The transfer of a family business – more than just a transaction

In practice, when a transfer takes place, attention is often focused initially on the transactional side: the financial, legal and tax structuring of the transfer. Typical questions include:

• Should the shares be gifted or sold?
• Is the company eligible for the favourable tax regime for family companies (with 0% gift tax)?
• Is the company well-structured for a possible transfer?
• What is the value of the business and how can a takeover be financially feasible for the next generation?
• In the event of a sale, should the price be paid immediately or deferred? Should a discount on the market price be applied for family members?
• What role should the transferring generation continue to play? A formal role in the management, or a purely advisory position? And how challenging will it be to truly “let go”?

These are obviously essential questions. Without a clear financial, fiscally and legally sound structure, a transfer can be jeopardized. However, this is not enough. In case of a transfer within the family, it is at least as important to reflect on two other questions: (i) how will governance and cooperation be organised after the transfer an (ii) what is the impact on your overall succession planning?

Whereas a sale to third parties often ends with a successful transaction, the real work only begins with a family transfer. No matter how well the transfer is organized, without a clear vision of roles, responsibilities and decision-making, the family business risks being undermined by unspoken expectations, conflicting visions or rivalry between family members.

Typical questions that are not asked often enough in this context are:

• Who will run the company? How will the necessary skills be objectively assessed when selecting the successor(s)?
• Will all children be involved in the management, or only those who are actively involved in the company?
• How will decisions be made?
• How will the balance between family and business be maintained?
• What are the criteria for family members to join the company later, as shareholders or employees?

Without a clear answer to these questions, the transfer can lead to tensions, demotivation or even conflicts – with the risk that the family nature of the company becomes a weakness rather than a strength.

Need for (family) governance

Family businesses that successfully navigate generational change are often those that establish a sound (family) governance structure in good time. This involves defining rules, agreements and communication channels that help the business and the family to work together in a new constellation. Ideally, such agreements are laid down in a family charter.

What should you pay attention to when it comes to governance in the context of a family transfer?

In the case of a family transfer, it is best to consider the following aspects:

• Vision and values of the family: are these shared by all family members?
• Succession and appointment of directors: who is eligible, and on the basis of which (objective) criteria? Are there nomination rules for directors (e.g. each family branch can nominate a director)?
• Decision-making: are decisions taken by majority vote, unanimity or with specific veto rights?
• Education and guidance: in what ways is the next generation being prepared and supported for their future role as director or shareholder?
• Exit arrangements: what happens if a family member wants to sell their shares or no longer wants to be involved?
• Conflict resolution: what procedures apply in the event of disagreements or tensions within the family?
• Relationship with non-active shareholders: how are they informed or involved?

When shares are transferred within a family by way of a gift, it is also important to not to view this step in isolation from general succession planning. How does this transfer relate to the rest of the future inheritance? What happens if only one child is interested in the ins and outs of the family business? Should each child receive shares or should the interested child be favoured, and if so, how will the other heirs be compensated? Answer to these questions are crucial to avoid conflicts later on.

Before the transfer is finalised, it is therefore advisable to carry out a succession scan. This provides insight into the following questions:

• Who inherits what in the current situation?
• What inheritance tax would be payable if no arrangements were made?
• What choices ensure balance between the children?

Only on the basis of this broader insight can an informed decision be made about the form and timing of the transfer of the company shares, taking into account both the tax rules and the family relationships.

A transfer within the family is not a one-off transaction, but a process that takes time and requires multidisciplinary support. Only this way can solutions be found that benefit both the company and the family.

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At deminor NXT, we guide family businesses through this entire process, with an eye for structure and emotion, for ownership and succession, for continuity and harmony.

Do you require assistance or have a question? Please do not hesitate to contact us.