Whether they are commercial, craft or industrial - SMEs, 70% of which are family businesses, are an essential component of the Luxembourg economy. However, the question of their transmission is becoming increasingly important. In the next ten years, many owners and managers will have reached retirement age, but few have really anticipated the end of their activities. Here are the key points to watch out for as an owner or manager of a family business.
For a transmission to be successful, the first step is to ask the right questions. What are your private goals? How will the transmission allow these goals to be attained? Are you ready to leave your company? What will be your future sources of income? Do you have sufficient pension cover? If your income other than from the business is insufficient to cover your expenses, you will need to choose a type of transmission that will provide additional income. Is it better for you and your family to keep control of the business or would it make more sense to sell it to management, to an investor, to a private equity fund or to another company?
It is important to have good governance in place before you transmit your business. Those who take over, whether family or not, are most often faced with human problems rather than legal or economic ones.
If you wish to pass on your business to your descendants, have a frank and open discussion with them as soon as possible to agree on a common vision for the future of the business and to ensure that they really have the desire and skills to take over. Very often, feelings and unspoken words interfere with cool-headed, logical considerations and it is quite common for family members to find themselves in charge of a company more out of family loyalty than because they really want to be. If the discussion is positive, it should be followed by the signing of an agreement or charter whereby the family shareholders commit in good faith to the transmission project agreed upon in due course.
If you wish to sell to a third party buyer, you will have to set up an operational succession within your company and make yourself less and less indispensable to its operational management. Otherwise you will be forced to stay and help with your business for years after the actual transfer date or, in the worst case, the valuation of your business will be negatively affected because of its over-dependence on you.
Passing on your business, especially when you have built it with your own hands and devoted most of your working life to it, is not easy. Most of the time, managers attribute a strong emotional value to it, which often complicates or indeed delays the transmission process. To avoid falling into this emotional trap, keep a cool head and prepare yourself as early as possible, at the latest by the age of 50, as recommended by the IDEA Foundation, a think tank created on the initiative of the Chamber of Commerce. A successful divestment project can take up to five years.
The transfer of your own business is a complex process that requires various skills. It is therefore essential to be accompanied by experts to ensure a successful transfer. They will help you assess the impact of the transfer on your income and assets and will work with you to find ways of optimising the transfer from a tax perspective. They will be able to provide you with substantial assistance in the objective valuation of your company prior to any transfer process and to help you determine the right price. They can also assist you in the search for the ideal candidate if you wish to sell your business to a buyer outside the family. Finally, a legal advisor specialised in mergers and acquisitions, who is used to this particular type of transaction, could be of great help in avoiding any financial and legal problems that might arise from the sale of your company.
One last piece of advice: don't hesitate to contact your bank. Most of them have a network of advisors who specialise in business transfers and can offer you several financing options, especially for your new projects or your new life.
The bank is naturally a key partner, alongside specialist advisors, when it comes to financing the transfer or takeover of a business while ensuring that it continues to grow.
There is no easy answer. Implementing governance in family businesses can indeed be complicated, as emotions linked to family ties tend to drive decisions where more objectivity is needed. These pitfalls can be a hindrance to the rational transfer or divestment of a business. How can you avoid them if you are the transferring manager?