Growth prospects for any country are significantly enhanced if small companies can thrive, and social benefits almost inevitably follow on from this.

Germany’s famous Mittelstand is a great example. It was undoubtedly one of the factors that helped the country weather the financial crisis. Sebastian Paust, a member of the international commission of the German Mittelstand SME Business Association, pointed out in a recent blog that, in 2014 alone, German Mittelstand firms created almost a million new jobs at the same time as Germany’s big companies were cutting back on more than half a million workers. 

Moreover, as Paust also observes, the vast majority of these firms are family-owned (95%) and managed by their owners (more than 80%). The intersection of these two categories – where families that own big stakes are also the main management – accounts for perhaps 20-30% of the Mittelstand, according to Marcus Ratz, a small-caps portfolio manager with Frankfurt-based Lupus Alpha. 

 Ratz cautions that family control does not necessarily guarantee business success. 

“You can have a very able founder who has developed a company and a weaker son taking over the business,” he observes. “Sometimes the majority owners are very careful because they have invested all their own private money into their business – but they may end up being too careful and miss some opportunities for development.” 

What often characterises family and owner-controlled companies is a much longer planning horizon, compared with that of independent management teams that may be more worried about how viable new investments might be over the shorter-term horizon over which many investors work. A good example that Ratz puts forward is the performance of Fuchs Petrolub over the last decade. 

“It has been an exceptional story of gaining market share on an annual basis by concentrating on a niche area as the world’s leading independent supplier of lubricants,” he explains. 

But families may also not always have the requisite management skills to allocate capital appropriately. 

“A good example of this is Solarworld, which grew dramatically with the demand for solar energy products and then went downhill and almost went bankrupt,” says Ratz. 

There can be particular problems when a patriarchal founder is in charge and refuses to let go of the reins. 

“There are several examples of people who, even in their late 70s, are still taking care of the business development and not stepping aside as the business becomes weaker and weaker,” Ratz says. “They want to keep control for as long as possible but then they are left with the issue of whether they should hand over to their children. In some cases it could be a good decision, as the children may have had an international education and would be able to drive the business internationally. But others may not be capable of driving the business further.”

 The influence of family businesses’ roots in their local environment, on both their long-termism and their corporate responsibilities, should not be underestimated either, Ratz suggests.

“In management-led companies, managers typically don’t come from the region the company operates in and they can move on, so their personal risk is limited,” he argues. “That can be a driving force for family-owned companies – they have their roots within a region or a city and they are much more operationally responsible in what they are doing.” 

Many German Mittelstand entrepreneurs have a special affinity with their company’s locale and workforce, agrees Paust. 

“Many pursue ‘entrepreneurial social responsibility’ by maintaining stable, long-term client relations, socially-oriented human resource policies and strong ties to their locality – including generous donations to their social and cultural environment,” he writes. This can often bring them support from local political and social leaders, he adds.

Faust sees the family-controlled Mittelstand success as dependent on a close symbiosis with the political and social environment based on Germany’s decentralised democratic system and also its decentralised banking system.

In contrast, as Hans Stoter, CIO of ING Investment Management says, access to capital is a challenge for SMEs in many countries. 

“Lending to SMEs collapsed after the introduction of the euro as banks focused on reducing their lending book, while larger companies have access to the bond markets,” he explains. “As a result, that symbiosis necessary for family controlled smaller companies to be supported to grow is still a challenge for other countries to emulate.”

Indeed, Germany’s strength in its Mittelstand may be unique in Europe. France also has a high incidence of family ownership among its smaller companies – but the number of such companies is much smaller than in Germany. 

“There are structural reasons for this,” says Ratz. “In France, the brightest people go to the grandes écoles and when they graduate, they either join the larger companies or go into politics. So the majority of subsidies in France are given to the larger companies because they are empire builders. They want to create large companies that have a global relevance.”

In Germany, by contrast, there has traditionally been good support from both the banking and political sectors for the Mittelstand, seen as the backbone of the German economy. 

“In France, there is the idea that they are missing out on 10,000-20,000 small firms

which should be the backbone of their economy, which is why they are in such dire straits,” Ratz suggests.