Family businesses are facing challenging times

Much has been said and written over the last few years on the challenges facing businesses in the local and international arena, particularly in the context of the challenges that the global economy has been facing. Although the local economy has performed relatively well in this difficult and often unpredictable environment, it is clear that local businesses, and in particular family businesses, face specific challenges.

Business succession should be supported from regulatory and fiscal perspectives

There is no single definition of what constitutes a family business and there are many characteristics which are typical of these types of entities. Typically they refer to businesses commenced in the first half of the 20th century by an enterprising individual, sometimes with siblings, as an importation and wholesale business serving the local market. Another feature of such businesses is that they have grown organically into diversified ventures as new business opportunities are sought and profits are reinvested for growth purposes.

It is also typical that these businesses are much bigger than they were 50 years ago and are run by the second or third generation of the founder group. Indeed, these various characteristics are the source of a number of challenges.

Given the growth of the business and the development of the local business environment, it is normal for the older generations to plan for the transfer of the organisation to the younger generations. This poses issues both in terms of the actual transfer of ownership as well as in terms of management and control.

The transfer of ownership normally results in particular tax issues making such transfers unattractive. Furthermore, dilemmas result from wishing to divest control on to the younger generations whereas retaining some entitlement to profits. Tax rules in this regard are not particularly helpful and such rules are many times not conducive to a smooth succession of the business. Although the latest Budget presented by Government has addressed the question of assets being transmitted or donated to descendants, this has been limited to very restrictive assets which do not include shares in family businesses.

The growth and diversification – together with the multiplication of shareholders as younger generations inherit – of family businesses also results in particular challenges in the manner that available resources are used. Different family members may have different interpretations to available business opportunities and this may result in conflicts. This has contributed to the acknowledgement that family businesses need to formalise corporate governance procedures.

This has been one of the reasons for the increase in the incidence of non-executive non-family members on board of directors, and who can provide the required balance to the differing views of family members.

The involvement of non-family members also allows for the creation of board committees, such as the remuneration committee, that provide a further balance to differing family interests in sensitive subjects such as the remuneration levels of senior positions in the organisation (often filled by family members), and the appointment of family members to such key posts.

These are but a few of the challenges particular to local family businesses. Creating an environment that ensures a seamless transition of the business between one family generation and the next is key, not only for the survival of the business itself, but also for Malta’s economy in general.

Although responsibility for this rests primarily in the older generations, business succession should ideally be supported particularly from the regulatory and fiscal perspectives.

The recently published amendments to the Capital Gains Rules and the introduction of a possibility to obtain rulings in respect of the income tax and stamp duty treatment of mergers and divisions should help in successfully planning for family business succession – even if these legislative amendments may not have been specifically introduced for this purpose.

Planning for Continuity is the theme of the Bank of Valletta-PwC Family Business Forum at Corinthia San Ġorġ on May 31, which will also be addressed by Small Business Minister Chris Cardona. Information is available at www.bov.com.

David Ferry is tax partner at PwC.