Avoid the pitfalls – and you’ll hand over the family business to the next generation
Published: 25 april 2024, 10:33
In recent years, the regulations for handing over businesses within the family have become more favorable.
But a generational change rarely comes without challenges. By planning and starting on time, you can still avoid the biggest pitfalls, explains the Bank of Åland’s expert.
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Suddenly, this is the day when you feel it’s time to step aside. Perhaps the realization has crept in: One day the company must be handed over to someone else. Either to the family’s younger talents, or via an external change of ownership.
By planning and doing the right things at the right time, you have the opportunity to strengthen your company’s conditions and build a stable foundation for both continuity and growth – and not least to create the best possible conditions for the next generation of leadership – states Fredrik Benson, who is a financial planner at the Bank of Åland.
– A generational change in a family business raises a number of different legal issues, but there are also soft values and feelings involved in such a decision. Therefore, it is important to take a holistic approach that includes the financial, legal and family aspects, he says.
Fredrik Benson, financial planner at the Bank of Åland.
The generational change takes 1-3 years
Fredrik Benson says that the most important advice he can give is to start planning in time.
– A successful generational change usually takes between one and three years, maybe even longer. But many people think it’s enough to talk it through over a Sunday dinner. In the case of a change of ownership, you have to take everyone’s wishes, needs and knowledge into account – and it takes considerably longer than that.
Common to many of the most successful generational changes, he sees that the intended successor has entered the business early and had to learn how it works from the inside. In this way, they are prepared for the task and gain practical experience, while their knowledge and leadership skills can be put to the test. This is especially important if the company is centered around the current owner.
– Some companies are built around a single person and if the next generation has no experience from the business, it can quickly go downhill after a change of ownership. If there is no natural successor, it may be better to sell the company to an external party, and to do so when the company still has a high value, says Fredrik Benson.
Don’t ignore soft values
No family is the same and therefore each generational change is also unique. A common situation is that there are several siblings in the family, but that only one of them is interested in taking over the family business after the parents. Should the other siblings be compensated for it in some way? And if so how?
It doesn’t have to be a company in the hundreds of millions of dollars for such an issue to create irritation and conflict in a family, Fredrik Benson emphasizes. Therefore, he emphasizes that soft values such as these are important to think about, and that it is important that the process leading up to the shift is clear and formalized so that no question marks remain.
– There is no one-size-fits-all solution, but each entrepreneurial family must find the solution that suits their particular situation and conditions. This is also why we really emphasize the importance of starting on time, says Fredrik Benson.
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New more favorable rules
Financially, it has become more advantageous to change generations within the family in recent years. Until 2019, somewhat simplified, transfers within the family were taxed higher than sales to an external party. The legislation was then changed and now the same tax rules apply in both cases. However, the transfer needs to meet a number of criteria to be taxed in this way.
– The new rules made the system significantly fairer, but the rules are rock-hard with a series of criteria that must be met. It is therefore still important to plan properly. This requires specialist knowledge. If you do not meet all the criteria, it is not possible to make the change of ownership with the more favorable tax rules, and this affects how much money you have left to live on afterwards, says Fredrik Benson.
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The Bank of Åland’s five tips for a successful generational change
1. Plan
Make a solid plan for the change of ownership that all involved parties agree on. Take into account personal wishes and soft values such as justice within the family and the need to provide for the outgoing generation.
2. Start on time
It takes between one and three years to fully complete a generational transition, so start planning as soon as thoughts of retirement arise.
3. Check the laws and regulations
Go through family and tax law properly. In order for the more favorable tax rules introduced in 2019 to apply, you must meet certain criteria, otherwise the tax for the seller will be higher.
4. Communicate
Remember that a change of ownership in a company also affects employees and other stakeholders. Communication and handling around the generational change can therefore play a big role, and you gain a lot by starting to communicate about this at an early stage.
5. Write an agreement
Formally agree on the forms for the change of generations and have paper on everything, above all regarding family law. In this way, it will be an orderly takeover.
The article is produced by Brand Studio in collaboration with the Bank of Åland and not an article by Dagens industri
