The American Lawyer - Focus Europe, Summer 2011

A GUIDE TO ‘MITTELSTAND’ TRANSACTIONS
WHAT ARE THE MAIN CHARACTERISTICS OF A
‘MITTELSTAND’ COMPANY?

MITTELSTAND as defined by the Institute for Mittelstand-studies in Bonn describes predominantly family-owned German companies that have between 10 and 500 employees and a sales volume of up to b50m. per year. However, more important than those numbers is the structure of the companies.

Most companies that belong to the German Mittelstand are not only family owned but also family run, as the same family members that own the companies are also managing directors. Furthermore, those businesses are often still run by their founders.

Such family companies can grow well beyond the figures given above and still be considered Mittelstand due to their structure. For instance, Dr. Oetker KG has far outgrown the numbers given above with around 24.500 employees and a sales volume of approximately b8bn – and is globally known for its traditional Dr. Oetker food products and its Jever beer – but still maintains a family controlled structure.

Another characteristic of the Mittelstand is that a
considerable amount of its companies occupy a
particular market niche and lead the world market with
a very specific outstanding product. For example,
Webasto AG is one of the biggest automobile
component suppliers in the world; it employs 8500
people and has a total sales volume of roughly b2bn.
Webasto is mostly recognized for its expertise in park
heating systems, where it is considered to be the world
market leader
An impressive 99.6% of the roughly 3.2 million
German businesses liable to sales tax are considered
Mittelstand according to the defining characteristics
mentioned above. They account for around 40% of the
national turnover and provide 60% of the jobs in
Germany.

WHY ARE THESE SMALLER COMPANIES SO ATTRACTIVE TO
FOREIGN CORPORATES?

Mittelstand companies have effectively capitalised on
their ability to corner local markets; efficiently
transforming their small focused companies into
suppliers of niche products to the world. Further
examples for such world leaders on niche markets are
Kärcher (high-pressure cleaners), Mühle (shaving
brushes) and Aeroxon (flycatchers).

WHAT ARE THE CHALLENGES INVOLVED IN DEALING WITH A
MITTELSTAND TRANSACTION COMPARED TO A VANILLA
M&A DEAL?

When dealing with Mittelstand businesses quite a few peculiarities have to be taken into account.

Often, the founders of the companies, or their descendants, are still the respective managing directors and/or owners. So the process of selling such a company will not always be about facts and figures but also about points that may seem somewhat irrational to an outsider. The transfer can become personal, moving beyond the basics of the company to touch on the lifework of a seller who does not want to see this work to be discredited.

The deep ties between a seller like this, and the company that is being sold, can lead to further complications. In many cases, the founding owner is also the proprietor of goods and rights that are essential to the company including patents, licenses or real estate. This has to be taken into account for the transfer. In order to not buy an empty shell, the deal has to include all of those essentials held by the founder of the company.

Moreover, the structure of the personnel has to be analysed closely. It is a habit of Mittelstand owners to employ family members pro forma. That way they can hand out tax-deductible money to relatives and friends.