Not Just Family Business

ABSENT VIABLE HEIRS, A TRUST, A FOUNDATION OR OUTRIGHT SALE ARE THE SOLUTIONS FOR A FAMILY COMPANY

by Alessandro Minichilli, Dept. of Management and Technology, Bocconi
Translated by Alex Foti


All family companies share a major weakness in a moment of their lives, i.e. the time when the family entrepreneur starts planning for succession. In fact, although there are many legal and business ways to execute a generational transfer, their effectiveness and applicability depends very much on the family's structure, as well as the willingness and ability of incoming generations to replace the outgoing ones. For this reason, if the entrepreneur has several heirs, solutions in support of generational change will range from the creation of a holding company where ownership and managerial interests can be neatly separated, to a family pact, where leadership in the company is entrusted to the heir who is considered most suitable for succession, up to the extreme solution of splitting the family company's assets among the various heirs. The situation is simpler if there is only one heir. However, even in this case the entrepreneur will have to determine how much autonomy and responsibility should be entrusted to her successor, who will directly run the company, or, alternatively, be complemented by an external manager, or even see access to assets and/or future income restricted by legislative means such as trusts or foundations, without considering the extreme solution of selling the company to outside buyers.
 
Similar solutions apply also when the entrepreneur has no biological heirs. This is for instance the case of Giorgio Armani,founder of a fashion group now worth €2.6 billion, who has confirmed his willingness to start the succession process by setting up a foundation. Where there are no direct heirs, or heirs are regarded as weak or incapable of managing the company, these two instruments are gradually emerging as concrete solutions to the problem of generational passage, albeit with important differences. On the one hand, a trust, which is not recognized under Italian law, appears suitable to protect the private interests of individual family members and weaker subjects (e.g. a minor or a person who is not yet ready for either ownership or management), ensuring business continuity through the work of an administrator (called trustee), who takes over management and has broad discretion, subject only to the control (if any) of a guardian (called protector), both appointed by the entrepreneur planning for succession. Foundations play a different, specific role in generational transitions. In fact, a foundation, while restricting availability of the entrepreneur's assets for family members, has the double advantage of allowing full control of the assets conferred – through careful design of the governance structure – and stipulating of a social aim, which leads to tax benefits. This reconciles – albeit with different weights with respect to traditional succession – the interests of the family with those of the community, thus enabling the legacy of the family entrepreneur to live on in real life and in the imagination of future generations.