Have you thought about when you will hand over the reins of your family business (and are actively planning towards it) or, like many entrepreneurs, do you see this event as simply occurring at some future, arbitrary and undefined date? If it's the latter, warns Director of Estate Planning at French private bank Société-Générale, Jean-Marie Turquais – in a recent conversation with France's Les Echos newspaper – you may be doing yourself and your family a great disservice, particularly when it comes to paying taxes on the transfer of the family business from founder to heirs.
In what tax context are family business transfers being made, in reality? Fortunately, there's a patch of blue sky in the current tax environment in France, says Turquais. Since the inception of the Dutreil Pacts in 2004, he explains, transfers of family businesses have been benefitting from a favourable tax gift – the value of an enterprise is retained after a 75% discount and donation tax on freehold shares benefits from a 50% discount (providing the donation occurs before the donator is 70 years old).
Says Turquais, that's the way a company valued at €100 million can be transferred to the heirs subject to a tax rate limited to 5.6%. In addition, the cost of taxes can be deferred (five years) or split up (10 years). Then, the tax rate payable by the administration is zero for operations carried out in 2013. Thus, the revised, actual overall cost doesn't exceed two or three percent, and many enterprises are, in fact, able to effect transfers for almost zero percent.
Dutreil Pacts have brought French family businesses distinct tax advantages. Nevertheless, cautions Turquais, pitfalls do exist – the principal one being not including the transfer of one’s enterprise in an overall reflection of one’s estate. To this end, family business owners should examine a transfer critically by asking (sometimes difficult) questions, such as what their future income needs will be and how to preserve the equality between the business' heirs (children).
The other pitfall is to do nothing – under the pretext that a suitable heir to the business has yet to be identified or that the children are not yet ready to take over at the helm, many entrepreneurs simply go into 'stand-by mode'. It must be remembered that family businesses are also family assets – it’s quite possible to dissociate the transfer of power from the transfer of capital – take action so that you don’t suffer the consequences, advises Turquais.
Evaluating or appreciating an enterprise – in other words, estimating its value – is an important step in transference. The family business comprises a professional asset but it also often represents close to 90% of an entrepreneur's personal assets, too. A valuation of the family business should not be anecdotal – once again, valuating the business should be part of an overall asset strategy.
If in doubt, the head of the family enterprise can always carry out several evaluations, says Turquais. Hence the importance, he urges, to anticipate the transfer and to take one's time. He advises the entrepreneur to draw on the knowledge and expertise of his accountant, attorney and even his banker in order to holistically examine and integrate the various legal, tax, financial and family issues at stake.
Whilst all companies are different – with a unique set of circumstances – Turquais estimates that a family business should anticipate a transfer of power over a five year period. He points out that Dutreil Pacts already 'lock in' shareholders for over four years, and notes that 34% of family business heads who are less than fifty-five years old envisage a transfer within the family circle. As they age, however, the less likely this possibility becomes.
That's why anticipating (and planning) the transfer is so essential. Turquais demonstrates this by way of example: He advised a 54-year old founder of a successful family business, married out of community of property (with a spouse of 54 years old), with no identified heir to the business, to transfer to his children the nue-propriété ('ownership without usufruct') component of his professional assets (at a transfer cost of 2-3%).
In five to ten years this will become – after an 'issue of transfer' – a personal asset (to be taxed at 45%). Parallel to this, the business owner made a donation of shares in favour of his/her spouse which permits he/she to gain cash at the end of his commitment to the Dutreil Pact (after four years), by way of capital reduction under favourable conditions.
"La transmission d'une entreprise doit s'anticiper à cinq ans" was originally published on Les Echos on 11 December 2013.