KMU Magazin No. 9, September 2024 Succession planning for owner-managed companies
In the course of succession planning for owner-managed companies, there are numerous factors to consider in addition to tax law. This article deals with some of the most important legal and non-legal aspects.
The inheritance tax initiative of the Young Socialists has once again brought the issue of succession planning for family businesses into the public eye. The initiative proposes a 50 percent tax on inheritances of over 50 million. However, succession planning is not only an important issue for large family businesses, but for all owner-managed companies. There are numerous factors to consider that go far beyond tax law. Before a company owner can start planning the succession, there are a number of questions to be answered: What do I expect of my successor? Should the company remain in the family? If so, to whom? Is there interest in the family? Should the company be sold, given away or bequeathed? Are there people outside the family who would like to continue the business and are suitable for it? What about the company owner's retirement plan?
The family-internal solution
Passing the company on to the next generation is something many business owners dream of. However, the path to achieving this is not easy, as planning must begin very early on. Often, successful integration into the family business begins with the training of potential successors. The training should ideally be tailored to the future role. In addition to the successor's professional skills, however, social skills are also of central importance.
It is also worth gaining professional experience not only in your own company, but also outside it. When the ideal time is to join the family business and take on the future role depends on the specific circumstances. However, it is clear that the whole process takes years and it is therefore not surprising that it is not always crowned with success.
A distinction must be made between the actual preparations at the operational and strategic level, as just mentioned, and the actual transfer of ownership, i.e. the transfer of assets to the next generation, for example in the form of the transfer of the share capital in the company. This transfer can basically take the form of a gift, a sale or, upon the death of the owner, inheritance. Hybrid forms such as a mixed gift are also conceivable. In all cases, the valuation of the company is crucial.
The gift
If the owner gives her company to one or more people of the next generation, this usually results in a significant outflow of assets for the former owner and an inflow of these same assets for the next generation. This process must be carefully analyzed from the point of view of tax law (is the project subject to gift tax?), but also from the point of view of matrimonial property and inheritance law.
Gifts to descendants are generally subject to equalization. This means that the gift is added to the descendants' inheritance after the death of the donor. The donor can release the descendants from this equalization obligation, but only to the extent that the compulsory portions of other heirs, in particular other descendants and the spouse, are preserved. In the September 2021 issue of “KMU-Magazin”, we reported in detail on the expanded freedoms of disposition for testators, which have been in force since January 1, 2023, and the corresponding compulsory portions.
The sale
Another option for taking over the company is for the successor to take it over in return for payment. In order to determine the takeover price, a prior valuation of the company is necessary and a due diligence check is recommended. In the course of the valuation and determination of the takeover price, it is often found that profits generated have been left in the company. These open or hidden reserves increase the value of the company.
This company valuation often results in the successor lacking the financial means to pay the purchase price. To ensure that the takeover against payment does not fail because of this, a separation into operationally necessary assets and non-operationally necessary assets must be carried out. The entrepreneur then transfers the non-operationally necessary assets to his private assets. This can enable the entrepreneur to increase his private assets.
This can be particularly useful with regard to the compensation of heirs to a compulsory portion or the purchase of an inheritance. However, it should be noted that this withdrawal is subject to income tax. Alternatively, a transfer to the successor including reserves can represent a tax-free capital gain if the indirect partial liquidation does not come into effect. In this case, it is recommended to obtain a tax ruling.
Either way, the financing of the takeover price for the successor is of central importance and must be regulated. Financing is often done through external financing, such as a loan from the entrepreneur to his successor or a bank loan. Important here are regulations on interest, amortization and security. However, financing can also be done through equity or the granting of an inheritance advance.
Often the takeover price is set below the actual market value. In this case, it is referred to as a (partially) gratuitous transfer or a mixed gift. In such cases, the matrimonial property and inheritance law relationships must be taken into account, since this (partial) transfer is generally subject to equalization in the event of inheritance in accordance with Art. 626 para. 2 ZGB. An individual solution can be found within the family by means of a marriage or inheritance contract.
Inheritance
Transferring a company to a family member after the owner's death is another succession option, but it often comes with disadvantages. Since the time of succession is uncertain and often postponed, this option is generally not recommended. However, it can be useful as an emergency solution in the event of an unexpected death.
The circumstances with regard to matrimonial property and inheritance law are of central importance and must be clarified on an individual basis. If the entrepreneur was married at the time of death, the estate must first be settled under the matrimonial property regime. The claims of the spouse vary depending on the choice of matrimonial property regime and can also be modified in advance in a marriage contract.
It is advisable to make provisions in the event of death in the form of a will, as otherwise the statutory provisions for division will apply, which can be problematic if the heirs are in disagreement. In a will or inheritance contract, the testator can make testamentary dispositions within the limits of the law. The heirs' (spouse and descendants) claims to a compulsory portion must be taken into account. To avoid disputes, amicable solutions can be found through marriage contracts, inheritance buyouts or inheritance waivers. If this is not possible, the businesswoman must accumulate sufficient private assets to be able to compensate the other heirs for their compulsory portions.
In addition, inheritance taxes must be taken into account. Inheritance taxes are the responsibility of the cantons and therefore vary from canton to canton. The cantons of Schwyz and Obwalden, for example, do not levy any inheritance tax. In many cantons, inheritances to descendants and spouses are not taxed at all or only taxed at a low rate, while inheritances to siblings or non-relatives are often subject to higher tax rates. The testator's last place of residence is decisive for the application of the cantonal regulation.
Sale to third parties
If succession within the family is not possible, the sale of the company to one or more third parties is the next step. The company can either be sold to an internal person (management buy-out), to an external person who buys and takes over the company (management buy-in) or to an investor. In this context, company valuation, takeover price and financing are key, as is the choice of the legal form for a simple and tax-optimized transfer. A non-competition clause for the seller and the regulation of the company name must also be taken into account.
Alternatively, the company can be transferred to a foundation, whereby a distinction is made between the company owner and the holding foundation. It is also possible to transfer the company to several heirs or buyers, whereby ownership and voting rights, as well as minority interests, should be regulated by shareholder binding contracts, which may also include pre-emption and purchase rights as well as security instruments.
Soft factors
The dynamics within the family that such forward-looking decisions can trigger should not be underestimated. Ideally, the generational change will create an upward spiral that brings new momentum to the company. However, the opposite may also occur: envy, insecurity and separation difficulties can also accompany a generational change and make it more difficult. It is sometimes difficult to anticipate these soft factors. With open communication, mutual expectations and desires can be identified and ideally taken into account or at least discussed. Another important aspect is the trust of the workforce in the new successor. The successor must gain the trust of the employees in order to make the transition run smoothly. In addition, the emotional attachment of the outgoing entrepreneur can put a strain on the new leadership, since letting go is often difficult and the need for influence remains.
Conclusion
There is no single recipe for successfully passing on an owner-managed company. Too many legal and non-legal factors play a role. In order to explore the various possibilities, company owners should give themselves enough time and seek professional advice.
