Etiqueta: empresa familiar

In the family business there are three concepts that are constantly intertwined: ownership, company and family. The three have much in common, but they are also separated by many divergences. Not the least of these are emotional differences. For this reason, professionalising relations within family businesses and bringing in external professional experts is the first step towards leaving personal and family emotions behind, so that there is a difference between a family meal and a shareholders’ meeting. Making this separation allows more rational decisions to be made.

The relationship between professionals and ownership

Professionalisation is one of the great challenges that family businesses usually face from the second generation onwards. On the one hand, it is essential, but on the other hand, it can be a source of internal conflict.

It is clear that being a member of a business family does not automatically give you the training and skills needed to manage a company. Therefore, as the company grows, it must delegate the management of finances, human resources, marketing, R&D, etc. to competent professionals. Despite possible reluctance within the family, entrusting part of the development and even leadership of the project to competent outsiders brings great benefits and new points of view to the family business.

Professionalise management with an external administrator from outside the family

In fact, it is even possible to delegate the entire management of the family business to professional administrators from outside the family. This is a frequent possibility in the case of unexpected deaths or even when the natural successors are not interested in taking over the company.

These professional directors are subject to personal liability, which is enforceable not only by the company but also by third parties. This is the same as in any commercial company. This is a potential source of conflict, because the owner can give the professional director orders at the general meeting which he is obliged to comply with, but for the result of which he is responsible.

There are also common conflicts of interest in companies that opt for professional management. For example, when part of the family wants to distribute dividends and the professional administrator, on the other hand, considers it a priority to strengthen the treasury in order to undertake a certain investment.

Professional managers are not spared from this kind of tension. Because business families are not only present on the board of directors as owners of the company. They often also exercise their management on the board of directors. Pressure can even come from outside the company. From family members who are partners but do not hold a position within the company.

Avoiding conflicts between the business family and external professionals

Every business family is made up of diverse individuals, perhaps many, each with their own personal visions and goals. But to make the business profitable and continue to grow generation after generation, it is vital to create a shared vision of the ‘collective self’, to align personal interests with corporate interests.

The family protocol can be a useful tool to help minimise conflicts. Because they mark the roadmap to be followed at key moments such as the succession process or the progressive incorporation of new generations into the company. They also determine the role of each member and their relationship with the company.

One thing that all successful and long-lived family businesses have in common is that they have trained their new generations and have opted to professionalise the management of the company in key areas.

Family businesses mix business and family relationships, affection and work. This makes them a special type of company that tends to make mistakes which, although common, can seriously affect the continuity of the family business.

In this article we review some of the most common ones.

Treating the company as a family and the family as a company

All family members must know which hat they are wearing at any given moment. Business families live daily with the risk of forgetting that in the family business the noun and therefore the main concept is «business». «Family» is only its adjective.

Confusing corporate governance bodies with the family

During the first and second generation the internal organisation may be simpler, but especially as third generation members enter the company, who no longer have such close family ties with each other, differentiated and specialised governing bodies have to be developed.

Even then, in the family business the same people often sit on different governing bodies. Bringing in talent from outside the family helps to introduce new points of view and avoid this problem.

Forgetting that the company is not the family’s current account

The finances of the company should not be confused with those of the family. The company cannot be the family’s current account, but neither can the family act as a bottomless pit that contributes money indefinitely to the company.

Failure to differentiate ownership and capacity

In family businesses, it is advisable to have a training plan for the progressive involvement of the new generations in the management of the company. By creating an environment that favours the imprinting of the entrepreneurial spirit, it is possible to a certain extent to pass on entrepreneurial skills and will. However, total success is not guaranteed.

Here again we are faced with the obligation to look for external talent to fill the possible gaps in the profiles of the entrepreneurial family. Honesty and self-criticism are indispensable for the survival of the common project.

Lack of communication within the business family

There must be no taboos when it comes to communicating about the company. There must be a free, open and empathetic dialogue between the different members of the family, especially with those who do not work directly in the family business. Otherwise, it can lead to the creation of opposing factions.

The disinterest of the new generations

Most commonly, the new generations are increasingly educated. This is a great asset for family businesses as long as the dreaded disaffection with the family business does not arise. Let us not forget that the most educated members of the family are also those who have the most options when it comes to choosing where to devote their professional lives.

To avoid this, it is important to gradually involve young people in the day-to-day running of the company, always respecting their freedom of choice. And above all, we must avoid conveying a message of tiredness, anguish, worries… Being an entrepreneur requires a great effort, but we cannot expect the next generation to face it as a sacrifice.

Lack of planning

Every family business is a complex entity with its own characteristics. But at the same time it faces a series of perfectly foreseeable challenges: generational succession, professionalisation of structures, tax planning, etc. At Confianz, we have advised many family businesses in their preparation for challenges that could have put an end to their continuity. That is why we know that good planning in time is the best way to guarantee a long life for the company. Because what is good for the company in the long run is also the best for the family.

The Treasury eliminates the tax exemptions in the Wealth Tax foreseen for the family business in cases where the ownership does not work in the family business.

The Directorate General of Taxes (DGT) has just established on 1 December in a resolution tougher criteria for accessing this tax benefit.  Until now, the owners of a family business were eligible when they stopped working in the business and the reins were taken over, for example, by their wife or children.

This change affects family businesses in which the founder remains the owner of all shares, despite the fact that the management functions and economic activity are carried out by another family member.

How to continue benefiting from these tax exemptions

Following the change in the criteria of the Directorate General for Taxation, the key is that in order to be eligible for exemption from Wealth Tax, the shares in the family business must be held jointly. In other words, they must necessarily belong to more than one member of the family.

There are currently many family businesses in which the founder has left the management of the business in the hands of a son or daughter, but still holds 100% of the shares in the company. If this is the case, he or she will now have to pay wealth tax on these shares. How can this be avoided? Simply transfer 1% of the shares to the son.

From now on, in order to continue to benefit from this wealth tax exemption, the members of the business family in charge of the management must own at least 1% of the shares of the business.

Of course, another option is for the father to keep 100% of the company, run it and make his salary from it his main source of income.

Additional requirements 

In order to benefit from this exemption, a number of additional requirements must be met on the date on which wealth tax is due. That is, on 31 December of each year:

• The exempt assets and rights must be used for the pursuit of an economic, business or professional activity that is carried out habitually, personally and directly.
• The economic, business or professional activity must account for at least 50% of the amount of the taxpayer’s general taxable income and savings income. This is a point on which tax planning is important, as it can vary from year to year.

In the case of minors or incapacitated persons who are holders of the family business assets, in order to be eligible for exemption from Wealth Tax, the requirements must be met by their legal representatives.

Deadline: 31 December

This tax development has been made public just a few weeks before the deadline for filing the Wealth Tax for 2023, which is 31 December. It therefore has a major impact on the tax planning of many companies.

The tax office will already apply this criterion for the 2023 tax year. So in these last days of the year it is urgent for many family businesses to make changes in the ownership of the business. The aim should be that at least 1% of the share capital passes into the hands of the second generation when it is the second generation that exercises the management functions.

The expert tax advisory team at Confianz can help you in this process to review your business structure so that your family business continues to benefit from Wealth Tax deductions.

Through a lot of hard work, the most successful business families end up generating a large financial and/or real estate wealth. In order to not only preserve it, but also to increase it and keep it in a single unit generation after generation, it is advisable to set up or contract a family office to manage it, taking into account the many variables: legal changes, legal procedures, family cohesion, etc. In this way, the management of wealth is clearly separated from the management of the business.

The legal structure of the family office can be a limited company. It does not have to be the parent company of the group; indeed, it is advisable that it is not.

Objectives 

In order to respond to such a complex environment, the family office integrates administrators, tax specialists, financial advisors and legal experts. In this way, it can provide a global response to the challenge of preserving the wealth of a family from generation to generation through good wealth and financial management, tax planning, investment in new financial and non-financial assets, real estate management, etc. It is advisable that the leadership of the family is entrusted to a professional in the financial sector who has been hired for this purpose.

For confidentiality reasons, in some cases the persons involved must be different from those in the family business.

The most common tasks of the family office are:

• Efficient wealth management: investments, taxation, pension plans, property management, etc.
• Family respite planning.
• Training new generations in heritage management.
• Designing the overall investment strategy.
• Organisation of Family Council meetings.

Which business families need a family office

It is advisable to set up a family office when:

• The volume of assets is difficult to manage. In Spain it is usually more than 2,000 million euros.
• A company is sold and the family has to organise the assets.
• They earn very large amounts of money in a very short period of time and do not know how to manage it. This is common for example in the case of sportsmen or artists.
• There is a high degree of financial complexity: equities, mutual funds, real estate, companies…

But the family office is not just for the big fortunes on the Forbes list. Entrepreneurial families with smaller wealth often manage their wealth themselves or with the advice of a professional expert in finance and investment planning. Another option is to join with other business families in a multi-family office. In this case, starting assets can start at around 20 million euros.

For their part, large fortunes tend to resort to the single family office, a type of exclusive wealth advisory service. Two paradigmatic examples are Pontegadea, the family office of the Ortega family, owner of the Indite group, and Omega Capital, owned by Alicia Koplowitz.

How family offices invest

It is up to the Family Council through the Family Strategic Plan to decide on the investment strategy and the acceptable level of risk. However, we can point out some common trends in family office investments.

Given their lack of investment time horizons and the absence of external interference, family offices tend to invest in long-term funds. Most seek to acquire new assets similar to their existing holdings, but with a greater ability to hold them in perpetuity. The biggest enemy is inflation.

If you would like to contract personalised and professional advice for the management of your family assets, Confianz will be delighted to help you.

The moment of generational handover is one of the most critical for family businesses. To make it a little easier, tax benefits have historically been introduced when a parent donates his or her shares to his or her descendants. In Spain there are two regimes for this: the donation of shares and the succession pact. Let’s look at them in detail and review the new developments that have taken place in this area in recent times.

Donation of shares in the family business

Throughout Spain, the donation of shares between different generations of a family business has in theory tax advantages for both the donor and the donee.

• Reduction in inheritance and gift tax for the donee (usually the child of the company founder). The requirement is that he/she keeps the company in his/her possession for at least ten years. In this case it is the autonomous communities who regulate this benefit.
• Non-subjection of the capital gain to personal income tax of the donor, which is deferred. The conditions are that he/she is 65 or over or disabled and that he/she retires. In this case, only the State Law is competent to regulate the matter.

The risk of tax incentives for gifts of shares in family-owned companies

If the donee complies with the maintenance requirement and then sells his shares, at the time of the transaction he will have to pay the income tax that the donor did not pay at the time. If, on the other hand, the donee fails to comply with the maintenance requirement and, for example, sells the shares before ten years have elapsed, then it is the donor who has to pay the untaxed income tax. This can be a tricky situation, as the donor will then be a retired person who may not be at his best financially.

To this potential risk must be added the recent Resolution of the Central Economic-Administrative Tribunal of 29 May 2023 (RG 1501/2020), which has ruled that if the company that is donated is the owner of assets that are not used for an economic activity, the deferral in the donor’s personal income tax is only partial.

In other words, the donor will generate a taxable capital gain, in an amount proportional to the weight that these assets have in the company’s net worth. The remainder is deferred and subject to compliance with the maintenance requirement of the donee.

As a consequence of all these difficulties, many family businesses choose to plan the transfer on the death of the share owner.

The advantages of the succession pact

Certain autonomous communities with their own civil law have an alternative regime to donation: the inheritance pact.

With the succession agreement, the owner agrees, during his lifetime, to transfer certain assets to his heirs. The key difference compared to a gift is that inheritance agreements are taxed as an inheritance and, therefore, the transferor does not pay income tax. It is not necessary for the parent to be of a certain age or to retire. He can even continue to manage the company. It is also irrelevant if the company has assets that are not used for its activity.

This is not a tax deferral, but a definitive benefit. However, there is one condition: the heir must not transfer the assets before the expiry of five years or before the death of the previous owner. Otherwise, he is subrogated to their acquisition value and the inheritance agreement results in a mere tax deferral. It is the child, and not the parent, who is liable to pay the personal income tax.

The major limitation of the succession pact is that it can only be made in Aragon, Catalonia, Navarre, the Basque Country, Galicia and the Balearic Islands. For residents of other territories, two years of residence in one of these communities and a declaration of will are required for this civil law to apply to them.

At Confianz we can advise you on how to organise the generational handover of your family business in the most advantageous way. Get in touch with us.

Remuneration is one of the thorniest issues facing family businesses. Salary issues vary according to the stages the family business goes through during its life cycle, as it faces the different generational successions. This is why it is important to take care of this aspect in order to neutralise a potential source of internal conflict.

Remuneration in family businesses throughout their life cycle

First generation: the entrepreneurial stage 

This first stage in the life of family businesses is perhaps the one that poses the least conflict. Because the company is unquestionably run by the founder. Meanwhile, the next generation is just starting out in the business and usually accepts his decisions on tax savings, family donations, estate planning, retirement plans, etc. without opposition.

Second generation: payoffs at the sibling stage

The complication increases as time goes by and the children take on more and more responsibilities within the family business. When it is time for the handover, the parents will have shaped the salary expectations of the second generation leaders as they progress through the business.

One possible strategy is for each sibling to receive different remuneration according to his or her training, functions and performance. However, such decisions pose risks for family relations. It is no coincidence that it is at this stage that conflicts over salaries often arise. It is advisable to confront them with a frank and open attitude. This is a way to dispel suspicions and to strengthen the commitment of all family members to the company.

In second-generation family businesses there are usually two possibilities:

• It is common for a sibling team to work in partnership co-managing the company, with very few inactive family shareholders and virtually no non-family involvement.
• In other cases, some business families prefer to choose a new leader from among the second generation siblings.

Long-term planning is important to avoid that the first children to join the family business end up with a very high and steadily increasing salary. This can lead to conflicts with the children who decide to join the company later on.

Creating a holding company for the family shareholding can be highly advisable at this stage. This will help to achieve the above objectives.

Third generation: the stage of cousins and family dynasty

When it is the turn of the third generation, a new era begins for the family business, which increasingly resembles a conventional company. Because not all family shareholders work there. Some stay away from the day-to-day business and only receive dividends. And their point of view must also be taken into account when calculating the remuneration of family members who do receive a salary from the company. There is a risk here that they may perceive that they are overpaid, at the expense of their dividends. However, those who work in the company may feel that their degree of emotional involvement in the entrepreneurial family project is underestimated.

This is a source of conflict that can end up having disastrous consequences if a rational, open and professional remuneration scheme, similar to that of a non-family business, is not adopted. It is very useful in this respect to take as a reference the average salaries paid in companies of similar size and in the same sector.

Initially, a family business is usually the brainchild of a single entrepreneur. Over time, however, ownership is likely to be divided among successor-heirs. As the growth of the family dilutes the shareholdings of individual members, it may be necessary to establish additional incentives for managers. It is recommended that these incentives be linked to increased shareholder value.

The family protocol can set the remuneration policy

Good planning and management of the remuneration plan depends to a large extent on the health of institutional coexistence in the family business. In this sense, having a family protocol is often useful, among other things, to establish the conditions for family members’ access to management positions and to draw up salary policies and career plans. The drafting of such a protocol usually requires an external source of advice that can gain the trust of active and inactive shareholders alike.

Having a family holding company at this stage is essential.

Are you looking for support in planning your remuneration or creating a family protocol? Then let us show you the way to effective and fair management. Let’s talk soon.

Although it sometimes seems to be a governing body reserved for large listed companies, the Board of Directors is also key in family businesses, especially when they start to grow.

Because its functions include such important functions as directing and supervising the company’s operations, establishing its medium- and long-term strategy and also monitoring and periodically improving it, controlling risks and ensuring the availability of financial resources for both the company and the family.

When is it advisable to set up the Board of Directors of a family business?

As family businesses grow, their management becomes more complicated and people from outside the business family join the company in positions of responsibility. This is the ideal time to set up a board of directors. For example, to prevent non-managing family members from feeling that their interests are being subordinated to those of the managing members.

The basic objective of the family business is to ensure its survival over generations. And for this it needs corporate governance that takes care of both the business and family relationships.

Who should be on the Board of Directors of the family business?

There is no single way to form the Board of Directors of a family business, which must represent the interests of the shareholders, but also understand the vision, mission and values of the family.

It depends very much on the point in the life cycle of the family business. However, it is most common for members of the business family to be integrated into it, if possible belonging to several different generations. In this way, the company benefits from the contribution of different points of view and gradually incorporates the new generations into the management of the business.

In the case of family businesses that integrate different lineages, it is advisable for all of them to have a presence in order to balance power and make them all feel part of the common project.

It is also advisable to include external directors on the Board of Directors who bring their experience in different companies and provide a more neutral and detached view of all the conditioning factors involved in mixing family and business. To guarantee their independence, it is important that they are free to give their opinion without jeopardising their position.

Functions of the Board of Directors

• Define the values of the company, which should remain aligned with the family’s culture, values, traditions and history.
• To look after the interests of all owners, without losing sight of the company.
• Striking a balance between the obligations of the company, the needs of the shareholders and the expectations of the family.
• Ensure compliance with legal requirements.
• Hire, evaluate and dismiss if necessary the general manager.
• Guiding the CEO and the management team in the long term, e.g. by helping them to identify opportunities, as the Board of Directors has a broader view of the overall situation of the company.
• Establish the company’s medium and long-term strategy.

Delegating to secure the company’s future

Setting up a Board of Directors in a family business is a complicated decision because it involves delegating and bringing in people from outside the family. But it is an essential decision for the future of the business as it grows.

For all these reasons, the figure of the Board of Directors must be tailored to each company, defining very well the medium and long-term strategy of the company and risk control. At Confianz we are specialists in advising family businesses, and we are ready to accompany you throughout this process.

The operation of family businesses involves a mixture of business and family, business decisions and more personal emotions. For this reason, they face particular challenges, different from those of other companies.

Challenges specific to family businesses

These are the four main challenges for companies where a family owns the business and has both management and executive functions.

1. Succession planning 

One of the main advantages of the family business is that it can maintain and increase its value within the family over the long term, over generations.

If all goes well, the successive generations have different roles in the company’s development: the first is creative, the second institutionalising and the third expansive. But achieving this evolution of constant growth is not easy. Some studies put the percentage of family businesses that do not make it beyond the third generation at 80%.

Ideally, it is the founder of the family business himself who starts planning the succession, progressively delegating his functions in order to avoid excessive dependence on him. The process of generational handover at the top of the organisation needs time, training and know-how. This transition should last at least ten years, allowing sufficient time for the preparation of the new leader and the gradual retirement of the founder.

2. Choosing the successor CEO

The choice of the successor CEO in the family business is a key decision for the survival of the company that cannot be based on sentimental reasons. There are still cases in which a son or nephew takes over the reins of the company whose only accreditation is that they are a member of the family. But in this case it is not always preferable to keep the business at home. It is often more desirable to choose an external manager with extensive experience in the sector, even if the ownership remains in the hands of the entrepreneurial family.

In the same way, having a trusted external advisor can provide an objective and unbiased view that looks after the interests of the organisation and avoids conflicts within the family.

It is important to avoid the company turning into a recruitment agency where family members take up positions for which they are not qualified or where even tailor-made jobs are created with a specific person in mind.

3. Allocate fair wages to family memebers

Many family businesses make the mistake of assigning salaries and benefits to family members based more on their needs than on their role and level of responsibility within the company. And this inequity can go in two directions:

• The altruistic family employee whose work brings value to the company far beyond his or her remuneration.
• The family employee who seeks a large salary just because he/she is a member of the family.

Both irregularities in the salary scale can lead to problems in the short and long term. Family members working in the family business should be remunerated in full accordance with the internal wage band and the reality of the labour market.

4. The challenges of separating family and business

Ultimately, mixing work and personal life is one of the main sources of conflict in the family business. It is a difficult separation to make, but conversations about work at family events should be avoided at all costs.