Barriers to family business in Slovakia

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In the analysis entitled Barriers to family business in Slovakia, we focused on a detailed examination of the problems that family businesses encounter in their entrepreneurial activities. The treated topic enjoys a high level of attention in the society, since also in our environment efforts to improve the conditions of family businesses have gradually started to be applied. These businesses are of great importance to the national economy and for this reason it makes sense to help them prosper.

The primary purpose of the analysis was to identify the problems that most burden family businesses. A secondary objective was to summarise recommendations leading to the mitigation of existing barriers. In addition to the theoretical background, interviews with representatives of family businesses and experts providing advisory services to family businesses were also used to achieve the objective.

Part of the treatment of this topic is a summary of practical as well as theoretical knowledge with a link between the current legislation in Slovakia and in neighbouring countries related to family business.

The document is divided into seven chapters, with the following central themes.

A summary of definitions of the concept of family business and a comparison of the current state of application of the definition in neighbouring countries such as the Czech Republic, Poland, Hungary, Austria and, as a representative among countries with a long history of family businesses, Italy.

Since family ties distinguish family businesses from conventional businesses, in the next chapter we discuss the interrelationships and interactions of family members in FBs, as well as the categorization of FBs.

Nowadays, the issue of generational change is a highly topical topic, because now is the time when the founders of Slovak family businesses need to hand over their businesses to the next, incoming generation.

The handover of the FB in terms of property succession is also dealt with in the analysis. We have been able to identify selected options for the transfer of FB, together with pointing out the shortcomings and opportunities for inspiration in other jurisdictions regulating instruments for the redistribution of company assets, which by their nature are more suitable for FB.

Property succession is also related to the topic of the legal conditions for inheritance of a family business. In the analysis, we also present the possibilities of expressing the will of the founders of the FB in matters of redistribution of the assets of the family business.

In the next chapter, we have elaborated on the support programmes and initiatives developed in our country and abroad targeting the FB.

The last chapter summarizes the recommendations of family business experts. We have also added some practical advice that can help FBs prepare for and manage complex family business situations. The chapter also contains summaries and proposals for changes to existing legislation.

As noted above, an important part of the analysis is the recommendations for family businesses. The recommendations below have been formulated by experts providing advisory services to family businesses.

In order to maintain the continuity of the family business, it is essential to establish an appropriate family business management structure. It is important for the FB to develop a strategy for the family business, to set up sufficient control mechanisms, to keep the family members (owners, managing family members and inactive family members) communicating with each other, with the managers or with other stakeholders involved in the running of the FB.

Family businesses have the option of forming the so-called family council (family governance) or, in other words, formally convened family meetings. These are meetings of the whole family, not just the active members participating in the FB. Family meetings should be organised at least once a year (but more frequent meetings are recommended). The result of the family council should be an agreement on family goals and values, on the development of the company, on the distribution or security of the company’s assets and on the preparation of the succession and handing over of the company to the next generation.

It is also important to create substitutability in the company if an unexpected event occurs (e.g. death, disability, etc.). A (general) power of attorney for another responsible member of the family business will help preserve the continuity of the business.

Setting rules for passive family members, what rights and entitlements they are entitled to, what share of voting rights they have. The size of their share of FB assets is a necessity. The solution to this situation is to draw up the so-called family constitution or code of values, i.e. a document which, although not legally binding, is morally binding. The content of the written document in question is a set of principles and procedures governing the management and business of family assets.

The topic of generational change in the family business must be addressed in advance and planned for in the long term. The process of handing over a business is indeed complicated, with many legal and property issues to be set up and settled. In generational change, it is necessary to plan not only for managerial but also for property succession. Property succession involves the transfer of all or part of the property already during the lifetime of the founder of the FB, or it may involve the transfer of property in the form of an inheritance. Both forms of passing on property to heirs have their advantages and disadvantages. Inheritance proceedings tailored to the needs of the family business are absent. As mentioned above, the FBs would need to make the inheritance process more flexible, as the current legislation imposes a number of restrictions and conditions on the parties to the inheritance proceedings.

If no successor is considered an external manager should be sought to take on this role. Finding a suitable external manager is a difficult and lengthy process. When selecting a suitable candidate, it is essential to take into account their previous experience, entrepreneurial mindset, attitude to the values of the family business, and many other factors. The manager is also required to minimize the occurrence of risks and not to take unnecessary risks if it is not necessary in order to be able to promote the interests of the direction of the family business.

The situation regarding finding a suitable external manager can also be dealt with through consultancy companies. These consultancy services can save businesses time, costs and minimise the risk of employing an unsuitable candidate.

In the case of enterprises classified by size as medium-sized enterprises, the reallocation of assets requires the use of different instruments than in the case of small enterprises. Consolidating assets into a single coherent family holding can usefully prevent some family problems from arising. The family holding fulfils the function of ensuring the protection of property. The advantages of the holding structure are mainly: the capital link; the possibility to influence the behaviour of other companies belonging to the holding; the possibility to implement restructuring plans by means of capital redistribution; the possibility to spread the business risk, e.g. by setting up subsidiaries for risky projects; the possibility of better access to financial resources in the form of credit resources or additional capital injections.

The following recommendations have been formulated for economic policy makers in the area of family business.

Since there is no legal definition of family business or family entrepreneurship in our legal system, it would be advisable to create a definition of the concept of FB that would be universally valid and widely accepted. With regard to EU support activities, it is foreseen that with the definition of the concept and subsequent embodiment in the legislation of individual EU Member States, support services leading to financial and non-financial support for FB can be provided.

In the context of family business, it would also be advisable to modify some of the laws that have a direct impact on FB. The legislation on inheritance in the Civil Code has not undergone any changes for a long time, and the development requires certain amendments. A suitable inspiration may be the Czech law on trusts or trust funds, which has its roots in the Anglo-American legal system. Also, testamentary succession is very restrictive for the person expressing his/her last will.

Adaptation of conditions to family businesses also requires a transfer from a trade to a limited liability company, as this transfer leads to an increase in costs, while the founder of the FB continues the same activity, but in a different legal form.

Since the assets in the FB tend to be formally assigned to different family members, or the assets themselves are not divided into family and business assets, a complication may therefore arise from the divorce of the spouses. Also, the possibility of dissolving the joint ownership of husband and wife when starting a business requires a change to the obligation to dissolve the joint ownership of husband and wife when starting a business, as in the event of doing business in the form of trade the property of the other spouse, who is not in business, is also at risk, and the entire family property is at risk at the same time.