Intergenerational Transfer of Family Businesses
Do you own a family business?
Consider the following situation: what if, regrettably, as a family business owner, you find yourself in a position where you can no longer make sound decisions? What would happen to your business? Additionally, after your death, how will your family members deal with intra-familial conflicts as they arise?
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
The intergenerational transfer of a family business is a core value at the heart of every family business. The grooming of the next generation, and then, the transfer of the business to said generation needs to happen in the smoothest and most comfortable manner possible.
The transfer itself is a complex procedure that must be well planned in order to maintain the efficiency of the business when the reins are passed to the next generation.
There are several models for intergenerational transfer:
The three main models are (1) the “continuing son” model (2) the appointing of a manager who is external to the company (3) the integrated model.
When trying to decide which model is relevant for you, there is a need to balance the need to act in the best business interest of the company, and on the other hand, the effect of the chosen model on the nature of the business. This balancing act is done in an attempt to select a model that will best guarantee that the business remains a family business.
The "Continuing Son" Model
The “continuing son” model means that there is an heir who accepts and takes over the management of the company. This can be done in one of two ways: the first is a gradual manner, in which the inheriting son progresses up the management ladder in the company until he finally takes over the management of the business, while the previous generation is still in office. The other option is to hand over the reins of the business only after the retirement of the founding generation.
Appointment of external manager
The second model for the intergenerational transfer of a family business is the appointment of an external manager. On the one hand, it can be argued that an external manager will not be as devoted to the business as a “continuing son”, who bears the weight of the family legacy on his shoulders, as well as the knowledge that the business supports his loved ones as well as himself, would. On the other hand, an external manager may be more objective, thus being more willing to make “cold” business moves that the “continuing son” may be reluctant to make due to his personal connection to the company. In addition, an external manager may work more diligently than a successor, as he knows that he needs to prove himself – his position depends solely on the results he brings, otherwise he will be fired. An external manager addresses another common cause for concern: that the family member, knowing he will inherit the business in the future, will not take his business training seriously and won’t learn all aspects related to running the business in a serious manner.
The Integrated Model
Another model that is available to the business owner is the integrated model. Whether there is a son that continues the family business or not, according to this model the business remains owned by the family, the only difference is that an external professional is appointed to be the actual manager. This model combines the best of both worlds, on the one hand, the family members who are most committed to the success of the business remain as the decision-makers. On the other hand, external guidance with professional knowledge is also available. Said manager can suggest or implement various organizational changes due to his detachment relative to the business, which the family members, being as attached to the business as they are, may be apprehensive about. This model requires that the relationship between the family and the external manager be clearly defined in a manner that allows for fruitful cooperation.
Support From a Lawyer is Essential
An intergenerational transfer has financial, managerial, and legal aspects to be aware of. Due to the transfer being very multi-faceted, the dates and manner of transfer to the new manager/”continuing son”, the details of organizational changes that will take place, and the standing of the rest of the family after the transfer must be determined. It is important to note that an intergenerational transfer, no matter what model is chosen, brings with it a significant change to the family dynamics as well as a change to the fabric of the business. Therefore, the more carefully the process is planned, the smoother it will be all around, allowing you to continue day-to-day business operations without crises that will lead to financial losses.
Lasting Power of Attorney – regulate today’s legal procedure in intergenerational transfer for tommorow including:
Drafting legal documents for the purpose of transferring rights and authority in business;
Drafting precise and detailed wills with the purpose of preserving family capital.
Drafting employment agreements
At times, changing the capital structure of the company is necessary.
Changes in the company’s articles of incorporation
Arrangements with additional business partners – as far as these exist
Prepaing for, and dealing with legal, economic, and social security Issues. (such as provident funds, pensions, national insurance in Israel and abroad, bank accounts in Israel, and more)
Defining or updating beneficiaries in life insurance policies, in provident funds, and in pension funds
Adding ‘longevity’ clauses in joint bank accounts.
Power of attorney, Lasting (enduring) power of attorney, advance directive documents
Trust Arrangements
Additional typical, day-to-day agreements that are essential for every type of business (this varies of course between different businesses, each business and its own requirements and agreements).
Through our legal accompaniment process, you will receive a comprehensive plan that will assist you in starting the process, guiding you along the way, and providing you with insights and tools for a successful outcome.
In Conclusion
Legal advice on inter-generational transfers that is accurate and specific
If you wish to make an intergenerational transfer of the family business, we recommend that you contact us for assistance in the process and in drafting the agreement for the transfer.
The series of actions and documents related to the intergenerational transfer that we will prepare will reflect your wishes and needs and will stand the test of time.
In our company, family law and commercial law departments have a wealth of legal knowledge and experience. In addition to having extensive experience in handling family cases and commercial law, we also have extensive experience in intergenerational transfer and the legal tools available for that purpose.
We commit ourselves to doing our best in order to meet the needs of our clients, in all matters related to the legal process, while protecting your interests, the interests of your family, and the interests of your business.
For legal advice (without obligation) in matters related to intergenerational transfer, we invite you to contact us at 02-595-3322 or on WhatsApp at 050-811-6181
