Business Succession at SMEs: Why Leadership Succession Must Be Planned Separately

Business Succession at SMEs: Separating Ownership and Leadership Succession

When succession at small and medium-sized enterprises (SMEs) is discussed, the conversation in practice usually centers on shareholder structures, corporate contracts and company valuations. The Institute for SME Research (IfM Bonn) regularly highlights the scale of this challenge in its publications: according to the institute's estimates, a large number of mid-sized businesses will face handover to the next generation or to external buyers in the coming years. With owners currently averaging 61 years of age, around 150,000 companies in Germany are currently looking for a viable succession solution.

From the perspective of modern management theory (as set out in relevant hardcover publications, established hardcover reference books and hardcover standard works on succession planning), owners, entrepreneurs and shareholders need to strictly separate two dimensions:

• Ownership succession (Corporate Succession): This governs the legal and financial transfer of company shares, assets or foundation structures.
• Leadership succession (Executive Succession): This concerns the operational staffing of the executive management, the company's strategic direction and the leadership of employees.

The framework for filling leadership positions has changed noticeably: on one hand, companies are applying more selective hiring processes for specialized roles as skill requirements around digital management shift rapidly. On the other hand, the widespread retirement of the baby boomer generation is drawing closer. A successful succession strategy therefore requires treating operational leadership succession as a transformation process in its own right. The analysis of what high-performing companies do differently in succession planning shows how future-oriented organizations are mastering this challenge. The sustained involvement of experienced high performers is also gaining importance; the Golden Age Index on integrating older employees offers valuable insights here.

Special Requirements and Hurdles When Filling the Executive Management Role

Filling the operational top position at a mid-sized company differs fundamentally from ordinary management changes. Often, the previous owner or entrepreneur has personally shaped the company for decades. Company culture, customer relationships and operational decisions at SMEs, whether in Baden-Württemberg, Berlin or elsewhere across Germany, often carry a very personal signature.

Owner Interests versus Operational Leadership

As part of business succession at SMEs, the handover process frequently produces noticeable hurdles and friction between what shareholders expect and what modern executive management requires:

• The shadow of the former owner: If the previous owner does not consistently step back from operational responsibility, a succession problem quickly emerges for future successors. If the workforce keeps seeking out the familiar former leadership, the scope of action available to new executives is restricted.
• Culture change and traditional values: While shareholders and owners prioritize preserving existing values, new executives need to make adjustments to future-proof the business in a dynamic competitive environment. This requires a clear strategy for cultural change, as set out in professional reports and hardcover guides on succession practice.
• Role clarity when moving to a board or advisory council: When a former executive moves into an advisory board or supervisory board, a strict separation between strategic sparring and improper interference is essential to anticipate the consequences of an unclear change in role. Implementing a new strategy for the organization opens up new opportunities, as is also emphasized in relevant hardcover volumes on corporate leadership.

Professionally Supporting Transformation Processes

If the handover to successors is to be accompanied by structural restructuring or realignment measures, professional support is required. Further information on supporting change processes is provided by insights into the role of change managers as a key role for corporate resilience as well as proven approaches to corporate restructuring. The analysis of the challenges facing hospital executives caught between expectations and reality also underscores how demanding it is to balance high expectations with operational realities in complex leadership environments.

Strategic Options: Internal Potential, Management Buy-In and M&A

Once it is clear that operational leadership needs to be filled anew, owners and shareholders face several options. Depending on the scope of preparatory measures, the choice of the right succession solution depends largely on market position, financial conditions and the time horizon involved.

Empirical studies in SME research show clearly how high the strategic relevance of external succession has become. When entrepreneurs cannot find a solution within the family, the external market opens up decisive possibilities and opportunities:

• High demand for external candidates: More than 200,000 companies in Germany search for external successors every year.
• Sale as a strategic option: Around 38% of mid-sized companies plan a targeted sale to resolve succession.
• Long planning horizon: Professional succession planning is not a short-term, ad hoc project, it can take up to seven years.
• Sustainable value protection: External successors secure existing jobs and keep valuable know-how within the company for the long term.

Internal Potential Analysis versus External C-Level Recruiting

Whether an internal solution is realistic and how the leadership potential of existing high performers can be objectively assessed is shown through the targeted use of validated potential diagnostics. Structured assessment methods for determining leadership potential allow the competencies and development areas of internal talent to be evaluated neutrally.

If this reveals a need for external input or specific expertise, a structured search process ensures the right fit when filling top leadership positions. Anyone looking to fill a key position at board or executive management level will find valuable guidance in the guide to C-level recruitment. Practice in the technology sector also shows why IT leadership roles are sometimes better filled externally, in order to anchor new specialist knowledge in the organization quickly.

Securing Knowledge, Supporting Development and Structured Knowledge Transfer

Selecting new executives only marks the beginning of the actual handover process. Long-term business success depends heavily on how thoroughly the company prepares and on how systematically know-how built up over years is transferred to future successors. When long-serving entrepreneurs leave the business, an external consultancy can structure the knowledge dialogue to prevent the negative consequences of a sudden loss of know-how.

Supporting Development Through Mentoring and Coaching

To help future successors, whether recruited internally or externally, grow into their new role quickly and effectively, a combination of internal knowledge exchange and targeted support has proven effective:

• Structured knowledge transfer: Through tandem models, new executives grow confidently into their responsibilities so successors remain capable of acting. An established mentoring program for employees supports successors in settling into the leadership role.
• Targeted leadership development: Tailored executive coaching methods for optimizing top executives provide support for reflecting on one's own leadership role, preparing successors specifically for C-level responsibilities.

Forward-Looking Succession Management as the Key to Company Value

Business succession at SMEs is far more than a legal or tax matter. Anyone who understands regulating ownership shares and operational leadership succession as two related but separately planned tasks needs a long-term strategy for knowledge transfer, so that successors can earn the workforce's trust. Compared with unprepared handovers, this protects organizational value on a lasting basis.

Through forward-looking succession planning and objective potential diagnostics, family businesses and SMEs can confidently meet the challenges of the labor market. Unlike short-term emergency solutions, professional succession management is part of a holistic strategy for protecting value. It preserves valuable knowledge within the company, secures competitiveness and firmly establishes the business's long-term future in the market.