The Mittelstand Is At That Awkward Age

Karl Tack never expected to preside over a 500-meter-deep hole in the ground. Content as a teacher, he made it clear when he married one of Manfred Rhodius' daughters that he would not run Gebruder Rhodius, the family mineral-water business, tucked away in the Eifel hills south of Bonn. But in 1987, when his father-in-law divvied up ownership of the company, Tack felt he had to do his part to keep the business going. So after a year of traveling in Australia with his family, he decided to go for it.

Tack shelved his schoolbooks and learned the business. Before joining the $142 million company in 1990, he apprenticed with PepsiCo Inc. in the U.S., even delivering crates of soda. Last June, he and another son-in-law took over Rhodius. His father-in-law, 66, now runs the advisory board and indulges his passion for hunting. Already, Tack has launched 15 new products: Sales rose 20% last year. "My father-in-law had the courage to leave at the peak of his career," says Tack, 45. "We're lucky he trusts us."

"SEVERE DAMAGE." Rhodius' story is just one part of a vast generational shift in power and ownership under way in Germany's Mittelstand. This network of two million small- and medium-size companies is the backbone of the German economy, generating two-thirds of gross domestic product. Now, nearly 300,000 of these businesses face the thorny issue of how to thrive after their aging owner-operators retire or die. Many of these feisty proprietors, who built businesses from scratch in the ruins of postwar Germany, may not be facing up to the problem. Gunter Kayser, director of the Institute for Mittelstand Research, estimates that 100,000 of them, employing half a million workers, have no successor at all: "This could do severe economic damage."

This generational crisis is brewing at a time when small companies are already under intense pressure. Soaring wages and benefits, as well as stiff inheritance taxes, hit them hardest. If they go under, they take with them Germany's best means of creating jobs, since the corporate giants are laying off, not hiring.

How the Germans tackle this issue has resonance for U.S. small businesses. Almost 1.6 million of them--about 18% of the total--are more than 30 years old, according to researcher David L. Birch of Cognetics Inc. in Cambridge, Mass. Many of their owners are pondering whether to keep a business in the family, sell it, or wind it up while it's still profitable.

U.S. business owners examining the German experience will see that long-term planning can pay off. Take the case of Kronenbrot. Just outside Aachen, near Belgium and the Netherlands, the scent of Kronenbrot's fresh-baked bread wafts over a fleet of yellow and red delivery trucks. Herbert Mainz, 58, inherited the family bakery at 19, when his father died, and built it into a regional powerhouse. To make sure he had enough time to groom his own sons, Herbert stepped back in 1990 to let his eldest, Lothar, now 32, take over as chief executive and production chief. Wolfgang, 29, will run marketing once he finishes his studies this year. Both trained in banking and baking.

The senior Mainz still runs purchasing, and the three Mainzes sit around a table each Friday afternoon to plan with top managers. But with Lothar now the boss of people who once pulled him around the yard in a wagon, his father makes it clear that the kids are in charge. Already, Lothar has opened a new factory, and Wolfgang is plotting to crack the Belgian and Dutch markets. "I'll bake till I collapse," jokes the senior Mainz. "But it's time for the next generation to bring in new ideas."

TAKING PUNCHES. The handoff should not be automatic, either. When Rolf Schwarz-Schutte emerged from a U.S. prisoner-of-war camp in 1945 at age 25, he joined his father's small pharmacy and built it into a $50 million marketer of cardiovascular products. But son Patrick had to earn the right to take over. First, he worked and trained outside, then he took on various jobs under his father's critical eye. "You need to be able to take a punch or two without going to the floor," advises Patrick, now 38. He proved himself to the family by handling acquisitions in the U.S. and eastern Germany. Now, he runs the company and is about to take it public by selling 22% of the shares to help finance further growth.

Not every transition is so well handled. Where the successor isn't obvious, the owner may delay a decision as long as possible. Kaspar Vierecke, for example, operates a small metal-parts company founded by his great-grandfather. His three daughters have no interest in taking over. But Vierecke plans to worry about that when he hits 60 in four years. That's the wrong attitude. "Many act like they'll live to be 100," says Horst Brokelmann, senior partner with consultants Trebag Treuhand & Beratung in Munich.

The greatest danger comes when the parent won't relinquish control. German consultants do a brisk business helping entrepreneurs learn to let go. "The worst thing an owner can do is not trust his successor," says consultant Jurg Glaser-Gallion. A reluctant offspring can inflict damage as well. At one maker of truck trailers, father and son squabbled during a lengthy takeover. Not as committed to the company, the son didn't invest, debts grew, and sales, once as high as $50 million, dwindled until liquidation became inevitable.

Some children refuse to take over because the inheritance taxes are so stiff they can threaten a company's competitiveness. Tack at Rhodius says if his father-in-law suddenly died now, "we'd have to sell some machines just to pay the taxes." The government, however, does allow a gradual transfer of ownership, which lowers the tax liability. And the Mittelstand groups are lobbying for special tax treatment for heirs who continue to run their inherited companies and reinvest profits.

Many entrepreneurs must look beyond their immediate families to find new managers for their companies. Harald Korte has just moved into semiretirement at his metalworking company after bringing in an outsider to run it. His sons aren't interested.

Others seek technical expertise to expand a business. Hellmuth Huser, 63, former CEO of Prinz, located west of Frankfurt, has installed a three-man team to run his company, including a physicist and an engineer. Once a maker of porcelain and utensils, Prinz now targets high-tech niches such as glass fibers and solar technology. The number of managers willing to sell is also on the rise, notes Peter von Windau, head of DGM, which advises small companies on mergers.

Of course, Germany's younger generation brings new values that can be a great help for the Mittelstand. They are often more willing to invest, for one, and they bring more modern management. Gunter Blase, who founded plastic-parts maker Igus with his accountant wife near Cologne in 1964, had what he calls a "patriarch profit-sharing plan"--relying on instinct to figure out yearend bonuses, then walking around to hand them out. His son Frank, 35, a fan of U.S. management gurus such as Tom Peters, is organizing a formal incentive scheme, and Frank's wife, Daniella, put their order book on CD-ROM.

Generational transitions are typically fraught with difficulty. The next 10 years will show how well Mittelstand owners have handled their biggest challenge since they resurrected the German economy. Small-business owners throughout Europe and the U.S. will be watching.


One consultant's advice for aging business owners:


Have a succession plan in place, preferably from age 50.


Don't choose the eldest son automatically. The best could be a younger son, a daughter, or an outside manager.


Set up a watertight description of decision-making to protect the successor from the interference of other family members.


The successor should gain outside work experience before taking over. It brings in knowledge and earns the respect of employees.


Update it and other inheritance documents yearly, and prepare them with help from experts.


Set up an advisory group, perhaps including a consultant and accountant, to run things temporarily in case of the owner's sudden death.


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