How to Keep the Shares of a Family and its Business Together

Inside View

Tamás Danku, TEP, Managing Director, AIRON TRUST Fiduciary Asset Management Kft.

Internal feuding can make the operation of a family business impossible. If the owners and managers of the company cannot work together, the firm will soon suffer. Problems between the stakeholders of family companies are often even more challenging to solve due to emotional relationships.

Business owners must look at a company’s operations from a different perspective than company managers or employees. The responsibility of ownership is no less than the responsibility of management, which must be learned in the same way as the professions required for specific jobs in the company.

Therefore, the responsibility associated with company ownership should be passed on to the next generation when they are experienced enough to exercise ownership rights. In addition to the professional field, the owner’s experience may also help with financial, legal and management knowledge.

How to Transfer?

Many family companies are structured by their owners so that the next generation also has a stake in the business. Typically, these shares are given to the younger generation as a gift and have the same ownership rights in the company as the founders. The ownership role comes with difficult decisions (downsizing, restructuring, liquidation, etc.), which are difficult even for an experienced entrepreneur but can be even more burdensome for a young person at the beginning of their career.

Owners running a family firm have a particularly difficult job if the next generation is not interested in the business. Most Hungarian businesses are not self-operating companies but the workplaces of their owners, who cannot be excluded from the activity. Therefore, if you want to involve the next generation in the ownership of your business, you should do so only if they are interested in active participation in the company’s life.

Each of the following four solutions is well suited to maintaining control over a family business, passing on the experiences of the older generations and sharing ownership responsibility.

Wealth Management Foundation

Due to the format and complexity of wealth (asset) management foundations, which have existed for a relatively short time in Hungary, this is primarily recommended for families with high value (HUF 600 million plus), diversified assets, many family members and a long-term asset management plan of up to 50 years. Such a foundation can be an excellent basis for the asset management of a diversified “dynasty” in terms of assets and relationships.

Private Holding Structures

The holding structure is probably known to all entrepreneurs and used by many. It s a good solution for families where the next generation is also an experienced owner and/or manager who is not unused to making complex business decisions and where there is inter-generational experience of working together effectively without significant conflicts.

Family Constitution

The family constitution is a somewhat euphemistic name for a “family regulation” in which the first generation lays down the basic principles of the family’s functioning. This is not a solid, unchangeable “law,” but rather a guideline from the older generation covering family, business, social and cultural relationships. Over the years, the experiences of the following generations are integrated into it, continuously improving it. The family constitution can be given an enforceable legal framework, but it is more about writing down the common family values, which the family members claim as their own.

Fiduciary Asset Management (Trust)

Fiduciary asset management is a tool that can be used when someone wants help regarding the succession of the family business or estate and succession planning. Hungarian fiduciary asset management is a type of contract that can be applied flexibly locally but also holds its own in international contexts.

If the main goal is to “keep” a family business together, it also provides a very effective solution for families in several circumstances. These include when the next generation is a minor, if there is a large age difference between generations, when the next generation will not continue the family business operating as a company, if the foundation generation has also built significant private wealth from the income extracted from the firm, or there are also beneficiaries with special care / educational needs who require lifelong care, and so on.

This article was first published in the Budapest Business Journal print issue of February 24, 2023.

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