The moment of succession is one of the most critical for family businesses. It involves complex legal, fiscal and emotional variables that make it difficult to plan this process and can endanger the very continuity of the business.
Providing for an orderly generational handover not only at the top of the company, but also in all key positions, greatly improves the functioning of the company and family harmony. In short, it lays the foundations for a long-term common project.
There are different legal instruments that make it possible to organise succession, to foresee the future organisation of the company and to avoid, as far as possible, family conflicts. On this occasion, we will talk about three of them: the family protocol, family pacts and succession pacts. Let’s get started.
The family protocol is the most popular instrument for succession planning in the family business
The family protocol is a private contract in which the family reaches a consensus and establishes in writing the regulations governing the professional and economic relations between the members of the family and the company. Its ultimate aim is to ensure the continuity of the company, and it can include in its wording as many assumptions as the family council wishes. Including the generational transition plan is one of the most common possibilities.
The family protocol is the fruit of deep family reflection, and one of its great challenges is to align the vision of the different generations. This is a private pact tailored to each business family that legally binds its signatories. It is also possible to publicise it and even establish compliance with it as an ancillary provision in the articles of association. This clause would make it possible to exclude from the company any partner who breaches the family protocol.
Family pacts, an option for smaller companies
For smaller family businesses with a less complex structure, it is possible to regulate succession by means of family pacts.
The family pact is a private agreement just like the family protocol. However, its scope is much more limited and focuses on regulating concrete, real and immediate concerns of the family. However, each pact serves to mark out how the family will act in the future, in the face of new difficulties that may arise later on.
Inheritance agreements, only in some Autonomous Communities
Here we are already dealing with a specific instrument of inheritance law, designed exclusively to organise generational succession in the family business. However, the use of succession agreements is much more limited because they are only permitted in some territories with their own civil law, such as Bizkaia, Navarre, Catalonia, Aragon, the Balearic Islands and Galicia.
Inheritance agreements make it possible to designate the successors to the family business and to organise the fate of the family assets in a binding manner to the same extent as a will. The major difference between succession agreements and wills is that succession agreements are in principle irrevocable. They can only be terminated by agreement of all the signatories or in accordance with certain very limited exceptions provided for by law. A will, on the other hand, can be modified or revoked unilaterally as often as the testator wishes.
As mentioned at the beginning of the article, these are only three of the legal instruments that can be used to arrange the succession of a family business. Some founders of family businesses plan the future of their estate by means of a standard will, although this is not the optimal choice.
Each option has its pros and cons, and it is very important to choose the one that best suits the particularities of each company. At Confianz we are specialists in advising family businesses and we can accompany you in this process.