When the time comes to find a successor for a business, keeping it within the family often remains the preferred option. It is a source of pride for parents and provides reassurance to all stakeholders by offering long-term prospects and ensuring business continuity.

However, family business transfers also involve a number of pitfalls that should be carefully avoided.

  • Fairness : When there is more than one child, how can you support the one taking over the business without disadvantaging the others? How can you ensure that the transfer does not create family tensions.
  • Freedom : Does the successor have the personality and skills required to take on such a significant responsibility? Is taking over the business genuinely their own choice, and has it been carefully considered? How can parents provide guidance while still allowing enough room for the successor to develop independently  ?
  • Financial security : Does transferring the business within the family allow the parents to look to the future with peace of mind? Will they require an income or capital to finance their retirement?

These issues become even more significant when the family's wealth is largely invested in the business, which is often the case. The desire to treat all children fairly may then conflict with the wish to support the successor.

Some recommendations for addressing this complex challenge

  • Sell your business rather than giving it away : A family business can be transferred either by way of a gift or a sale. The highly favourable tax regime (*) applicable to gifts of family businesses often encourages families to consider only that option. However, the sale of company shares is generally not subject to taxation either.In the case of a gift, certain conditions must be met (such as maintaining employment, among others). More importantly, a gift can create an imbalance in the family's assets that is difficult to compensate for when there are several children. Finally, the absence of financial consideration may be problematic if the parents need funds for their own future.
  • Carry out the transaction at market value : If the transfer takes place at a fair market price, supported by an independent business valuation, the risk of family conflict is significantly reduced.
  • Be flexible regarding payment terms : Deferring payment of part of the purchase price — commonly known as vendor financing or a vendor loan — is an excellent way to support the successor without creating an imbalance between family members. The repayment schedule should be carefully aligned with the company's available free cash flow.
  • Respect the principle of simultaneous gifts to the children : Once the parents receive the sale proceeds, they may choose to gift all or part of the amount to their children. If this gift is made simultaneously with the completion of the sale (at closing), the successor may use it as part of their own equity contribution.
  • Consider a family inheritance agreement : A family inheritance agreement enables the heirs, during the parents' lifetime, to reach a definitive agreement regarding the future distribution of the family's assets.
  • Seek advice from a business succession expert : A specialist can prepare the business valuation, structure the financial transaction, assist in securing financing, and draft the transfer agreements. Where the advisor is officially accredited, part of their fees may be eligible for government subsidies (**).

Selling the business, combined with gifting part of the sale proceeds to the children and/or allowing deferred payment terms, often provides the best balance between supporting the successor and preserving family harmony.

As every family and every business is unique, it is essential to carefully assess the available options, together with their tax and estate planning implications, in order to implement the succession plan that best safeguards both the family's interests and the long-term future of the business.

Tanguy della Faille
Fondaris

(*) 0% gift tax may apply, provided certain conditions are met. These conditions differ depending on the Belgian region where the company is established. More information: https://www.notaire.be/donations/comment-donner/donation-dentreprise

(**) This support scheme is administered at regional level. In Wallonia, up to 75% of advisory fees may be subsidised through the Chèques Entreprises programme.

Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 16 February 2023. This version has been published/updated on the Fondaris website with the author's permission.