9620_Applying the Principal – Agent Theory to Company Succession at SMEs

MENDEL UNIVERSITY IN BRNO
FACULTY OF BUSINESS AND ECONOMICS

DISSERTATION

Brno 2016
Ivica Ivo Odak
Statutory Declaration
Herewith I declare that I have written my dissertation “Applying the Principal-Agent
Theory to Company Succession at SMEs – Problematic Areas and Recommendations
from a Role-Specific Perspective” by myself and all sources and data used are quoted in
the list of references. I agree that my work will be published in accordance with Section
47b of Act No. 111/1998 Sb. On Higher Education as amended thereafter and in accordance
with the Guidelines on the Publishing of University Student Theses.
I am aware of the fact that my thesis is subject to Act. No. 121/2000 Sb., the Copyright Act
and that the Mendel University in Brno is entitled to close a licence agreement and use
the results of my thesis as the “School Work” under the terms of Section 60 para. 1 of the
Copyright Act.
Before closing a licence agreement on the use of my dissertation with another person
(subject) I undertake to request for a written statement of the university that the licence
agreement in question is not in conflict with the legitimate interests of the university, and
undertake to pay any contribution, if eligible, to the costs associated with the creation of
the dissertation, up to their actual amount.

In Brno on March 31, 2016
Ivica Ivo Odak

Abstract
5
The tremendous significance of small and medium-sized businesses for the German
economy is indisputable. This is why the long-term preservation of small and medium-
sized businesses is regarded as a key topic for the German economy. In particular, the
securing of company succession is a major challenge for many of these companies. Com-
pany succession can be described as a process of transferring management and owner-
ship. Consequently, whether the company was previously owned and/or managed by a
family or within another proprietary structure is insignificant.
This dissertation focuses on trying to answer the research question “What are the prob-
lematic areas, resulting risks and solution mechanisms in the process of company suc-
cession when the asymmetry in information is considered within the scope of the princi-
pal-agent theory?”, from which it derives two main objectives:

Identification of the problematic areas and resulting risks.

Determination of the solutions and specific recommendations.
The process of company succession is fundamentally depicted in the St. Gallen succes-
sion model. Its essential phases are preparation, execution and follow-up work. Due to
the particular significance of asymmetries in information during the succession pro-
cess, the principal-agent theory has been used as the theoretical foundation in this dis-
sertation. This widespread basic theory is applied in various company-relevant areas
such as human resources management or contract management. The principal-agent
theory served to identify issues in the course of the research work. These issues may
relate to the succession process from the perspective of the transferring party, as well
as that of the acquiring party. The issues and problem areas are identified in methodo-
logical steps that build upon each other. The first step involves an analysis of the rele-
vant literature, followed by the iterative collection of data in each case as a part of the
different qualitative data collection methods.
The findings in the dissertation support the conclusion that the fundamental phases pro-
posed by the St. Gallen succession model are suited as a basic structure in a company
transfer. Nonetheless, the possible solutions in the principal-agent theory appear to be
appropriate as support for the succession process. In addition, it is possible to identify
other process-supporting measures, which can be considered from the perspective of the
transferring party and the acquiring party. In a consolidated form, these measures result
in a model of company succession.
The dissertation concludes in accordance with its intention in generating specifically for-
mulated hypotheses, which are based on the principal-agent theory, considering the per-
spectives of the transferring party and the acquiring party and also including other sig-
nificant supportive aspects in the transfer process.
1

MENDEL UNIVERSITY IN BRNO
FACULTY OF BUSINESS AND ECONOMICS

Applying the
Principal-Agent Theory to
Company Succession at SMEs

Problematic Areas and Recommendations from
a Role-Specific Perspective

DISSERTATION

Ivica Ivo Odak, MBA

Supervisor: doc. Ing. Helena Chládková, Ph.D.

Brno 2016
Acknowledgements
The end of a long path approaches, and I have received support from many sides. There are many
people to whom I would like to express my gratitude for this. The first is Mr Thomas Rösler, my former
mentor who made this dissertation project possible. I would also like to thank Mr Erik Kurtz, my cur-
rent business partner, who has always accompanied me on this path.
I would like to express my sincere thanks to Professor Dr. Stefan Sander from the University of St.
Gallen and the Steinbeis University Berlin, the supervisor for my dissertation project at the Steinbeis
University Berlin. I am also very grateful to the professors Dr. Urs Frey and Dr. Frank Halter at the
University of St. Gallen for always being available with advice and giving me support on methodology
and content. At the same time, I would also like to extend my thanks to all of the participants in my
focus group, interview partners and participants in expert talks.
I also owe my gratitude to Dr. Jörg Hahne, my former co-doctoral candidate, for the many conversa-
tions that were valuable and always motivating.
I would also like to especially thank Dr. Holger Schaaf and Dr. Christoph Thome, my former co-doc-
toral candidates, with whom I met repeatedly. In the many hours and days of discussing and philoso-
phising on the research topic, they helped me and my work to progress. In the meantime, they have
become true friends. So thank you so much for this, my dear “Spreissel” and “Toni”.
I would also like to give my warmest thanks to Dr. Wolfgang Reiger from the Institute of Management
in Salzburg for assisting me in word and deed when I changed universities. I am also particularly grate-
ful to my supervisors at Mendel University Brno, professors doc. Ing. Helena Chládková, Ph.D. and
doc. Ing. Pavel Žufan, Ph.D., for the valuable discussions and conversations that have enriched my
work.
It is not possible for me to personally thank everyone who was involved in such a long phase. I would
therefore like to express my gratitude to all of my friends and relatives who repeatedly encouraged
and supported me during this dissertation project. They repeatedly provided me with a change of pace
and intellectual breaks, for which I am very thankful and appreciative.
Above all, I would like to thank my partner Ina, as well as my sisters Tatjana and Dominik and their
families for always being there for me – even when this meant encouraging me emotionally and mor-
ally on this long path and releasing me from other obligations.
I dedicate this dissertation to my parents, without whom I would never have come this far. Only their
unceasing love and affection, together with their boundless support for all of my projects, have made
it possible for me to successfully complete this dissertation. Thank you for everything!

Acknowledgements
3
The end of a long path approaches, and I have received support from many sides. There
are many people to whom I would like to express my gratitude for this. The first is Mr
Thomas Rösler, my former mentor who made this dissertation project possible. I would
also like to thank Mr Erik Kurtz, my current business partner, who has always accompa­
nied me on this path.
I would like to express my sincere thanks to Professor Dr. Stefan Sander from the Univer­
sity of St. Gallen and the Steinbeis University Berlin, the supervisor for my dissertation
project at the Steinbeis University Berlin. I am also very grateful to the professors Dr. Urs
Frey and Dr. Frank Halter at the University of St. Gallen for always being available with
advice and giving me support on methodology and content. At the same time, I would
also like to extend my thanks to all of the participants in my focus group, interview part­
ners and participants in expert talks.
I also owe my gratitudeto Dr. Jörg Hahne,my former co­doctoral candidate,for themany
conversations that were valuable and always motivating.
I would also like to especially thank Dr. Holger Schaaf and Dr. Christoph Thome, my for­
mer co­doctoral candidates, with whom I met repeatedly. In the many hours and days of
discussing and philosophising on the research topic, they helped me and my work to
progress. In the meantime, they have become true friends. So thank you so much for this,
my dear “Spreissel” and “Toni”.
I would also like to give my warmest thanks to Dr. Wolfgang Reiger from the Institute of
Management in Salzburg for assisting me in word and deed when I changed universities.
I am also particularly grateful to my supervisor at Mendel University, Professor Dr. Ing.
Pavel Žufan, for the valuable discussions and conversations that have enriched my work.
It is not possible for me to personally thank everyone who was involved in such a long
phase. I would therefore like to express my gratitude to all of my friends andrelatives who
repeatedly encouraged and supported me during this dissertation project. They repeat­
edly provided me with a change of pace and intellectual breaks, for which I am very
thankful and appreciative.
Above all, I would like to thank my partner Ina, as well as my sisters Tatjana and Dominik
and their families for always being there for me – even when this meant encouraging me
emotionally and morally on this long path and releasing me from other obligations.
I dedicate this dissertation to my parents, without whom I would never have come this
far. Only their unceasing love and affection, together with their boundless support for all
of my projects, have made it possible for me to successfully complete this dissertation.
Thank you for everything!
I would like to express my sincere thanks to Professor Dr. Stefan Sander from the University of

St. Gallen and the Steinbeis University Berlin, the supervisor for my dissertation project at the Steinbeis
University Berlin. I am also very grateful to the professors Dr. Urs Frey and Dr. Frank Halter at the
University of St. Gallen for always being available with advice and giving me support on methodology
and content. At the same time, I would also like to extend my thanks to all of the participants in my focus
group, interview partners and participants in expert talks.
Abstract
The tremendous significance of small and medium-sized businesses for the German economy is in-
disputable. This is why the long-term preservation of small and medium-sized businesses is regarded
as a key topic for the German economy. In particular, the securing of company succession is a major
challenge for many of these companies. Company succession can be described as a process of trans-
ferring management and ownership. Consequently, whether the company was previously owned
and/or managed by a family or within another proprietary structure is insignificant.
This dissertation focuses on trying to answer the research question “What are the problematic areas,
resulting risks and solution mechanisms in the process of company succession when the asymmetry
in information is considered within the scope of the principal-agent theory?”, from which it derives
two main objectives:

Identification of the problematic areas and resulting risks.

Determination of the solutions and specific recommendations.
The process of company succession is fundamentally depicted in the St. Gallen succession model.
Its essential phases are preparation, execution and follow-up work. Due to the particular signifi-
cance of asymmetries in information during the succession process, the principal-agent theory has
been used as the theoretical foundation in this dissertation. This widespread basic theory is applied
in various company-relevant areas such as human resources management or contract management.
The principal-agent theory served to identify issues in the course of the research work. These issues
may relate to the succession process from the perspective of the transferring party, as well as that
of the acquiring party. The issues and problem areas are identified in methodological steps that
build upon each other. The first step involves an analysis of the relevant literature, followed by the
iterative collection of data in each case as a part of the different qualitative data collection methods.
The findings in the dissertation support the conclusion that the fundamental phases proposed by the
St. Gallen succession model are suited as a basic structure in a company transfer. Nonetheless, the
possible solutions in the principal-agent theory appear to be appropriate as support for the succession
process. In addition, it is possible to identify other process-supporting measures, which can be con-
sidered from the perspective of the transferring party and the acquiring party. In a consolidated form,
these measures result in a model of company succession.
The dissertation concludes in accordance with its intention in generating specifically formulated
hypotheses, which are based on the principal-agent theory, considering the perspectives of the trans-
ferring party and the acquiring party and also including other significant supportive aspects in the
transfer process.
Key words: SME, company succession, principal-agent theory, St. Gallen succession model
Abstract
5
The tremendous significance of small and medium-sized businesses for the German
economy is indisputable. This is why the long-term preservation of small and medium-
sized businesses is regarded as a key topic for the German economy. In particular, the
securing of company succession is a major challenge for many of these companies. Com-
pany succession can be described as a process of transferring management and owner-
ship. Consequently, whether the company was previously owned and/or managed by a
family or within another proprietary structure is insignificant.
This dissertation focuses on trying to answer the research question “What are the prob-
lematic areas, resulting risks and solution mechanisms in the process of company suc-
cession when the asymmetry in information is considered within the scope of the princi-
pal-agent theory?”, from which it derives two main objectives:

Identification of the problematic areas and resulting risks.

Determination of the solutions and specific recommendations.
The process of company succession is fundamentally depicted in the St. Gallen succes-
sion model. Its essential phases are preparation, execution and follow-up work. Due to
the particular significance of asymmetries in information during the succession pro-
cess, the principal-agent theory has been used as the theoretical foundation in this dis-
sertation. This widespread basic theory is applied in various company-relevant areas
such as human resources management or contract management. The principal-agent
theory served to identify issues in the course of the research work. These issues may
relate to the succession process from the perspective of the transferring party, as well
as that of the acquiring party. The issues and problem areas are identified in methodo-
logical steps that build upon each other. The first step involves an analysis of the rele-
vant literature, followed by the iterative collection of data in each case as a part of the
different qualitative data collection methods.
The findings in the dissertation support the conclusion that the fundamental phases pro-
posed by the St. Gallen succession model are suited as a basic structure in a company
transfer. Nonetheless, the possible solutions in the principal-agent theory appear to be
appropriate as support for the succession process. In addition, it is possible to identify
other process-supporting measures, which can be considered from the perspective of the
transferring party and the acquiring party. In a consolidated form, these measures result
in a model of company succession.
The dissertation concludes in accordance with its intention in generating specifically for-
mulated hypotheses, which are based on the principal-agent theory, considering the per-
spectives of the transferring party and the acquiring party and also including other sig-
nificant supportive aspects in the transfer process.
Souhrn
Obrovský význam malých a středních podniků pro německou ekonomiku je nesporný. Proto je také
dlouhodobá ochrana malých a středních podniků považována za klíčové téma pro německou
ekonomiku. Zejména zajištění následnictví v podnicích je velkou výzvou pro mnohé z nich.
Nástupnictví v podniku lze popsat jako proces převodu řízení a vlastnictví. Proto je také skutečnost,
zda byl podnik v minulosti vlastněn a/nebo řízen rodinou nebo v rámci jiné majetkové struktury,
zanedbatelná.
Tato disertační práce se zaměřuje na hledání odpovědi na výzkumnou otázku „Jaké jsou problem-
atické oblasti, výsledná rizika a mechanismy řešení v procesu nástupnictví v podniku, při zohlednění
asymetrie informací v rámci teorie zastoupení?“, z níž odvozuje své dva hlavní cíle:

Identifikace problémových oblastí a výsledných rizik.

Návrh řešení a specifických doporučení.
Proces nástupnictví v podniku je od základu popsán v následnickém modelu St. Gallen. Jeho zá-
kladní fáze jsou příprava, realizace a zpětná vazba. Vzhledem ke zvláštnímu významu asymetrií v
informacích v průběhu procesu následnictví, je jako teoretický základ této práce použita teorie
zastoupení. Tato rozšířená základní teorie je aplikována v různých firemně-důležitých oblastech,
jako je řízení lidských zdrojů nebo řízení smluv. Teorie zastoupení sloužila k identifikaci problémů
v průběhu výzkumné práce. Tyto otázky se mohou týkat procesu následnictví z pohledu
převádějící strany, stejně jako strany nabývající. Tyto otázky a problémové oblasti jsou uvedeny v
metodických krocích, které na sebe navazují. První krok zahrnuje analýzu příslušné literatury
následovanou iteračním shromažďováním údajů v rámci různých kvalitativních metod sběru dat.
Výsledky výzkumu provedeného v rámci zpracovávání disertace podporují závěr, že základní fáze
navržené v následnickém modelu St. Gallen jsou vhodné jako základní struktura převodu podniku.
Nicméně možná řešení v teorii zastoupení se zdají být vhodná jako podpora pro proces nástupnictví.
Kromě toho je možné identifikovat další vhodná opatření podporující proces převodu, která lze rov-
něž posoudit z pohledu převádějící strany a nabyvatele. V konsolidované formě vyústila tato
opatření v model následnictví ve firmě.
Disertační práce je v souladu s původním plánem zakončena formulací specifických hypotéz, které
jsou založeny na teorii zastoupení, berou v úvahu pohled převádějící strany a nabývající strany, a
zahrnují také další významné podpůrné aspekty v procesu převodu.
Klíčová slova: MSP, následnictví, teorie zastoupení, následnický model St. Gallen.

Zusammenfassung
7
Die enorme Bedeutung von kleinen und mittleren Unternehmen für die deutsche Wirt­
schaft ist unbestritten. Daher gilt der langfristige Erhalt kleiner und mittlerer Unter­
nehmen als zentrales Thema für die deutsche Volkswirtschaft. Die Sicherung der
Unternehmensnachfolge stellt insbesondere für viele dieser Unternehmen eine große
Herausforderung dar. Die Unternehmensnachfolge kann hierbei beschrieben werden
als ein Prozess des Übergangs von Leitung und Eigentum. Dabei ist es unerheblich, ob das
Unternehmen bislang im Eigentum respektive in der Leitung einer Familie oder in einer
anderen Eignerstruktur ist.
Der Prozess der Unternehmensnachfolge wird grundsätzlich im St.Galler Nachfolge
Modell abgebildet – wesentliche Phasen sind die Vorbereitung, Durchführung und
Nachbereitung. Aufgrund der besonderen Bedeutung von Informationsasymmetrien im
Rahmen des Nachfolgeprozesses soll in dieser Arbeit als theoretisches Fundament die
Principal­Agent­Theory herangezogen werden. Diese stellt eine verbreitete Grundlagen­
theorie dar, die in verschiedenen unternehmensrelevanten Bereichen, beispielsweise im
Personalmanagement oder Vertragsmanagement, Anwendung findet. Die Principal-Agent-
Theory dient dazu, im Laufe der Forschungsarbeit Problemkreise zu identifizieren. Diese
Problemkreise können den Nachfolgeprozess sowohl aus Sicht des Übergebers als auch
des Übernehmers betreffen. Die Problemkreise bzw. Cluster von Problemkreisen werden
in aufeinander aufbauenden methodischen Schritten identifiziert. Im ersten Schritt erfolgt
die Analyse relevanter Literatur, darauf aufbauend erfolgt jeweils iterativ die Erhebung von
Daten im Rahmen verschiedener qualitativer Datenerhebungsmethodiken.
Die Erkenntnisse des Forschungsprojektes lassen darauf schließen, dass im Zuge der
Unternehmensübergabe die grundsätzlichen Phasen, welche das St.Galler Nachfolge
Modell vorschlägt, als grundlegende Struktur geeignet erscheinen. Gleichwohl deuten die
Lösungsansätze der Principal­Agent­Theory als geeignet darauf hin, um den Nachfolge­
prozess zu unterstützen. Ergänzend können weitere prozessunterstützende Maßnahmen
identifiziert werden, die sowohl aus der Perspektive des Übergebers als auch des Überneh­
mers ihre Berücksichtigung finden können. Diese münden konsolidiert in einem Modell
der Unternehmensnachfolge.
Das Vorhaben schließt gemäß seiner Absicht der Hypothesengenerierung mit konkret
formulierten Hypothesensätzen, die auf der Principal­Agent­Theory aufsetzen, die Per­
spektiven des Übergebers und Übernehmers berücksichtigen und ergänzend weitere
wesentliche prozessunterstützende Aspekte des Übernahmeprozesses beinhalten.
Contents
Statutory Declaration …………………………………………………………………………………………………..2
Acknowledgements…………………………………………………………………………………………………….. 4
Abstract…………………………………………………………………………………………………………………………..5
Souhrn …………………………………………………………………………………………………………………………… 6
Contents………………………………………………………………………………………………………………………….7
Figures………………………………………………………………………………………………………………………….. 10
Abbreviations ……………………………………………………………………………………………………………… 12
1
Introduction ………………………………………………………………………………………………………….. 13
1.1
Starting point and problem……………………………………………………………………………..13
1.2
Relevance of small and medium-sized companies………………………………………….15
1.3
Importance and challenges of succession in Germany ………………………………….20
2
Objective and methodological approach …………………………………………………………..23
2.1
Current state of research and objective of this dissertation…………………………… 23
2.2
Methodological approach ……………………………………………………………………………… 27
2.3
Structure of dissertation…………………………………………………………………………………..33
3
Theoretical foundation ……………………………………………………………………………………….. 36
3.1
Models of company succession……………………………………………………………………… 36
3.1.1
Definition and types of company succession …………………………………….36
3.1.2
St. Gallen succession model based on Halter/Schröder……………………..37
3.1.3
Company succession model based on Kary/Dittmers……………………….40
3.1.4
Company succession model based on Viehl………………………………………42
3.1.5
Witten phase model for succession…………………………………………………….43
3.1.6
Wiesbaden model ……………………………………………………………………………….45
3.1.7
The 5-year model and 7-year model……………………………………………………47
3.1.8
Conclusion: Evaluation of succession models in terms of this
dissertation’s objective………………………………………………………………………. 48
3.2
Principal-agent theory……………………………………………………………………………………. 52
3.2.1
Definition and characteristics of principal-agent theory……………………52
3.2.2
Branches of research in principal-agent theory………………………………….53
3.2.2.1
Normative principal-agent theory……………………………………….54
3.2.2.2
Positive principal-agent theory……………………………………………54
Acknowledgements…………………………………………………………………………………………………….
3
Abstract…………………………………………………………………………………………………………………………
5
Zusammenfassung………………………………………………………………………………………………………
7
Contents………………………………………………………………………………………………………………………..
9
Figures……………………………………………………………………………………………………………………………
13
Abbreviations………………………………………………………………………………………………………………
15
1
Introduction ……………………………………………………………………………………………………………
17
1.1
Starting point and problem ………………………………………………………………………………
17
1.2
Relevance of small and medium­sized companies…………………………………………..
19
1.3
Importance and challenges of succession in Germany…………………………………… 24
2 Objective and methodological approach……………………………………………………………
27
2.1
Current state of research and objective of this dissertation …………………………….
27
2.2 Methodological approach …………………………………………………………………………………
31
2.3
Structure of dissertation……………………………………………………………………………………
37
3 Theoretical foundation…………………………………………………………………………………………. 41
3.1
Models of company succession…………………………………………………………………………
41
3.1.1
Definition and types of company succession………………………………………..
41
3.1.2
St.Gallen succession model based on Halter/Schröder ……………………….. 42
3.1.3
Company succession model based on Kary/Dittmers…………………………..
45
3.1.4
Company succession model based on Viehl………………………………………….
47
3.1.5
Witten phase model for succession ………………………………………………………. 48
3.1.6
Wiesbaden model…………………………………………………………………………………… 50
3.1.7
The 5­year model and 7­year model……………………………………………………….
52
3.1.8
Conclusion: Evaluation of succession models in terms of this
dissertation’s objective……………………………………………………………………………
53
3.2 Principal agent theory ………………………………………………………………………………………
57
3.2.1
Definition and characteristics of principal-agent theory………………………
57
3.2.2 Branches of research in principal­agent theory…………………………………….
58
3.2.2.1
Normative principal­agent theory……………………………………………
59
3.2.2.2 Positive principal­agent theory…………………………………………………
59
3.2.3
Definition and types of asymmetry in information……………………………… 60
3.2.3.1
Hidden characteristics………………………………………………………………
61
9
Contents
Statutory Declaration …………………………………………………………………………………………………..2
Acknowledgements…………………………………………………………………………………………………….. 4
Abstract…………………………………………………………………………………………………………………………..5
Souhrn …………………………………………………………………………………………………………………………… 6
Contents………………………………………………………………………………………………………………………….7
Figures………………………………………………………………………………………………………………………….. 10
Abbreviations ……………………………………………………………………………………………………………… 12
1
Introduction ………………………………………………………………………………………………………….. 13
1.1
Starting point and problem……………………………………………………………………………..13
1.2
Relevance of small and medium-sized companies………………………………………….15
1.3
Importance and challenges of succession in Germany ………………………………….20
2
Objective and methodological approach …………………………………………………………..23
2.1
Current state of research and objective of this dissertation…………………………… 23
2.2
Methodological approach ……………………………………………………………………………… 27
2.3
Structure of dissertation…………………………………………………………………………………..33
3
Theoretical foundation ……………………………………………………………………………………….. 36
3.1
Models of company succession……………………………………………………………………… 36
3.1.1
Definition and types of company succession …………………………………….36
3.1.2
St. Gallen succession model based on Halter/Schröder……………………..37
3.1.3
Company succession model based on Kary/Dittmers……………………….40
3.1.4
Company succession model based on Viehl………………………………………42
3.1.5
Witten phase model for succession…………………………………………………….43
3.1.6
Wiesbaden model ……………………………………………………………………………….45
3.1.7
The 5-year model and 7-year model……………………………………………………47
3.1.8
Conclusion: Evaluation of succession models in terms of this
dissertation’s objective………………………………………………………………………. 48
3.2
Principal-agent theory……………………………………………………………………………………. 52
3.2.1
Definition and characteristics of principal-agent theory……………………52
3.2.2
Branches of research in principal-agent theory………………………………….53
3.2.2.1
Normative principal-agent theory……………………………………….54
3.2.2.2
Positive principal-agent theory……………………………………………54
Acknowledgements…………………………………………………………………………………………………….
3
Abstract…………………………………………………………………………………………………………………………
5
Zusammenfassung………………………………………………………………………………………………………
7
Contents………………………………………………………………………………………………………………………..
9
Figures……………………………………………………………………………………………………………………………
13
Abbreviations………………………………………………………………………………………………………………
15
1
Introduction ……………………………………………………………………………………………………………
17
1.1
Starting point and problem ………………………………………………………………………………
17
1.2
Relevance of small and medium­sized companies…………………………………………..
19
1.3
Importance and challenges of succession in Germany…………………………………… 24
2 Objective and methodological approach……………………………………………………………
27
2.1
Current state of research and objective of this dissertation …………………………….
27
2.2 Methodological approach …………………………………………………………………………………
31
2.3
Structure of dissertation……………………………………………………………………………………
37
3 Theoretical foundation…………………………………………………………………………………………. 41
3.1
Models of company succession…………………………………………………………………………
41
3.1.1
Definition and types of company succession………………………………………..
41
3.1.2
St.Gallen succession model based on Halter/Schröder ……………………….. 42
3.1.3
Company succession model based on Kary/Dittmers…………………………..
45
3.1.4
Company succession model based on Viehl………………………………………….
47
3.1.5
Witten phase model for succession ………………………………………………………. 48
3.1.6
Wiesbaden model…………………………………………………………………………………… 50
3.1.7
The 5­year model and 7­year model……………………………………………………….
52
3.1.8
Conclusion: Evaluation of succession models in terms of this
dissertation’s objective……………………………………………………………………………
53
3.2 Principal agent theory ………………………………………………………………………………………
57
3.2.1
Definition and characteristics of principal-agent theory………………………
57
3.2.2 Branches of research in principal­agent theory…………………………………….
58
3.2.2.1
Normative principal­agent theory……………………………………………
59
3.2.2.2 Positive principal­agent theory…………………………………………………
59
3.2.3
Definition and types of asymmetry in information……………………………… 60
3.2.3.1
Hidden characteristics………………………………………………………………
61
9
Contents
Statutory Declaration ………………………………………………………………………………………………….. 2
Acknowledgements …………………………………………………………………………………………………….. 4
Abstract ………………………………………………………………………………………………………………………….. 5
Souhrn …………………………………………………………………………………………………………………………… 6
Contents …………………………………………………………………………………………………………………………. 7
Figures
………………………………………………………………………………………………………………………….. 10
Abbreviations ……………………………………………………………………………………………………………… 12

1
Introduction ………………………………………………………………………………………………………….. 13
1.1
Starting point and problem
…………………………………………………………………………….. 13
1.2
Relevance of small and medium-sized companies
…………………………………………. 15
1.3
Importance and challenges of succession in Germany ………………………………….
20

2
Objective and methodological approach ………………………………………………………….. 23
2.1
Current state of research and objective of this dissertation
…………………………… 23
2.2
Methodological approach ……………………………………………………………………………… 27
2.3
Structure of dissertation
…………………………………………………………………………………..
33

3
Theoretical foundation ……………………………………………………………………………………….. 36
3.1
Models of company succession ……………………………………………………………………… 36
3.1.1
Definition and types of company succession …………………………………….
36
3.1.2
St. Gallen succession model based on Halter/ Schröder ……………………. 37
3.1.3
Company succession model based on Kary/ Dittmers
……………………… 40
3.1.4
Company succession model based on Viehl ………………………………………42
3.1.5
Witten phase model for succession……………………………………………………. 43
3.1.6
Wiesbaden model ……………………………………………………………………………….
45
3.1.7
The 5-year model and 7-year model ……………………………………………………
47
3.1.8
Conclusion: Evaluation of succession models in terms of this
dissertation’s objective ………………………………………………………………………. 48
3.2
Principal-agent theory ……………………………………………………………………………………. 52
3.2.1
Definition and characteristics of principal-agent theory
…………………… 52
3.2.2
Branches of research in principal-agent theory …………………………………. 53
3.2.2.1
Normative principal-agent theory
……………………………………….
54
3.2.2.2
Positive principal-agent theory ……………………………………………
54
1
3
5
7
9
3.2.3
Definition and types of asymmetry in information……………………………55
3.2.3.1
Hidden characteristics………………………………………………………….56
3.2.3.2
Hidden action ………………………………………………………………………57
3.2.3.3
Hidden information……………………………………………………………..58
3.2.4
Challenges in principal-agent theory…………………………………………………60
3.2.4.1
Moral hazard……………………………………………………………………….60
3.2.4.2
Adverse selection …………………………………………………………………61
3.2.4.3
Hold up……………………………………………………………………………….. 62
3.2.5
Conclusion ………………………………………………………………………………………….63
4
Qualitative research…………………………………………………………………………………………….. 67
4.1
Qualitative research approach………………………………………………………………………..67
4.2
Quality criteria in qualitative research……………………………………………………………68
4.3
Research design ……………………………………………………………………………………………….71
4.3.1
Development of a research plan …………………………………………………………73
4.3.2
Sampling strategy ……………………………………………………………………………….73
4.4
First survey of qualitative data: Focus group …………………………………………………. 77
4.5
Interim results of focus group …………………………………………………………………………81
4.6
Second survey of qualitative data: Expert interviews…………………………………….89
4.7
Interim results of expert interviews……………………………………………………………… 103
4.7.1
Summary of Group 1: Acquiring party before the transfer ………………104
4.7.2
Summary of Group 2: Acquiring party after the transfer…………………108
4.7.3
Summary of Group 3: Transferring party after the transfer………………112
4.8
Third survey of qualitative date: Expert interviews II……………………………………. 115
4.8.1
Procedure for expert interviews…………………………………………………………115
4.8.2
Interim results of the expert interviews……………………………………………..116
5
Results…………………………………………………………………………………………………………………… 121
5.1
Recommendations for Action……………………………………………………………………….121
5.2
Hypotheses …………………………………………………………………………………………………….135
6
Discussion…………………………………………………………………………………………………………….140
6.1
Discussion of findings from the literature analysis………………………………………140
6.2
Discussion of findings from the focus group………………………………………………. 142
6.3
Discussion of findings from the expert interviews………………………………………..143
3.2.3.2
Hidden action …………………………………………………………………………… 62
3.2.3.3
Hidden information ………………………………………………………………….
63
3.2.4 Challenges in principal­agent theory …………………………………………………….
65
3.2.4.1
Moral hazard……………………………………………………………………………..
65
3.2.4.2 Adverse selection ……………………………………………………………………… 66
3.2.4.3 Hold up………………………………………………………………………………………
67
3.2.5
Conclusion……………………………………………………………………………………………… 68
4 Qualitative research………………………………………………………………………………………………. 73
4.1
Qualitative research approach ………………………………………………………………………….
73
4.2 Quality criteria in qualitative research……………………………………………………………..
74
4.3 Research design …………………………………………………………………………………………………
77
4.3.1
Development of a research plan …………………………………………………………….
79
4.3.2 Sampling strategy……………………………………………………………………………………
79
4.4 First survey of qualitative data: Focus group……………………………………………………
83
4.5 Interim results of focus group…………………………………………………………………………..
87
4.6 Second survey of qualitative data: Expert interviews……………………………………..
95
4.7 Interim results of expert interviews…………………………………………………………………. 109
4.7.1
Summary of Group 1: Acquiring party before the transfer………………….. 110
4.7.2 Summary of Group 2: Acquiring party after the transfer…………………….. 114
4.7.3
Summary of Group 3: Transferring party after the transfer…………………. 118
4.8 Third survey of qualitative date: Expert interviews II……………………………………… 121
4.8.1 Procedure for expert interviews ……………………………………………………………. 121
4.8.2 Interim results of the expert interviews………………………………………………… 122
5 Results……………………………………………………………………………………………………………………… 127
5.1
Recommendations for Action………………………………………………………………………….. 127
5.2 Hypotheses……………………………………………………………………………………………………….. 141
6 Discussion ………………………………………………………………………………………………………………. 147
6.1
Discussion of findings from the literature analysis…………………………………………. 147
6.2 Discussion of findings from the focus group ………………………………………………….. 149
6.3 Discussion of findings from the expert interviews …………………………………………. 150
6.4 Discussion of findings from the expert talks…………………………………………………… 151
6.5 Discussion of the derived hypotheses……………………………………………………………… 152
7 Conclusion………………………………………………………………………………………………………………. 155
10
Contents
6.4
Discussion of findings from the expert talks……………………………………………….. 144
6.5
Discussion of the derived hypotheses……………………………………………………………145
7
Conclusion…………………………………………………………………………………………………………….147
References…………………………………………………………………………………………………………………..152
Appendices…………………………………………………………………………………………………………………169
Appendix 1: Letter of invitation focus group………………………………………………………… 169
Appendix 2: Guideline focus group……………………………………………………………………….. 171
Appendix 3: Letter of invitation expert interviews…………………………………………………174
Appendix 4: Guideline expert interviews……………………………………………………………….175
Appendix 5: Letter of invitation expert interviews II ……………………………………………..178
Appendix 6: Guideline expert interviews……………………………………………………………….179
Curriculum Vitae……………………………………………………………………………………………………….184
References……………………………………………………………………………………………………………………. 161
Appendices ………………………………………………………………………………………………………………….. 179
Appendix 1: Letter of invitation focus group…………………………………………………………… 179
Appendix 2: Guideline focus group…………………………………………………………………………. 181
Appendix 3: Letter of invitation expert interviews …………………………………………………. 184
Appendix 4: Guideline expert interviews………………………………………………………………… 185
Appendix 5: Letter of invitation expert interviews II………………………………………………. 188
Appendix 6: Guideline expert interviews………………………………………………………………… 189
Contents
11
Figures
Figure 1:
SME criteria according to the IfM Bonn and EU Commission…………………….15
Figure 2:
Statistical data on SMEs (2004-2012)……………………………………………………………19
Figure 3:
Derived gaps in research……………………………………………………………………………..26
Figure 4:
Overview of method for collecting data……………………………………………………..28
Figure 5:
Fundamental research approach………………………………………………………………….33
Figure 6:
St. Gallen succession model based on Halter/Schröder …………………………….. 38
Figure 7:
Succession model based on Kary/Dittmers ………………………………………………..40
Figure 8:
Succession model based on Viehl……………………………………………………………….42
Figure 9:
Witten phase model for succession……………………………………………………………. 43
Figure 10:
Option models for company asset relief ……………………………………………………. 47
Figure 11:
St. Gallen succession model as an integrating approach ……………………………49
Figure 12:
The principal-agent relationship with hidden characteristics over time…… 56
Figure 13:
Principal-agent relationship in hidden action over time……………………………. 58
Figure 14:
Principal-agent relationship in hidden information over time………………….. 59
Figure 15:
Research logic according to Mayring…………………………………………………………. 72
Figure 16:
Research plan……………………………………………………………………………………………….73
Figure 17:
Sampling selection……………………………………………………………………………………… 76
Figure 18:
Forms of qualitative interviews………………………………………………………………….. 78
Figure 19:
Focus group for data collection…………………………………………………………………..80
Figure 20: Clusters as a result of the focus group………………………………………………………….81
Figure 21:
Classification of issues in the cluster of Entrepreneurial Personality …………82
Figure 22: Classification of issues in the cluster of Attitude – Willingness – Action….. 83
Figure 23:
Classification of issues in the cluster of Strategic Aspects…………………………. 83
Figure 24: Classification of issues in the cluster of Financing-Relevant Aspects ………..84
Figure 25:
Relevance of clusters…………………………………………………………………………………… 85
Figure 26: Entrepreneurial Personality cluster in phase 1……………………………………………. 85
Figure 27:
Attitude – Willingness – Action cluster in phase 1……………………………………..86
Figure 28: Strategic Aspects cluster in phase 1……………………………………………………………..86
Figure 29: Financing-Relevant Aspects cluster in phase 1……………………………………………86
Figure 30: Entrepreneurial Personality cluster in phase 2…………………………………………… 87
Figure 31:
Attitude – Willingness – Action cluster in phase 2 ……………………………………. 87
Figure 32:
Strategic Aspects cluster in phase 2……………………………………………………………. 87
Figure 33:
Financing-Relevant Aspects cluster in phase 2 …………………………………………..88
Figure 34:
Entrepreneurial Personality cluster in phase 3 ……………………………………………88
Figure 1:
SME criteria according to the IfM Bonn and EU Commission …………………..
19
Figure 2:
Statistical data on SMEs (2004–2012)………………………………………………………….
23
Figure 3:
Derived gaps in research …………………………………………………………………………….. 30
Figure 4:
Overview of method for collecting data……………………………………………………..
32
Figure 5:
Fundamental research approach…………………………………………………………………
37
Figure 6:
St.Gallen succession model based on Halter/Schröder……………………………..
43
Figure 7:
Succession model based on Kary/Dittmers………………………………………………..
45
Figure 8:
Succession model based on Viehl ……………………………………………………………….
47
Figure 9:
Witten phase model for succession……………………………………………………………. 48
Figure 10: Option models for company asset relief……………………………………………………..
52
Figure 11: St.Gallen succession model as an integrating approach…………………………….
54
Figure 12: The principal­agent relationship with hidden characteristics over time…..
61
Figure 13: Principal­agent relationship in hidden action over time ……………………………
63
Figure 14: Principal­agent relationship in hidden information over time …………………. 64
Figure 15: Research logic according to Mayring………………………………………………………….
78
Figure 16: Research plan……………………………………………………………………………………………….
79
Figure 17: Sampling selection………………………………………………………………………………………. 82
Figure 18: Forms of qualitative interviews ………………………………………………………………….. 84
Figure 19: Focus group for data collection………………………………………………………………….. 86
Figure 20: Clusters as a result of the focus group…………………………………………………………
87
Figure 21: Classification of issues in the cluster of Entrepreneurial Personality ……….. 88
Figure 22: Classification of issues in the cluster of Attitude – Willingness – Action…. 89
Figure 23: Classification of issues in the cluster of Strategic Aspects ………………………… 89
Figure 24: Classification of issues in the cluster of Financing-Relevant Aspects……….. 90
Figure 25: Relevance of clusters ……………………………………………………………………………………
91
Figure 26: Entrepreneurial Personality cluster in phase 1…………………………………………….
91
Figure 27: Attitude – Willingness – Action cluster in phase 1…………………………………….. 92
Figure 28: Strategic Aspects cluster in phase 1…………………………………………………………….. 92
Figure 29: Financing­Relevant Aspects cluster in phase 1…………………………………………… 92
Figure 30: Entrepreneurial Personality cluster in phase 2……………………………………………
93
Figure 31: Attitude – Willingness – Action cluster in phase 2…………………………………….
93
Figure 32: Strategic Aspects cluster in phase 2…………………………………………………………….
93
Figure 33: Financing­Relevant Aspects cluster in phase 2………………………………………….. 94
Figure 34: Entrepreneurial Personality cluster in phase 3…………………………………………… 94
Figure 35: Attitude – Willingness – Action cluster in phase 3 ……………………………………. 94
13
Figure 35:
Attitude – Willingness – Action cluster in phase 3……………………………………..88
Figure 36:
Expert interviews on data collection…………………………………………………………..92
Figure 37:
Sample of expert interviews………………………………………………………………………..94
Figure 38:
Starting points for guideline development………………………………………………… 95
Figure 39:
Excerpt from the interview guidelines. Grid for written documentation
of the contributions made by the interview partner for the issue of
credibility…………………………………………………………………………………………………….96
Figure 40: Documentation of interview contributions in the guideline grid……………… 97
Figure 41:
Structure of a conversation in the expert interview…………………………………… 97
Figure 42: Transcription of an interview (excerpt)……………………………………………………..101
Figure 43:
Extraction and paraphrasing of a transcribed interview (excerpt)…………… 102
Figure 44: Sample summary from the extraction and paraphrasing of a transcribed
interview …………………………………………………………………………………………………….103
Figure 45:
Sample of expert group………………………………………………………………………………116
Figure 46: The Inner Team communication square……………………………………………………122
Figure 47:
Steps in balance sheet analysis……………………………………………………………………125
Figure 48: Situation model of Truth of the Situation………………………………………………….126
Figure 49: Milestone plan by means of a Gantt chart………………………………………………….127
Figure 50: The four forms of converting knowledge ………………………………………………….129
Figure 51:
Knowledge spirals in the generation of knowledge………………………………….. 133
Figure 52:
Learning cycle …………………………………………………………………………………………….134
Figure 53:
Hypotheses Block 1 …………………………………………………………………………………….136
Figure 54:
Hypotheses Block 2…………………………………………………………………………………….137
Figure 55:
Hypotheses block 3…………………………………………………………………………………….137
Figure 56: Hypotheses Βlock 4……………………………………………………………………………………138
Figure 57:
Hypotheses Block 5…………………………………………………………………………………….138
Figure 58:
Hypotheses Block 6…………………………………………………………………………………….139
Figure 59: Company succession model at a SME………………………………………………………..148
Figure 36: Expert interviews on data collection………………………………………………………….. 98
Figure 37: Sample of expert interviews……………………………………………………………………….. 100
Figure 38: Starting points for guideline development ………………………………………………… 101
Figure 39: Excerpt from the interview guidelines. Grid for written documentation
of the contributions made by the interview partner for the issue of
credibility…………………………………………………………………………………………………….. 102
Figure 40: Documentation of interview contributions in the guideline grid…………….. 103
Figure 41: Structure of a conversation in the expert interview………………………………….. 103
Figure 42: Transcription of an interview (excerpt)……………………………………………………… 105
Figure 43: Extraction and paraphrasing of a transcribed interview (excerpt)……………. 108
Figure 44: Sample summary from the extraction and paraphrasing of
a transcribed interview……………………………………………………………………………….. 109
Figure 45: Sample of expert group………………………………………………………………………………. 122
Figure 46: The Inner Team communication square ……………………………………………………. 128
Figure 47: Steps in balance sheet analysis……………………………………………………………………. 131
Figure 48: Situation model of Truth of the Situation………………………………………………….. 132
Figure 49: Milestone plan by means of a Gantt chart………………………………………………….. 133
Figure 50: The four forms of converting knowledge…………………………………………………… 135
Figure 51: Knowledge spirals in the generation of knowledge……………………………………. 139
Figure 52: Learning cycle……………………………………………………………………………………………… 140
Figure 53: Hypotheses Block 1……………………………………………………………………………………… 142
Figure 54: Hypotheses Block 2 …………………………………………………………………………………….. 143
Figure 55: Hypotheses Block 3……………………………………………………………………………………… 143
Figure 56: Hypotheses Block 4…………………………………………………………………………………….. 144
Figure 57: Hypotheses Block 5 …………………………………………………………………………………….. 144
Figure 58: Hypotheses Block 6…………………………………………………………………………………….. 145
Figure 59: Company succession model at a SME ………………………………………………………… 156
14
Figures
Abbreviations
AG
Aktiengesellschaft (incorporated company)
BMWi
Bundesministerium für Wirtschaft und Energie
(German Federal Ministry for Economic Affairs)
ca.
circa
cf.
compare
e. g.
for example
et al.
et alii
etc.
et cetera
f., ff.,
following pages
FBI
Family buy-in
FBO
Family buy-out
GmbH
Gesellschaft mit beschränkter Haftung (limited liability company)
H
Hypothesis
Hrsg.
Herausgeber (publisher)
HSG
University of St. Gallen
i. e.
id est
IfM
Institut für Mittelstandsforschung Bonn
(German Institute for SME Research)
KfW
Kreditanstalt für Wiederaufbau
(German Credit Institute for Reconstruction)
KMU-HSG Schweizerisches Institut für Klein- und Mittelunternehmen
der Universität St. Gallen (Swiss Institute for Small and Medium-Sized
Enterprises at the University of St. Gallen)
MBI
Management buy-in
MBO
Management buy-out
No.
number
p.
page
p. a.
per annum
PAT
Principal-Agent Theory
SME
Small and medium-sized enterprises
www.
world wide web
ZEW
Zentrum für Europäische Wirtschaftsförderung
(Center for European Economic Research)
15
1 Introduction
13
1
Introduction
1.1
Starting point and problem
The business landscape in Germany is very diverse. In addition to large corporations,
there are especially small and medium-sized companies that are typically referred to as
SMEs. Small and medium-sized enterprises or companies are largely characterised by
their small staff and low annual sales revenue. In Germany, small and medium-sized en-
terprises assume a place of great economic importance. Besides their contribution to
overall economic output, they play a prominent role especially due to their dominant
share of the private economy and their relevance for vocational training. Consequently,
it is not surprising that statements or headlines such as “Germany’s strength is the
strength of our SMEs”1 or “SMEs considered backbone of the German economy”2 are ac-
cepted by the public and frequently appear in the headlines.
Due to the strong significance of SMEs for the economy and employees, the long-term
survival of small and medium-sized enterprises is a central issue. This is due in particular
to the fact that the majority of SMEs are run by their owners and often involve family
companies (Familienunternehmen). In simple terms, family companies are characterised by
the combination of ownership and management. A central characteristic of German
small and medium-sized enterprises is therefore the heavy concentration of ownership
in the company.3
Securing the company succession is a major challenge for many SMEs. A study by the
Center for European Economic Research (ZEW)4 and the IfM Bonn (Institute for SME Re-
search)5 analysed company succession in SMEs in general and family companies in par-
1
Gabriel (2015), p. 1.
2
Wirtschaftswoche (2015), article of 16 April 2015.
3
Cf. Hilpisch (2005), p. 96.
4
The Center for European Economic Research (ZEW) is a non-profit economic research institute […]. It was
formed in 1990 at the initiative of the Baden-Wuerttemberg state government, the economy in the state and the
University of Mannheim and started its work in April 1991. Since then, the Center for European Economic Re-
search has established itself as one of the leading German economic research institutes with a very solid European
reputation. Source: www.zew.de.
5
The IfM Bonn (Institute for SME Research) was formed, at the initiative of Ludwig Erhard, by the Federal Republic
of Germany and by the state of North Rhine-Westphalia as a foundation under private law. The job of the IfM
Bonn is to research the situation, development and problems in SMEs, make the research results accessible to the
public and use its work to contribute to fulfilment of the tasks in the area of its founder. Source: www.ifm-
bonn.org.
17
1 Introduction
14
ticular from 2002-2008, showed that family-internal successors had the least profes-
sional experience in the industry, management positions and running a company relative
to all successors who were considered. This leads to the conclusion that the requirements
in terms of professional qualifications and experience are lower for family-internal suc-
cessors than for external successors.6 The study also reveals that after taking over the
company, a large percentage of the successors made organisational changes and also al-
tered external business relationships. After taking over a company, a higher percentage
than average also pursued process innovations.7 Comparing an internal and external as-
sumption of a company basically demonstrated that companies with an external succes-
sor had higher growth and higher returns on sales than other successor-run companies,
which also includes companies with internal succession. External successors tend to take
over companies that appear less profitable than family companies. However, the former
generally have a larger potential for development, which the external successors can take
advantage of.8
Company succession is essentially a complex topic. Company succession can be de-
scribed as the “transfer of ownership in a company and the associated management pow-
ers independently of whether the ownership of the affected company is in the hands of a
family or other economic subjects – such as a legal entity or individual natural people
dependent upon each other.”9
While previous definitions understood company succession to be solely the succession
in family companies, Hering and Olbrich adopt a broader understanding of company
succession with their definition. Company succession goes through a process that con-
sists of the decision phase, matching phase (search phase), transfer phase and withdrawal
phase.10 In literature and in the practice, a few phase models have been developed and are
addressed in greater detail in section 3.1.
As the preceding explanations show, family-internal and family-external succession
means that there are different options for succession. Another alternative is also the liq-
uidation or discontinuation of the company.
A characteristic feature of family-internal succession is that capital and management
6
Cf. ZEW/IfM (2009/2010), p. 8.
7
Cf. ibid.
8
Cf. ibid, p. 9.
9
Hering/Olbrich (2003), p. 4.
10
Cf. IfM Bonn (2009), p. 2.
18
1 Introduction
A characteristic feature of family-internal succession is that the shareholding ratios

as well as management tasks stay within the family, which typically means that the
1 Introduction
15
comes from within the family, which typically means from the children. However, a lack
of interest in taking over the family company and a lack of qualifications often prevent
family-internal succession from occurring.11 Then a family-external succession is taken
into consideration. Family-external succession can occur in three different ways:
1.
The company continues to be owned by the family: e. g., external management, ren-
ting or leasing
2.
Transfer to a foundation
3.
Sale: e. g., to a strategic investor, financial investor, management buy-out or manage-
ment buy-in.12
Above all, company succession is a central issue and also frequently a main problem in
small and medium-sized companies.
1.2
Relevance of small and medium-sized companies
Since the focus of this dissertation is on small and medium-sized companies, they must
be defined more precisely. The literature does not provide a uniform definition of the
term SME or small and medium-sized enterprise or company. In order to still be able to
define it, the two or three main characteristics of annual sales, size of the company and
its total assets are often used. One of the most popular definitions is the system employed
by the IfM Bonn and the EU Commission, which are described below:
Figure 1: SME criteria according to the IfM Bonn and EU Commission
Source: Senn (2013), p. 9.
11
Cf. Ciesielski (2007), p. 17.
12
Cf. Lüders (2008), p. 3.
1.2 Relevance of small and medium-sized companies
19
children take over the entrepreneurial position from their parents. However, a lack
1 Introduction
16
The IfM Bonn considers the number of employees and annual sales to be critical quanti-
tative criteria for differentiating between small, medium-sized and large companies. The
EU Commission also considers the quantitative criterion of total assets and fundamen-
tally distinguishes between very small, small and medium-sized companies. The EU
Commission also takes the independence of SMEs into account as an additional charac-
teristic. This means that no other company may hold more than 25% of the capital or the
voting rights in the company. Furthermore, the company may not hold more than 25%
of one or more companies.13
Quantitative criteria alone are usually not sufficient to correctly define a SME in an ob-
jective way, which is why consideration must be given to qualitative characteristics.14
Qualitative characteristics of SMEs may include “personal” company management by the
owner, limitation to a narrow product or service spectrum, individualised offers and per-
sonal network structures.15 These characteristics will be addressed in greater detail in the
following section.
Above all, German small and medium-sized companies are characterised by a heavy con-
centration of ownership in the company; in many cases, the handling of the company’s
management is also in the hands of the owner or partner.16 The IfM Bonn describes com-
panies in which the ownership and management are combined as family companies.
Companies in which the owner does not hold a significant share of the capital or the con-
trol rights cannot be defined as a family company.17 The combination of ownership, lia-
bility, decision-making, risk and management in one person results in a linking of private
and professional risk for the owner.18 This concentration of functions makes the entre-
preneur the central person in the SME, influencing its values and therefore representing
thedefining figure.19This is associatedwith thefactthattheentrepreneur has aninfluence
on the important decisions in the company,20 which typically exhibit an intuitive char-
acter.21 The close intertwining of entrepreneur and company frequently has the conse-
13
Cf. Senn (2013), p. 8.
14
Cf. Kluth (2011), p. 6.
15
Cf. Fueglistaller et al. (2013), p. 92 f. Other characteristics are flat hierarchies and short communication and
decision-making processes.
16
Cf. Hilpisch (2005), p. 96.
17
Cf. Haunschild/Wolter (2010), p.3.
18
Cf. Kluth (2011), p. 6.
19
Cf. Bergmann/ Crespo (2009), p. 10.
20 Cf. ibid.
21
Cf. Meyer (2011), S. 94.
20
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17
quence that the entrepreneur’s departure is difficult and a replacement of the SME’s man-
agement cannot be achieved in the same way as in a major corporation. 22 The heavy con-
centration of ownership is also clear in a consideration of the SME’s legal form. Many
small and medium-sized companies operate as an individual business (Einzelunternehmen),
civil-law partnership (Gesellschaft bürgerlichen Rechts // GbR), limited liability company (Ge-
sellschaft mit beschränkter Haftung // GmbH), limited partnership (Kommanditgesellschaft // KG)
or limited partnership with the general partner as a limited liability company (GmbH &
Co. KG).23
Furthermore, SMEs usually have an easily understandable range of services. By limiting
themselves to a narrow range of products or services, SMEs may be able to focus on their
core competencies but this concentration comes with heavy dependency on one mar-
ket.24
Individualised products and services let SMEs react flexibly to customer wishes and
changes in market conditions, which gives them an advantage over big companies that
tend to produce a large quantity of standardised products.25 A less formalised organisa-
tion supports the flexibility of SMEs.26 However, the limited resources of the entrepre-
neur make it challenging to adapt the company’s internal capacities to changes in the or-
der situation.27
A characteristic feature of SMEs continues to be the personally defined contacts with cus-
tomers and suppliers, whereby the entrepreneur also has a major influence on purchas-
ing and sales relationships and the relationship with competitors.28
Small and medium-sized enterprises are of particular significance for the economy.
Within this context, the German Federal Ministry for Economic Affairs and Energy
speaks of SMEs as the “motor of the German economy.”29 The importance of SMEs can
also be seen in the following figures:

99.6% of all German companies are SMEs (this was roughly 3.65 million companies
in 2012).
22 Cf. Fueglistaller et al. (2013), p. 92.
23
Cf. Hilpisch (2005), p. 96.
24 Cf. Fueglistaller et al. (2013), p. 92.
25
Cf. ibid, p. 93.
26 Cf. Bergmann/ Crespo (2009), p. 11.
27
Cf. ibid.
28 Cf. Fueglistaller et al. (2013), p. 93.
29 Cf. German Federal Ministry for Economic Affairs and Energy (2014), p. 1.
1.2 Relevance of small and medium-sized companies
21
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18

German SMEs contribute over 56% to the entire economic output and accounted for
roughly 36% of all sales by German companies (this was €2.1 billion in 2011).

Small and medium-sized enterprises employed 16.8 million people in 2014, which
corresponds to 62.3% of the entire labour force required to contribute to social secu-
rity.

Sales abroad by small and medium-sized companies have been growing annually and
were €199 billion in 2012.30
It should be emphasised that 84% of all trainees worked in companies with less than
500 employees at the end of 2012.31
Due to their economic importance, German SMEs are also supported by political policy.
This especially applies in regard to topics such as investments in research and develop-
ment, demand for skilled labour, the need for financing, start-ups and company succes-
sion plans.32
30 Cf. ibid, p. 3 ff.
31
Cf. IfM Bonn, www.ifm-bonn.org.
32
Cf. German Federal Ministry for Economic Affairs and Energy (2014), p. 4.
22
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19
Figure 2: Statistical data on SMEs (2004-2012)
Source: IfM Bonn (no year), p. 1.
The above table provides an overview of the number of SMEs, their sales revenue and the
number of employees subject to social insurance contributions in Germany from 2004
to 2012, as well as estimates of the number of companies in 2013 and 2014. For example,
it shows that all of the companies in total generated sales revenues of €6,069.39 billion in
1.2 Relevance of small and medium-sized companies
23
1 Introduction
20
2012, of which €2,149.29 billion or 35.3% was generated by SMEs. This sales revenue was
generated by a total of 3,649,051 SMEs.
On the other hand, SMEs also have numerous problems and must repeatedly face new
challenges that arise due to their particular characteristics. The most important chal-
lenges for SMEs include financing and succession. Since medium-sized companies tend
to have a low equity ratio, it is often difficult for them to raise outside capital – a situation
that is due in particular to changes in legislation. The securing of company succession is
also considered to be an important topic for SMEs.33
1.3
Importance and challenges of succession in
Germany
Above all, company succession becomes a challenge because ownership and manage-
ment are combined at medium-sized companies. Entrepreneurs must make decisions on
the long-term continuation of the company, as well as their own provisions for old age
and securing the needs of the family.34 Succession arrangements at an early stage are also
important. One of the most common reasons for a transfer is the departure of the entre-
preneur due to age (about 86%), death (about 10%) or illness (about 4%).35 But a frequent
situation in the practice is that the majority of entrepreneurs do not prepare for succes-
sion in advance, even though they are aware that regulating succession is important.36
The successful implementation of company succession frequently becomes more diffi-
cult as a result. However, successful company succession has a major influence on the
long-term continuity of the company and is associated with other issues such as the se-
curing of jobs and trainee positions.37
From the entrepreneur’s point of view, i. e. that of the transferring owner, the main prob-
lems in succession are frequently identified as:

not prepared in advance

purchase price too high

owner cannot let go for emotional reasons
33 Cf. ibid, p. 3.
34 Cf. Lüders (2008), p. 3.
35 Cf. IfM Bonn (2014).
36 Cf. IfUWS (no year), p. 7.
37 Cf. ibid, p. 8.
24
1 Introduction