Intergenerational transition in a family business: models, documents and order of steps
Ownership, control and management are three separate components of a family business, and they need not move together. Separating them turns the handover to the next generation from one large decision into a process that can be planned and corrected.
"The handover is almost always postponed because it looks final. Break it into its components and it turns out you can take one step without giving up the rest."
Adv. and Notary Igal Mor
What intergenerational transition is, and when to begin
Intergenerational transition is the process by which ownership, control and management of a family business pass from one generation to the next. Those three components do not have to move together, and in most files they do not. Management can pass without ownership, ownership without control, and control gradually over a number of years.
That separation is what makes the process capable of being planned. When people speak of handing over the business as a single event, the decision is postponed because it looks final. Once it is broken into components, it becomes possible to take one step and retain the rest.
Three starting points recur in practice: a son or daughter joining the business, a first thought about retirement, and a health or family event that raised the question of what happens if. The third is the most common, and it is the worst in terms of timing, because it forces complex decisions under pressure.
The three models
Three models for transferring management recur in practice, each with its own commercial logic. None of them is the correct one in the abstract; the right choice is the one that fits the particular business and the particular family.
- A successor from within the family. One of the children takes over management. The advantage is deep commitment and familiarity with the business from the inside. The difficulty is that knowing in advance that the business will pass to them can reduce the need to prove themselves, and that the position of the other siblings has to be addressed expressly.
- An outside manager. Management is handed to a professional from outside the family. The advantage is objectivity and the ability to take commercial steps a family member would hesitate over, together with full accountability for results. The difficulty is preserving the family identity of the business and the owners' control over material decisions.
- The combined model. Ownership and supervision remain with the family, and day to day management is given to an external figure. This is usually the choice where the next generation wants to stay involved but not to manage, or where there is no suitable candidate within the family.
Every model requires a clear line between who manages and who decides. A manager, family member or not, acts under authority conferred on them; owners decide by virtue of ownership. Where that line is not written down, every unusual decision becomes an argument about authority.
Choosing a model
The choice of model is a commercial decision, but it bears directly on relations within the family. The two considerations are examined together rather than one after the other.
Four questions help focus the choice:
- Is there a suitable candidate in the family. Not whoever is interested, but whoever has the skills and experience to run the business at its present scale.
- What the ownership structure looks like afterwards. If ownership splits between siblings, how decisions are taken and how deadlock is broken has to be settled.
- What the founding generation will live on. Retiring from management without an alternative income creates a dependency that makes letting go of control harder.
- What the timetable is. A staged transfer over years allows course correction; a single transfer does not.
The answers are usually fixed in a structured document, from which the amendments to the articles and the shareholders agreement are then derived. See family businesses for the arrangement as a whole.
Transferring ownership: shares and restrictions
Handing over management does not transfer ownership. Ownership passes by a transfer of shares, and that is a separate legal act governed by the company documents. Section 17(a) of the Companies Law, 1999 gives the articles the force of a contract between the company and its shareholders and among the shareholders themselves, so a restriction set out in the articles binds even a person who receives shares by inheritance.
The arrangements required alongside the transfer are these:
- Defining who may hold shares. It is common to provide that shares are held by descendants only and not by their spouses, and that a transfer to a third party requires consent.
- Right of first refusal. Anyone wishing to sell first offers the shares to the other shareholders on terms fixed in advance.
- Different classes of shares. The economic right can be separated from the voting right, so that value passes without control. Section 20 of the Law protects share classes, providing that no amendment prejudicing the rights of a class may be made without the approval of a meeting of that class, unless the articles provide otherwise.
- An exit mechanism. A valuation and purchase formula fixed in advance, so that a future departure does not become an open negotiation.
A gradual transfer of shares over a number of years is the accepted way to combine passing value with retaining control. It also allows the next generation to be observed in practice before control passes in full.
The siblings who do not manage
Most family business disputes that reach the courts are not between the founding generation and the next one, but between siblings. The source is almost always the same: one sibling manages and draws a salary, the others hold shares and receive nothing, and nobody explained in advance why that is fair.
Three tools narrow the gap:
- Separating salary from dividend. The manager is paid for their work by reference to defined criteria, and ownership is rewarded by dividend under a written distribution policy. Neither then competes with the other.
- A written distribution policy. Deciding in advance what share of profit is distributed and what is retained in the company. Without it, the same argument reopens every year.
- Balancing outside the business. Where the business passes to one sibling, the others are commonly balanced with other assets, by will or by lifetime gift. See wills and inheritance.
Fairness and equality should be kept apart. An equal split of shares between a sibling who manages and siblings who are not involved is not necessarily fair, and an unequal split is not necessarily oppressive. What matters is that the reasoning be explained in advance and recorded in writing.
Tax aspects
An intergenerational transfer carries a tax cost, and it is examined before the transfer rather than after it. The simple rule is that a transfer without consideration is not necessarily a transfer without tax.
Three points recur in every file:
- Real estate. Section 62 of the Land Taxation (Appreciation and Acquisition) Law, 1963 exempts from appreciation tax a transfer of a right in land without consideration to a relative. The definition of relative covers a spouse, parent, grandparent and descendants; a sibling is included only where the right was received from a parent or grandparent, by inheritance or as a gift. The exemption does not extend to acquisition tax, which is charged at a reduced rate.
- Shares. Share transfers are governed by different tax rules and not by that exemption. A transfer to a relative may itself be a taxable event, and an early review with a tax adviser is part of the preparation rather than a step that follows it.
- Company structure. Section 64A of the Income Tax Ordinance provides the family company route, under which all shareholders are relatives and income is attributed to a representative taxpayer. A change in the ownership structure may affect continued eligibility.
Israel has no estate tax. It was abolished in 1981, and receiving an asset by inheritance is not in itself a taxable event. A later sale of the asset by the heir may be taxable, so the transfer is planned with the whole sequence in view.
The legal tools that accompany the transfer
The company documents govern a transfer made during lifetime. Two other events, incapacity and death, call for further tools, and without them the entire plan depends on everything happening in the intended order.
- An enduring power of attorney. A document drawn up while a person is still capable, setting out who will act for them if they can no longer manage their affairs. It is drawn up before a lawyer trained for the purpose by the Administrator General and deposited with that office. In a business mid transition, it prevents the process from stopping halfway. See enduring power of attorney.
- An aligned will. A will not aligned with the articles may leave shares subject to a transfer restriction, producing an heir unable to realise what they received. See estate planning.
- A trust. Holding the shares through a trustee for the benefit of the beneficiaries. It is used where the passing of control is to be deferred, or where shares are to be held for a child not yet ready to receive them. See trusts in estate planning.
Combining the tools matters more than any one of them. A transition plan, a will, an enduring power of attorney and articles that do not speak to each other produce contradictions that surface at the most sensitive moment. See also probate and succession orders.
What the process looks like in practice
An orderly process runs over months rather than weeks and is built in stages. The order matters, because each stage supplies the information the next one needs.
- Mapping. The existing ownership structure, the documents already in place, the assets inside and outside the business, and each family member's rights.
- Separate conversations. Establishing the wishes and concerns of the founding generation and of each of the children, before everyone sits at one table.
- Choosing a model. Deciding on management, ownership and control, and the pace at which each passes.
- Drafting. Amending the articles, preparing a shareholders agreement, and updating wills and powers of attorney accordingly.
- Implementation and review. Carrying out the transfer, and checking after a period that the arrangement works as intended.
Where a disagreement emerges at one of the stages, mediation is the accepted way to carry on without stopping the process. See mediation in a family business.
In summary
Intergenerational transition is a route rather than a single event, and it succeeds when it begins while there is still a choice. Ownership, control and management are three separate components, and separating them is what allows a gradual handover instead of one decisive moment.
- The three models, a family successor, an outside manager and the combined model, are not ranked against each other. The choice follows from the business and the family.
- Handing over management does not transfer ownership. Ownership passes in shares, subject to the articles and the shareholders agreement.
- The position of siblings who do not manage has to be settled in writing, or it will be settled in litigation.
- Tax, and preparation for incapacity and death, are part of the planning rather than an appendix to it.
The process brings together company law, family law, succession law and taxation, and every decision in it affects the others. It is therefore built as a whole, with advisers who know all four fields.
If you are considering passing the business to the next generation, or you are the next generation and want to prepare, contact us for an initial assessment. We will map the present position and set out the options available to you.
Questions that recur in an intergenerational transition
These answers are general and do not replace advice on your own file.
What is the successor model?
Does handing over management also transfer ownership?
How long does an intergenerational transition take?
What if there is no suitable candidate in the family?
How is the position of siblings outside the business settled?
Can shares be kept from passing to the children's spouses?
What are the tax implications of a transfer to the next generation?
Is there an estate tax in Israel?
What happens if the founder loses capacity mid process?
Does the will need to change because of the transfer?
What is done when the siblings disagree?
Can the chosen model change later?
All pages in the Family and Inheritance department
The separation itself
The divorce processLeaving home before divorceReconciliation or divorceRequest for dispute resolutionDissolution of marriageEconomic abuseRestraining orderBreach of a divorce agreementThe children
Child supportChild support claimIncreasing or reducing supportSupport for a child born outside marriageCollecting support through National InsuranceSpreading a maintenance debtCustody and parenting timeShared parentingThe tender years presumptionChanging a custody arrangementRelocating abroad with the childrenParental alienationDealing with an alienating parentGuardian ad litemSurrogacyPaternity claimThe Youth (Care and Supervision) LawVisual parenting plan builderProperty and agreements
Prenuptial agreementSame sex prenuptial agreementSame-sex marriageNotarised prenuptial agreementDissolution of joint ownershipCareer assets and goodwillSelling the apartment on divorceCommon law partnersInheritance and estate planning
Wills and inheritanceInheritance between same-sex partnersEstate planningWills in estate planningIntergenerational transfer in estate planningTrustsDynasty trustSpecial needs trustInheritance orderProbate orderAgreements between heirsInheritance disputes between siblingsContesting a willNo-contest clause in a willBegin the handover while there is still a choice
An initial consultation meeting maps the existing ownership structure, the documents already in your hands and the gaps, so that the order of steps can be decided before anything is drafted.