November 13, 2018
Business transfer: the path is long, but the result can bring relief and success

Gediminas Laucius, Head of Tax and Legal Services at Lewben Group

There are so many and so varied ways to transfer a business, and businesses are diverse as well, and the business transfer planning process is as important as its daily management. But in all cases the axiom applies: the earlier we start planning, the less surprises will be awaiting for us in the future.

One of the first questions that arises when you start planning a business transfer – will it be directly passed on to the heirs, or sold. We have already discussed recently that business can be successfully transferred to the heirs when the process is carefully planned, taking into account both the nature of the business and the circumstances of its founder’s family.

The business founder can also go the other way – to sell the business or part thereof, or transfer it to the heirs indirectly through intermediate structures. All of these methods require a thorough analysis and a diligent business transfer plan, and the process can take up to 10 or maybe 15 years.

Why the business founder, knowing his business as good as the back of own hand, cannot transfer it in the chosen way in one go? First of all, because the business grown over a lifetime is not homogeneous – “scanning” of the current situation and the adoption of decisions takes time. After valid many external factors, such as regulatory, fiscal, and even political circumstances. Partly due to these changing circumstances, the business transfer plan must be flexible – this is yet another axiom.

Generally speaking, if you decide to sell a business “today”, “tomorrow” it will not be possible if you want to derive the maximum value out of it. Going towards this goal, the business will need to be prepared accordingly, creating a system that would allow to disconnect the business its founder, so that when the latter retires, his whole life’s work will not crumble like the sand castle.

In order to purify the structure of current assets, it often turns out that it is expedient to sell part and not the whole business. This can be attributed, for example, to business cyclicality – perhaps one business segment has bright growth prospects, while the other has already reached its zenith and is in the “descending” cycle. So, perhaps, it is worthwhile to grow the prospective business further and transfer it to future generations, when they have heirs whose education and modern skills will provide the business even greater value.

Meanwhile, it may be appropriate to sell the other part of the business that doesn’t shine with good long term prospects for the future, today, and decide on how to invest and multiply the benefits for future generations.

Once you decide which part of the business will be sold and which is passed on to the heirs, you should consider how the latter will be handed over to younger generations. There are many direct forms of transfer – donation, testament, partial transfer of shares, gradual introduction of heirs into the business. The most unfavourable option for the business and its founder’s family is inheritance by law, that is, when the transferor does not provide for other means of the transfer of assets. There are already examples in Lithuania that illustrate the sad truth that inheritance by law determines the division of business and separation, since assets under the law are freely divided to spouses and heirs in certain parts.

A testament is a good instrument when the property has a simple structure, for example, apartments or houses. The testament allows expressing the value, the testator is rather free, but there are disadvantages and various limitations here. An important nuance – a universal transfer of rights applies both for inheritance of estate by law and by a will. This means that the estate is transferred along with all obligations of the transferor, and it often happens that the debts may even exceed the value of the remaining assets. In addition, transfer by testament is a public process that does not always allow discretion to preserve sensitive personal circumstances.

The business transferor should consider various ways of transferring assets to achieve their goal of seamless transfer of business. One such way is the creation of a family fund. In countries with deep financial traditions – such as Switzerland, the Netherlands – the use of fund structures for family property is very popular, it is one of the welfare management services. In Lithuania, people are still cautious about family funds but there are no regulatory barriers to this. It is recommended to choose non-regulated funds or the so-called “de minimis” regime funds for family property planning.

Funds are highly structured products, and are therefore ideal for realizing the idea of ​​a family constitution. All family businesses, real estate or other classes of assets can be contributed to the family fund. The fund’s documents should detail the management mechanism for these assets, and may also contain various restrictions (for example, on the transfer of securities issued by the fund), heirs’ rights, etc.

When planning a family fund, one has to answer the question whether or not you want to work with a professional fund manager. A professional manager is recommended when the heirs are young, when attempting to attract external capital or selling part of the assets, when investing in the more liquid assets. The family fund may resemble the trust funds that are popular in the Anglo-Saxon jurisdictions. In these countries, trust funds have been in operation for centuries, it can be said they are an attribute of good taste – not managing the assets directly, but through trust funds. However, the establishment of trusts in Lithuania would not be appropriate, as our country is not party to 1985 Hague Convention on the Recognition and Treatment of Such Funds. Sometimes, a simple management company or a special legal regime can be sufficient for the the management of consolidated assets (such as usufruct or life annuity) for the assets transferred to the heirs.

Although the transfer of ownership through intermediary structures is a process requiring complicated, careful planning, but it is an advanced and sufficiently flexible method. It allows the inclusion of professional managers in the management of assets, opening up the possibility for the heirs to grant only the right to financial benefits, without ability to dispose of property, to plan the transfer of property for several successive generations of heirs, and the like

Whatever the path the transferor will choose in transferring his own business, this decision should be in line with the entrepreneur’s own perception of how he intends to live in the future. He should consider the interests of the others, for whom he is responsible – employees, business partners, creditors, and ultimately the state. Having overcome this whole path – from confrontation with oneself, identification of one’s needs, protection of the interests of others, careful planning to the making of decisions – the business founder can expect a solid, peaceful future after leaving the active business.

The author of the comment is Gediminas Laucius, Head of Tax and Legal Services at Lewben Group

 

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