Family succession, the most common model

Family succession is the most common method of company transfer in Switzerland. This succession can take a variety of forms, depending on the circumstances. 

Family succession means that one or more of the transferor’s heirs take over, entirely or on a majority basis, the operational management and/or financial control of the company. For family succession to take place, the following conditions must be met:

  • Presence of successor(s) within the entrepreneur’s family wanting to take over the company and capable of doing so
  • Existence of sufficient personal funds to compensate the other heirs
  • The transfer has been sufficiently well planned

Family succession is the option most frequently chosen in connection with a company transfer, although it is currently on the decline. Even 20 years ago, seven out of 10 companies favored a transfer within the family. In a few years, this ratio has fallen to just one in four companies.

Most entrepreneurs would like to pass on their business to family. There are many advantages to this solution. First, the entrepreneur is assured that their life’s work is transferred to their heirs, which guarantees a certain continuity in the business, in addition to the personal satisfaction of seeing their wealth perpetuated by their descendants. Second, they save themselves the meticulous search for an external buyer or for solutions outside the family circle, or pure and simple liquidation of the business. Employee loyalty is also generally established for heirs of the company founder, provided they have had the opportunity to engage in the company’s business before taking over its management.

Transfer of the company within the family does however conceal some risks. First, as in any succession, conflicts of interest may arise between the various heirs. Second, it is not unusual for emotional considerations to affect the assessment of the heir’s actual abilities. An entrepreneur, usually rational and demanding, may thus easily disregard the managerial qualities of their children and overestimate their potential. Another problem is that the transferor leaves their job but cannot resign themselves to their new retired status and continue to interfere in the company's business. And lastly, heirs risk hanging on for longer than necessary to the company’s old operational methods and structures due to inertia or fear of offending their parents. These threats to the smooth progress of the succession and the future of the company must be clearly identified and dealt with in full knowledge of the facts. As for the company’s articles of association and organizational rules, these must explicitly set out the tasks, rights and obligations of the successor. 

Procedures of a family succession

  • Transfer of the company within the family. This is the most common type of family succession. The successor acquires operational management of the company along with financial control, by means a transfer of shares (majority shareholder). This usually means one person, but it can happen that more than one heir shares financial control and responsibility for management, for example, in the case of siblings.
  • Takeover of management by a family member. The successor takes over operational management of the company but financial control is still handled by other members of the entrepreneur’s family. The new director does not have any financial interest in the company or, if they do, only as a minority shareholder.
  • External management with control by the family. The transferor’s family keeps financial control of the company of which it remains the owner, but operational management is entrusted to a manager from outside the family. This manager may come from the company or from outside the company. This solution can be favored if there is no heir within the family. 

Fiscal consequences of family succession

When the transfer of a company takes place within the family framework, questions coming under the law on jointly-owned property within a marriage and inheritance law come into play. The terms of succession can differ completely depending on the transferor’s marital and family status. Ideally, the successor must be able to ensure economic control of the company they are inheriting. The other heirs must also be treated equitably.

To avoid unpleasantness relating to distribution of inheritance, it may be wise to draw up, as early as possible, an inheritance agreement determining specifically the statutory order of succession and the shares of the estate devolved upon each of the beneficiaries. This agreement could also specify the statutory heir of the company, the takeover price, but also the allocation of sundry assets, such as shares or real estate. The inheritance agreement must be certified, that is, notarized, in the presence of the interested parties who must provide their consent. It should be noted that the statutory minimum shares allocated to heirs must be taken into account in any case.

Source: UBS Outlook

Last modification 21.02.2020

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