Succession for Familiy-owned Enterprises: Analysis of Succession for Familiy-owned Enterprises, Valuation and Effective Implementation

Frederik Smollerup Hansen & Frederik Orthmann Bitsch

Student thesis: Diploma thesis

Abstract

Studies have shown that 23,000 companies will in the next decade need to consider how to deal with succession. The other solution could be selling to a third party. The studies highlight that 3/10 of the 23,000 companies prefer to go through with a succession. The remaining companies, 7/10 of the 23,000, are likely to sell to a third party. Therefore, this topic is relevant to a major part of familyowned companies since the subject ‘generational’ can be very costly if the succession is not carried through on time and under the best terms and conditions. The terms and conditions are considered especially important in relation to the new generation’s competences, the structure of the company, the time factor and the united approach and desire of the old and new generation. These conditions must be taken into account before a succession is implemented. Furthermore, the wish to go through with a succession is important to the Danish economy since a lot of work and many investments are generated by family-owned companies. In fact, there are many ways of initiating a succession. It is, however, important to emphasize that “no solution fits all”, as there is not only one accurate and correct way, since it depends on the family’s desires and the structure of the company. However, a successfully implemented succession might be considered, as the major part of capital is retained in the company, as this is in the best interest of the family and the government, since this contributes to future investments. In the current case, we find two solutions/methods relevant: Tax succession, which is frequently used, and the A/B model. Both models are applicable in this case. This thesis examines and illustrates how a succession can be carried through using two methods. The scenario covered in this thesis relates to a company transaction where a father wants to transfer his majority shareholding to his son through succession. As the transaction generates a gain on selling, this thesis illustrates the tax consequences for all stakeholders, including the father and the son, who are both subject to taxation, and the company, as it entails costs for the company. In order to determine which of the following methods is the most appropriate and the best solution for all stakeholders, we look into the interpretation of the criteria and the Danish legislation on taxation. In the outline, we describe all principles and legislation, which must be considered before a succession is planned and carried through. The Danish legislation on taxation is both complex and comprehensive, which means that companies need assistance from specialists to assist with the succession as it is not usual that management have been through one before. A lot of focus on succession in recent years has resulted in debate with major political involvement. The public debate has in fact contributed to a reduction of the gift taxation from 15% to 6% in 2019. The percentage will be further reduced to 5% in 2020, please also refer to legislative L 183, which took effect on 8 June 2017. Before we make an extensive analysis and compilation of the successions by the two methods, we will prepare an analysis of the soft and hard values based on the presentation of the company and recent financial information, resulting in an overview of the soft and hard values. These are important to elucidate, as the soft values describe the non-financial conditions, such as the new generation’s competences and the family’s interests and desires according to the succession. But it is also important to look at the hard values, as these procure the firm’s valuation according to TSS-2000-9 and TSS-2000-10. The Danish tax authorities accept the valuation methods when a valuation is made between related parties. The valuation methods are used since the Danish tax authorities have previously challenged the valuation in connection with succession. When the soft and hard values have been addressed, the next phase is to the analyse the two different solutions: tax succession and the A/B model. Exhaustive analyses of succession implementations will be prepared. The consequences for the father and the son when applying tax succession and the company when applying the A/B model are illustrated through calculations. This thesis seeks to conclude and determine which of the solution methods is the most accurate solution. To retain most of the capital in the company after a succession is not just the only factor to be considered in the overall assessment. The time factor, the father’s need for capital, family’s wishes and the son’s competences must also be included, as they are all important for the company’s future activities as a going concern. We will present and compare the findings of our analysis. Our main conclusion in this thesis will be followed up by an analysis and consideration of solution method, which we find the most applicable for the case. The thesis concludes that the A/B model is the most successful solution applying to the case and the family’s interests and wishes. Our main conclusion is that the father does not have any interest in being paid out at the time of the transaction. Neither is the time factor considered to be a problem, since the son is not considered to have the right competences, and therefore we consider a three-year transition period appropriate, as it will give the son time to get acquainted with the company and its operation and processes.

EducationsGraduate Diploma in Accounting and Financial Management, (Diploma Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages90
SupervisorsSøren Bech