A Generational Succession and Finance of a Family-owned Business: Based on a Case

Peter Schmidt Rasmussen & Kevin Klitgaard Lindgaard

Student thesis: Master thesis

Abstract

This thesis is written for the Master Course in business Economics and Auditing, Cand.merc.aud, at Copenhagen Business School.
The purpose of this master thesis is to provide knowledge to Danish family-business owners, advisors and auditors on the subject of generational change of Danish family-businesses within the family while the company owner is alive. The thesis focuses on the current taxable aspect, laws and regulations regarding the tax-free options of restructuring of group structure, the valuation of family owned businesses in transactions within the family and the financing opportunities in relation to the transaction of the company.
A generational succession requires timely planning and action and can be a long-term process. A generational succession shall consider the hard and soft values that runs in the family and the company. The hard values relate to the economic situation of the business owner, the younger generation and the company including the tax aspect the generational change will cause. The soft values relate to the emotions the company owner and the younger generation can have towards the company and in the family in general. The company owner must consider whether the younger generation share the same vision for the company and has the desire and capabilities to continue the company operations or come to the conclusion that the company is better off sold to an independent buyer, a staff member or liquidated.
The generational succession shall also consider if the company will continue to exist after the generational succession have occurred by considering the impact on the company stakeholders such as employees, customers and trade partners.
With expectations aligned in the family and within the company stakeholders, the next step is the restructuring of the group structure and funding opportunities. In this thesis the restructuring models “Exchange of shares” and “Demerger” are considered. The complex laws and political changes to the models in use is a reason why both the company owner and the younger generation shall consider the planning of a generational succession in due time. A careful planning and preparation will result in the generational succession to match the needs and wishes of both generations while achieving the lowest tax burden available from a tax-law perspective.
The restructuring models are used to prepare a generational change and are a significant part of the process. The restructuring models can be applied with taxation as an outcome but can also be applied with tax succession in which the company owner will not be taxed on any profit from the restructuring until the shares are disposed of. In a generational succession the shares of one or more companies are transferred from the company owner to the younger generation. A transfer of shares usually results in a taxation of profit on the shares but in a generational succession within the family it may be possible to apply the tax succession laws. If tax succession is applied on the transfer of shares the company owner will not be taxed on any profit. Instead the younger generation succeed in the tax-related positions related to the shares and the taxation will come due when the younger generation dispose of the shares.
When it comes to funding of the generational change the company shares which are transferred need to be valuated. As the transaction are made between dependent parties and the shares are often not traded on a public stock exchange the law requires specific valuation models to be used to find the value which independent buyers would pay for the shares. When the shares are valuated there are a range of funding options to choose from besides cash payments or bank financing as the younger generations private economy often does not enable them to pay the full transfer amount. The options described in this master thesis are a gift transfer, advance distribution dividend rights, demand letter and self-financing. The options can be used alone and in situations combined with one another. The funding options shall consider the company owners needs to preserve assets for their retirement plans, as part of their pension may be tied up in the company assets and also the younger generation possibility of paying the transfer amount that are not provided as a gift transfer.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages127