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German Lessons

The Mittelstand is the envy of the world. Other family businesses could profit from looking closely at the way things are done there.

It is often said that Germany’s Mittelstand companies, which are largely family-owned, are the reason that the country’s economy isn’t in such a dire state as, say, Britain’s. So what can family firms learn from the Mittelstand?

The first lesson is about ownership. In the next five years, there could be 5,000 ownership transitions in Germany’s Mittelstand firms. There are two major questions that firms have to answer when they are going through a succession. The first is: who is the right person to run the business in the future? Many German firms are mature enough to acknowledge that this could be someone from within the family, or a non-family manager. This leads straight into the second question: what is the proper role for family members? Is it to run the business, or as an educated owner without managing rights? When you take these two together, it is clear that people are going to be thinking very hard about what type of governance and leadership structures they should have.

You might wonder whether you can really continue to be a family business if family members are no longer running things day-to-day. But where some might see a danger of dilution, I would say there is an opportunity to keep the business healthy. More and more in Germany we see family members bringing in professional managers and I think they are well advised to do so, because management and ownership can be separated in a fair way and you continue to be both a successful business, and a family one. Strategic decisions are still with the owners, and management is in the hands of more experienced and capable outsiders. In Germany we see a clear trend to this model, unlike in the Middle East or in Southern Europe where they are still very much focused on family managers.

The second lesson families can learn from the Mittelstand is about priorities. German firms tend to put all their eggs in one basket, financially-speaking. They sink all their money into the business, and their primary aim is to keep it going at all costs: if the business fails the family wealth is gone. This had a very interesting result in the last crisis. Even when things were going wrong, they kept their workforce and invested in education, meaning that after the crisis when corporates had to recruit, the family-owned firms could build on the enhanced ability and motivation of the workforce they had kept on board. This really paid off.

A third lesson is that taxation can have a deleterious effect on family businesses. We are facing an election in Germany later in the year, in which a coalition of the left and greens are likely to get into power. They have made noises about raising taxes, but because German family firms tend to sink all they have into the business they don’t really have any money left to pay them. The inheritance tax regime in a country should be arranged so that it doesn’t damage businesses that are, after all, valuable assets for the whole nation.

The final lesson is that family firms should learn to see succession as a structured process, and not an event. German firms tend to be good at this. You have to start the process early and set out a system for the fair assessment of the next generation. The challenge in succession is that you have to combine the most rational world, business, with the most emotional, family, and you simply have to apply the same criteria for your own children as anyone else. Nobody said success was easy.

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