity assistance quickly and effectively on the bureaucratic side. Credit institutions and development banks are facing an unprecedented onslaught, therefore the federal and state governments must have the courage to grant lump-sum approvals in a fast-track procedure. From the point of view of family businesses, weaker rules governing the obligation to file for insolvency are important. Companies suffering from the consequences of the Covid crisis would be given additional time before being forced to file for insolvency. Furthermore, the Covid crisis has also led to succession issues in Germany. In only 5 years, more than 70% of the owners of family businesses will be over 55. Depending on the personal health state of the shareholders, the majority of German family-owned companies are faced within a few years with the question of how to arrange a reliable and future-oriented succession. Due to the combination of the Covid crisis and demographic developments, securing succession is becoming the most important issue for medium-sized companies.
A partnership research between the University of Witten/Herdecke and Durham University has resulted in findings that family businesses can act upon to secure their company. There are 4 elements that this research recommends to family businesses:
In the Covid crisis, family businesses have to change their organization in the short term or at least transform processes and structures in order to survive and pursue business as usual. Many companies show themselves to be highly inventive and develop a genuine pioneering spirit, while others are still searching for the right strategy for their company.
A very German approach: analyse, plan act, support
The study led by Prof. Clauß and Prof. Kraus recommends that companies should establish crisis teams that keep the dynamic situation in view at all times and communicate changes within the organization and initiate the necessary measures. It is also important to secure liquidity through discussions with financial backers, the use of support programs and the provisioning of investments. Innovative forms of work organization should also be implemented, such as organizing administrative processes in shifts, the spatial separation of employees and the relocation to the home office. Companies should engage in proactive, up-to-date and bilateral communication with all employees using appropriate channels (intra- and internet, podcasts, hotlines, etc.). Companies should also examine whether the basic business model can be temporarily adapted. For example, many companies use unused production capacities for the manufacture of system-relevant goods such as mouth-nose masks or ventilators. Service providers offer virtual consultations and webinars, and restaurateurs sell canned food as take-away solutions.
The social market economy with its values such as property, freedom, (personal) responsibility and competition have made Germany what it is today: an economically successful country. But these maxims are currently being overturned by the Covid crisis. Property rights are being curtailed when rent is terminated, the freedom of movement and the freedom of trade are being suspended and personal responsibility is being put on ice.
The opportunity to build an inclusive, more sustainable and resilient future
The pandemic has created many problems and challenges for the German family businesses. There are many learnings that we can draw from this crisis. There is the necessity to critically reflect on business processes and to identify inefficiencies and weaknesses. In order to survive, family businesses need to reflect and learn from their mistakes to finally adapt to their environment. The study by Prof. Clauß and Prof. Kraus shows family businesses one way to adapt to a new situation and survive this crisis. These circumstances can lead to opportunities that innovate business models and streamline companies in the long term.
While the current situation looks dire and there are many difficult challenges to surmount, we believe that there is a silver lining to the clouds. A new generation of globally minded, multicultural German entrepreneurs are coming to the fore in many industries. These are digital natives, who look at the world with a different perspective than the post war generation that is now retiring. The opportunity to use new technologies, optimize capital and access new markets is open to them as a way to transform and reinvigorate some of the amazing mittelstand companies. While often this generation of “Rising Stars” might be from the founding families, we are also starting to see a movement towards Entrepreneurship through Acquisition. This is a great way to preserve the legacy of the company while injecting a new generation of talented entrepreneurs into the business. We at August One have been actively supporting this ecosystem.
While we are not sure of what 2021 will look like, we can be assured that it will not be like the past. What encourages us about dealing with this uncertainty is the fact that the founding generations of today's mittelstand were also starting from a point where the future looked very unpredictable, but they were determined to create great products, invent new business models and access new markets. This sense of innovation and determination that drove the founders of these companies in the past is also the impulse that will drive the next generation who will lead the Mittelstand to a sustainable future with a positive impact on their communities.
Author: Oscar Hong
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