The European Forum On The Transfer of Business On 3 and 4 February 1997 in Lille
The European Forum On The Transfer of Business On 3 and 4 February 1997 in Lille
The European Forum On The Transfer of Business On 3 and 4 February 1997 in Lille
Introduction
The transfer of business is one of the key issues of the European Commission’s Enterprise
Policy. After the creation and growth of the business, the transfer is the third crucial phase
in the life-cycle of a business. Many jobs are at stake when the founder reaches his or her
retirement age and has to envisage the handing over of the business to the next
generation.
On 28 and 29 January 1993, a symposium was organized in Brussels with the aim of
finding out the situation in the different Member States and to define best practice in the
field of business transfers. This symposium was followed, in the course of 1994, by wide
consultation of all interested parties on the basis of a specific communication1. This
consultation led to the adoption, on 7 December 1994, of a formal recommendation
concerning the transfer of small and medium-sized enterprises (SMEs), which was
addressed by the European Commission to the Member States2.
After the period by which the Member States were invited to report on the progress made,
i.e. 31 December 1996, the European Commission organized the European forum on the
transfer of business on 3 and 4 February in Lille (France). The recommendations which
emerged from the Forum, in particular from the different workshops, are set out below.
In some Member States, legal measures have been taken in recent years in order to
facilitate business transfers. Most of these measures concern civil and company law.
Progress has been made in some areas, but little in others and the improvements are
uneven across Member States. The following areas are of particular concern:
1
O.J. n° C 204 of 23.7.1994.
2
O.J. n° L 385 and C 400 of 31.12.1994; hereinafter referred to as: the recommendation.
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in practice. This experience should therefore be extended to the other Member States
where such changes are still not allowed or result in adverse tax consequences.
2. Introduction of a simplified public limited company into national law
Art. 4 (b) of the recommendation states that the concept of a simplified limited company
should be introduced into all Member States’ laws. This would give SMEs easier access
to this kind of company, which is more robust in the process of transfer while permitting
the distribution of shares among actual or future heirs, as required by inheritance law.
Such a simplified limited company has so far only been introduced in Germany, within
the Aktiengesetz, which provides for certain lower administrative burdens for small
companies. In France, the Société Anonyme Simplifiée (S.A.S.) was introduced in 1994.
However, this legal form aims at facilitating the cooperation between big companies and
is therefore not a suitable instrument for SMEs.
In all Member States, access to the limited company could be facilitated further, so that
this type of company would be more widely used by SMEs. This is currently being
envisaged in France in the report on the modernization of company law, which was
presented to the Prime Minister in 1996 by Senator Philippe Marini.
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being dissolved by heirs with conflicting interests, a number of Member States have
introduced a pre-emption right or another form of preferential attribution of shares in a
business to one of the heirs working in the business, coupled with the obligation to
compensate the other heirs (e.g. Luxembourg in art. 815-1 to 815-18 Code Civil, as
modified by the Loi relative à l’organisation de l’indivision et étendant l’attribution
préférentielle en cas de succession aux entreprises commerciales, industrielles et
artisanales of 8.4.1993; for agricultural businesses in Belgium by virtue of art. 41 of the
law of 7.11.1988).
The continuity of businesses could also be increased by introducing a form of certification
of shares into national law (as for instance the administratiekantoor of Dutch law, whose
introduction is being considered in Belgium). An even stronger instrument would be the
introduction of a form of trust, as is well known in English law, or of the fiducie, as
recently envisaged in Belgian and French law.
Another practical way to increase the continuity of the business is the use of so-called
business or family agreements (pacte d’entreprise, protocole familial). Especially in
family businesses, such agreements can be used in order to maintain a certain number of
management rules throughout the change of generations. They are already used to a
certain extent in France and Spain, so as to mitigate the consequences of the prohibition
of future succession pacts.
The wisdom of the prohibition of future sucession pacts can be questioned, because it
makes proper estate planning unnecessarily difficult in the countries concerned (Italy,
France, Belgium, Spain, Luxembourg). Those Member States should therefore consider
allowing the conclusion of future succession pacts.
5. Administrative simplification
The administrative requirements of the transfer of businesses should be simplified in the
same way as for the setting up of companies, i.e. less formalities, shorter deadlines and
with a single contact point for the entrepreneur. At present, for example in Italy, the
entrepreneur often has to contact several offices and complete time-consuming
administrative procedures before the transfer can take place.
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employment. Everyone, including the State, loses out when jobs are lost through
unsuccessful transfers. The following areas are of particular concern:
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4. Double taxation
There are at present very few double taxation treaties between Member States covering
inheritance and gift taxes. Double taxation can be a major problem for the transfer of
business assets other than land when the business operates with branches in more than
one Member State. Member States should eliminate all double taxation in this field by
completing the inheritance/gift tax treaty network, as they are required to do under article
220 of the EC Treaty.
6. Tax reforms
These recommendations imply that tax systems need to evolve with changing business
practices and changing priorities. Ongoing tax reform in the area of business transfers,
tackling the most urgent obstacles first, should be pursued by Member States.
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In Belgium, a special fund for financing business transfers (Fonds de Transmission) has
been set up as part of the Fonds de participation at the Caisse Nationale du Crédit
Professionnel. The transfer fund offers preferential interest rates for loans facilitating
business transfers within the family or to third parties. The loan is granted for a minimum
period of 7 years and a maximum of 20 years. The interest rate is 3% during the first five
years, and rises by 0.25% points thereafter with an upper limit of 3.75%. No guarantee is
required to secure the loan.
Since 1990, the Deutsche Ausgleichsbank, a German public institution, has promoted the
transfer of businesses through its Eigenkapitalhilfeprogramm (equity capital assistance
programme). More than 20,000 business takeovers have been supported through
subordinated loans at very favorable interest rates. Almost 50% of the businesses taken
over belong to the craft sector, 25% to trade and 20% to the service sector. This
experience has shown that the default rate of loans granted for the transfer of business
was slightly higher than that for newly created enterprises (4.6% for transfers against
3.3% for start-ups), but could be kept within manageable proportions.
Similar schemes providing guarantees and loans at interesting rates for business takeovers
also exist in France (SOFARIS) and in Italy, through the public aid for the setting up of
worker cooperatives, which is granted by virtue of the Legge Marcora and distributed via
the Compagnia Finanziaria Industriale (CFI).
All of the abovementioned schemes have proved worthwhile and should also be
introduced in other Member States.
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a) Existing measures provided by professional advisers to support the transfer of
business
For the entrepreneur thinking about transferring the business, the main services provided
by accountants and consultants concern advice, studies, surveys, seminars,
communications, development of a network, and an enterprise check-up. For persons
seeking to take over a business, the main services concern the preparation and the
monitoring of the business before and after the takeover, notably through communication
with a wide public, setting up a network of enterprises which are ready for transfer, and
the development of business transfer plans.
Many firms and organizations are active in this field and many databases have been set up
either in a specific region or in a specific sector. However, the activities aimed at bringing
interested parties together generally have a limited range. There is no single activity
which fulfills the requirements of the entire group. In order to mediate effectively
between the parties, a larger database of supply and demand would therefore be
necessary, so that specific and selective contacts could be arranged. The fact that most of
the databases are not accessible for the public poses another problem, since entrepreneurs
are excluded from consulting the data available only to banks and accountants. These
databases should become more widely accessible.
3. Conclusions
The transfer of business has to be accompanied in all its phases, since the entrepreneur
needs financial support (see art. 3 of the recommendation) and professional advice before,
during and after the transfer. The criteria for the best future development of the business
and the actions which have to be taken need to be clearly identified from the outset. A
cross-border network of potential buyers and sellers (as is already the case in the
Netherlands and Belgium) should be set up. The transfer of business has to be supported
on an equal basis as for the start-up of enterprises, especially concerning the financial
support measures (as it is already the case in Belgium, France, Germany and Italy).
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D. Practical experience by entrepreneurs
having transferred or taken over a business
2. Valuation
No single method exists for the valuation of an enterprise. One can use methods based
upon the intrinsic value, the return on investment, cash-flow, market value, etc.. One can
also use a combination of the above with the aim of drawing up a plan for the transfer
negotiations.
As regards transfer by sale, the final result is determined by negotiations as well as the
financial capacities of the parties involved. In this respect one can only encourage
transferors or transferees to inform themselves as to the different methods of valuation.
Or if need be to make use of experts sufficiently early on in the process so that they can
assess an offer.
As regards transfer by succession, the valuation methods used by State administrations, in
particular relating to inheritance taxes, are often seen as being too rigid. It is, therefore,
important to allow enterprises the option of having an independent analysis carried out.
Moreover, as set out in art. 6 (c) of the recommendation, it is important to ensure that the
tax assessment of the business should take account of how the value of the business can
change after the death of the owner.
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transferor could continue to help the new entrepreneur in decision-making, acting for
example as a consultant or part-time director or manager for a limited period of time after
the transfer. Good understanding between the transferor and the transferee is essential in
this respect. It could also be envisaged that an external adviser supports the transferor and
the person taking over in order to integrate the various audits (social, fiscal and financial)
into the transfer process. Furthermore, it would be advantageous if a dialogue was
initiated on advantages to be gained from greater understanding between different
generations of entrepreneurs.
For example, the concept of Business Angels3, which is relatively widespread in the USA
and the United Kingdom, consists of retired businessmen who are prepared to invest the
proceeds of the sale of their own business into one or several other small and medium-
sized businesses. The reinvestment of such proceeds has been made attractive for tax
purposes and could well facilitate a number of business transfers. The added value of this
scheme consists in the fact that the retired businessmen also offer advice to the companies
in which they invest, thus assisting them in avoiding problems encountered in the transfer
from one generation to the next.
3
See Commission Communication on the financial problems experienced by small and medium-sized
companies, COM(93) 528 of 10.11.1993, paragraph 29; Commission Communication on the
improvement of the fiscal environment of small and medium-sized enterprises, O.J. n° C 187 of
9.7.1994, page 5, paragraph 6.