Many family businesses often reach a crossroads. On one hand, they may choose to preserve ownership, retain control and pursue gradual growth, a path particularly characteristic of the German Mittelstand (broadly defined as companies with annual revenues of up to EUR 500 million and a strong owner-family identity), where long-term stability and intergenerational continuity are traditionally prioritized over short-term value maximization. On the other hand, they may open their corporate capital to investments of third parties or pursue acquisitions, accept industrial or financial partners, share governance and accelerate growth at the cost of diluting control.

Mergers & Acquisitions (M&A) are an important strategic lever for family businesses seeking to consolidate, grow, expand into foreign markets and pass value to future generations. They are also often an opportunity to address generational succession (already discussed in the previous two posts in this blog). In Germany, this dimension is particularly pressing: according to data from the Institut für Mittelstandsforschung (IfM) Bonn, a significant number of Mittelstand businesses face succession challenges every year, with M&A increasingly emerging as a viable alternative to traditional intra-family handovers.

Through a sale, the family can monetize years of work and consolidate wealth to reinvest according to other objectives, particularly when none of the heirs intend to run the business.

Launching any M&A transaction requires preliminary preparation of the company, often with the support of advisors with specific experience. It is essential to have a credible, detailed business plan, a clear strategy, audited accounts, internal control systems and internal digital processes that enable an orderly collection of corporate information. In Germany, this also means ensuring compliance with specific statutory obligations under the Handelsgesetzbuch (HGB), including the preparation of annual financial statements (Jahresabschluss) and, for larger entities, group consolidated accounts (Konzernabschluss), which may differ materially from Italian GAAP or IFRS-based presentations familiar to international buyers. German family businesses should also consider the relevance of co-determination (Mitbestimmung) obligations during M&A processes, which may require consultation with works councils (Betriebsräte) before structural decisions can be implemented.

Processes of aggregation among family businesses

One common goal of M&A for family business is the aggregation of small, synergistic businesses that can only scale, become structured and remain competitive if united. Aggregation can be implemented through different forms. First, by way of full acquisitions, which often nonetheless allow for the continuing operational involvement of the family management in the target company. These deals can be structured in two stages: acquiring a majority of the target together with call option agreements to buy the remaining equity after a set period and, sometimes, only upon the achievement of certain conditions (for example, revenue targets or customer base growth). Alternatively, family businesses may incorporate joint ventures by contributing business units or creating corporate spin-offs to develop a specific line of business. Or they may proceed by means of mergers. Aggregation of small and medium-sized enterprises is often seen as necessary in the Italian market, which is highly fragmented (over 95% of active companies are small and medium enterprises, the vast majority being micro-enterprises with fewer than 10 employees). This is a strength of “Made in Italy” in terms of specialization and flexibility, but also a weakness in terms of the ability to compete globally. The German market, while also predominantly composed of small and medium sized enterprises, presents a structurally different dynamic. The German Mittelstand is comparatively more internationalized and export-oriented than its Italian counterpart. Aggregation through M&A is therefore often driven not by the need to achieve minimum viable scale, but rather by the desire to enter new geographic markets, acquire technology or talent, or respond to increasing competitive pressure from larger industry players and private equity roll-up strategies. The concept of a ‘hidden champion’ — a globally leading niche specialist that remains largely family-owned — is particularly German in character and should inform any M&A strategy targeting this segment.

Aggregative M&A transactions often require precise post-closing commitments to align governance practices as well as control and compliance systems between the two entities. Or, where the transaction envisions the continued participation of different families in the shareholder base, clear governance rules that define areas of activity, roles and remuneration. In Germany, post-closing governance alignment must also address the potential applicability of co-determination rules at supervisory board level (Aufsichtsrat) under the Mitbestimmungsgesetz 1976 or the Drittelbeteiligungsgesetz, which mandate employee representation depending on the combined entity’s headcount. This layer of stakeholder governance is structurally distinct from Italian models and should be planned for in advance of closing.

Development through opening capital to funds

A different purpose of M&A can be to find a financial partner (typically a private equity fund) that can help accelerate the family business’s development, especially when its ambitions exceed its own resources.

Private equity investments often take the form of minority stakes: the fund leaves day-to-day management to the family and negotiates, as part of the investment agreement, typical minority protections. These rights generally are:

• information rights;
• right of appointment of members in management and supervisory bodies;
• preferential liquidation rights in case of liquidity events;
• tag-along rights on share transfers;
• drag-along rights, which are particularly relevant in German GmbH structures where the transfer of GmbH shares requires notarial deed (notarielle Beurkundung);
• anti-dilution protections, particularly relevant in follow-on financing rounds which German family businesses increasingly undergo as part of growth equity strategies;
• right to start a full exit procedure after a defined period.

Private equity funds may also invest by purchasing part of the shareholders’ stakes, allowing the family to monetize part of their holding and sometimes enabling only certain family members to reinvest in the business. In such cases, though not only in such cases, the investment may lead to a change of control, with the fund acquiring the majority of the corporate capital. Often, however, even then the company’s operational management, at least for the first few years, remains in the hands of the family, which keeps the right to appoint the CEO and some members of the board. In a German AG or SE structure, this right is exercised indirectly: the family retains influence through the supervisory board (Aufsichtsrat), which appoints and removes members of the management board (Vorstand). Investors and families should be aware that direct contractual restrictions on Vorstand appointments may be void under German stock corporation law (Aktiengesetz), making governance design at Aufsichtsrat level the primary tool for managing management continuity post-closing.

Sometimes this appointment right is time-limited or conditional on achieving specific results verifiable at the approval of the financial statements.

In general, the investment of a private equity fund into the corporate capital, especially in long-standing family businesses, can bring significant corporate change that requires a shift in mindset. In particular:

• appointment of external managers;
• the need to face professional investors with defined horizons;
• implementation of more rigorous control systems;
• increased transparency and reporting obligations.

Success is more likely when the entrepreneur views the fund not only as a provider of capital but also as a source of managerial expertise and strategic vision.

Conclusions

The success of M&A transactions depends not only on the financial merits of the deal, but also on the quality of the relationship between the family, management and investors, on clear governance rules and on the ability to manage the cultural changes required. When these conditions are met, M&A can become a lasting tool to strengthen competitiveness, preserve and grow corporate wealth, and support the continuity of the entrepreneurial project over time.

For German Mittelstand families in particular, who often measure success not in quarterly returns but in generational legacy, M&A — when thoughtfully structured — can be fully reconcilable with the core values of independence, craftsmanship and long-term stewardship that define their entrepreneurial identity.

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Insight by:

Valentina Dragoni – valentina.dragoni@crccdlex.com

Martino Liva – martino.liva@crccdlex.com

For a comparative look on the family business in Germany, please refer to the Insight of Bettina Wirth-Duncan on the blog/web site of Flick Gocke Schaumburg (click here).