The German economy stagnates:
An opportunity and time to expand?

Stagnation in Germany means the availability of a large number of distressed assets and companies that can be increasingly made use of by foreign investors, including Czech entrepreneurs. Germany offers industrial strength and investment in innovation. The generational turnover among the owners of German “Mittelstand” companies brings many acquisition opportunities. How to use this potential from the perspective of a Czech entrepreneur?

The decision to expand into Germany or acquire a German company can be strategically advantageous, given the current favourable conditions.

Although the German economy is currently stalling, it is still one of the largest economies in the world and in any case the largest in our region. This opens up a wide range of opportunities for Czech entrepreneurs to join the rising wave of Czech investments in the M&A market in Germany. The stagnating generational turnover in the SME (“Mittelstand”) sector and the considerable range of distressed assets offer ample opportunities on often interesting terms. Besides, many Czech companies are also growing into Germany quite naturally on their own. Czech companies started to invest more after the Czech Republic joined the European Union. In 2020, their investments in Germany totalled 900 million euros. The best known investors are ČEZ, EPH, Agrofert, PPF, Rohlík, Avast, SIKO and Kofola, while other large players are preparing for acquisitions.

From the Czech Republic to Germany, or the other way around? It works both ways. Since the 1990s, Germans have invested heavily in the Czech Republic, especially as part of privatisation. This mainly involved the automotive industry, engineering, infrastructure, telecommunications, and retail chains. According to data from CzechInvest and its German office in Düsseldorf, CzechInvest alone brokered 350 investment projects by German companies in the Czech Republic between 1993 and 2016 worth over CZK 218 billion, which created 58,000 new jobs. The largest ones include Volkswagen, Bosch, Siemens, Rieter, Hartmann, Continental, Linde, and Saint-Gobain. Among the German “Mittelstand” investors in the Czech Republic are Trumpf (engineering), Heberger (construction), and Müller - Die lila Logistik AG (logistics). Logically, this makes Germany a country with which Czech business has a great opportunity to grow.

Germany today: stagnation and potential

The German economy has not yet overcome the impacts of recent crises - the covid and energy crises. One of the other factors holding it back is the ageing population and the declining share of the economically active part of the population. Is this an opportunity for Czech entrepreneurs? Absolutely.

A major challenge in Germany is the generational turnover in the backbone of the German economy, “Mittelstand”, which comprises more than 3 million traditionally family-owned companies. Approximately 100,000 of them, i.e. 5%, change hands every year. Increasingly, existing owners have to find new ones outside their families on the M&A market. This is mainly due to the demographic curve and the declining willingness of the younger generation to take on the burden of doing business. This trend will continue in the coming years. Today, approximately 1.2 million SME owners are over 60 years of age, three times more than 20 years ago. This affects not only the traditional manufacturing sector, but also IT companies, etc.

Innovation as the driving force for growth

Innovation is one of the key factors for Germany to maintain and develop its status as an industrial centre in the future. Germany offers various subsidy programmes and maintains a high standard in this respect. In various rankings (for example, the UN Global Innovation Index or the index of the Federation of German Industries and the consultancy firm Roland Berger), Germany ranks around tenth in the world. The country invests EUR 120 billion a year in science, research and innovation, equivalent to 3.1% of GDP. The average for OECD countries is 2.8%. By comparison, it is 2% of GDP in the Czech Republic.

According to a unique joint study by three of Germany’s largest consultancies - McKinsey, Boston Consulting Group, and Roland Berger - ambitiously entitled “Agenda 2035”, Germany’s success in the future will continue to be based on cutting-edge technology, engineering and research. According to the authors of the study, Germany should make its way globally to the top 3 in the following technologies: digitalization and artificial intelligence with cloud computing; cybersecurity solutions and quantum technologies; clean technologies for buildings, the energy sector and industry; future mobility, infrastructure for electric vehicles, autonomous driving and space technologies; (digital) health, Biotech and Pharma with mRNA, cell and gene therapy, telemedicine and Wearables (i.e. wearable devices that control bodily functions). All these are areas where a Czech footprint can potentially be seen.

Targeted investment combined with the public resources of a relatively under-indebted country (Germany’s public debt is only 64% of GDP compared, for example, to 121% in the US or 111% in France) should help to achieve this. Germany has a strong infrastructure for startups and innovative projects where you can get venture capital support.

Improving the ecosystem

The WIN initiative is one of the steps towards this goal. The German government has teamed up with big investors such as Allianz and Deutsche Bank. Together, they promised a total of EUR 12 billion in venture capital and a major improvement in the ecosystem for German and European startups by 2030. The de:hubs, of which there are already 25 across Germany, are intended to bring mutually beneficial interaction between startups and the established Mittelstand companies.

The WIN initiative is one of the steps towards this goal. The German government has teamed up with big investors such as Allianz and Deutsche Bank. Together, they promised a total of EUR 12 billion in venture capital and a major improvement in the ecosystem for German and European startups by 2030. The de:hubs, of which there are already 25 across Germany, are intended to bring mutually beneficial interaction between startups and the established Mittelstand companies.

What to do?

How to pick up this thrown down gauntlet? We know from our international experience that a reliable network of contacts can most effectively help develop business in a foreign market. Germany prides itself on long-term and trustworthy trade relations. This means that personal contact with and access to local business partners plays a key role.

This will help you better understand the specifics of the German market, tailor your offer to local expectations and gain the trust that is essential in the German business environment. Thanks to our representation in Frankfurt and our extensive international network of contacts, we are not only directly in touch with clients and foreign law firms that refer clients to us, but we are also closer to foreign private equity and venture capital funds, investment and private banks, family offices and other stakeholders and business partners. In addition, a well-built network facilitates access to useful information, referrals and potential business opportunities, which can be the key to expansion success.

The decision to expand into Germany or to buy a German company can be strategically very advantageous. However, it also includes a number of practical steps and conditions that you should keep in mind. These are, in particular, specifics in the legal, tax and administrative environment.

If you want to expand your Czech business across the border, you need to either set up a branch in Germany (Zweigniederlassung; that, too, is registered in the German Commercial Register), or establish a new legal entity. The typical options available for a new legal entity are a limited liability company (GmbH with a minimum share capital of EUR 25,000) or a joint-stock company (AG with a minimum share capital of EUR 50,000).

Both the new company and the Zweigniederlassung must be registered with the tax authorities for the relevant taxes, typically income tax (Gewerbesteuer) and VAT (Umsatzsteuer), and the relevant tax registration number must be obtained. Employees must be registered with an insurance company and with the employment authority.

When acquiring an existing German company, it is necessary to first take into account the costs of initial due diligence and legal and tax advice. These of course depend on the company in question and the scope of the necessary due diligence (technical, financial, legal, tax). When buying a company in Germany, you also need to take into account notary public’s fees, as even a contract for the purchase of shares in a GmbH must be executed in the form of a notarial deed.

The good news for Czech entrepreneurs, who may be concerned about Germany’s notoriously excessive and lengthy bureaucracy, is that the German government perceives the problem and promises to improve the situation. This is to be facilitated by a special law to eliminate bureaucracy proposed in 2024 (“Bürokratieentlastungsgesetz”), which aims to lift the burden of “paperwork” from businesses and the public. This also shows the willingness to improve the situation and open doors for Czech entrepreneurs.