Overview of Family Business Relevant Issues Country Fiche Luxembourg

2008

Author: Chambre des Mtiers du Grand-Duch de Luxembourg Christian REDING

Project Co-ordination:

Project conducted on behalf of:

EUROPEAN COMMISSION
ENTERPRISE AND INDUSTRY DIRECTORATE-GENERAL Crafts, small businesses, cooperatives and mutuals

In the framework of the study Overview of Family Business Relevant Issues

This study has been elaborated with reasonable care. The authors and the project coordinator do not, however, accept responsibility for printing errors and/or other imperfections and potential (consequential) damage resulting thereof.

Overview of Family Business Relevant Issues - Luxembourg

Index
1 2 3 4 5 6 7 Introduction ......................................................................................................... 1 Understanding of family businesses in the national context............................. 2 Importance of family businesses for the national economy ................................ 4 Characteristics of family businesses................................................................... 5 Institutional actors and their strategies, policies and initiatives........................... 8 Future issues .................................................................................................... 10 Bibliography ...................................................................................................... 11

Overview of Family Business Relevant Issues - Luxembourg

Introduction

The issue of family businesses as such is not a special topic in public and policy discussion and no particular differentiation is made between family businesses and non-family businesses. However, with regard to the economic policy, the differentiation is made between industrial companies, banks and all other companies. For industrial companies, the Ministry of Economics is the responsible Ministry, for banks its the Ministry of Finance and for all other companies the Ministry of Middle Classes is the responsible Ministry. Thus particular interests of SMEs, which often differ from those of multinational companies, are considered separately what allows to lead a particular policy for SMEs.

Overview of Family Business Relevant Issues - Luxembourg

Understanding of family businesses in the national context

There is no official or common definition of family businesses, also not whether oneperson enterprises or sole proprietors are considered as family businesses or not. Family businesses are considered as companies where the family members have the control over the ownership and/or the control over the management and where they are willing to transfer the company to the next generation. Often companies which are managed or owned by the second generation are considered as family business. In the first generation, the word family business is not so commonly used. There exist legal regulations referring to family businesses in the social security law and in the tax law. In the social security law, the regulation consists of providing the assisting spouse a social security. The regulation concerning the assisting spouse was implemented in the seventies. The reason then for introducing this regulation was to improve the social security of the assisting spouse especially with regard to the old-age pension. In the seventies the regulation only covered the pension schemes: old-age pension, invalidity pension and survivors pension. This regulation however has been changed on 25 July 2005, by the Luxembourgish Code of Social Insurance. (article 1 point 5). With this change, the regulation now also covers sickness. The overall objective of the regulation is thus to improve the social security position of the assisting spouse and especially promote the independent old-age pension career of assisting spouses. This regulation gives the assisting partner the same social security protection as the entrepreneur. The target is to increase the number of assisting spouses that are taking advantage of this measure. When an independent affiliates to social security, the assisting spouse is covered under a special statute (conjoint aidant) except in the case that the independent decides to opt out. Then the assisting spouse is not insured under the statute of conjoint aidant and the spouse will be automatically covered by the co-insurance of the employer (as an independent). In order to be insured under conjoint aidant (assisting partner), the partner has to carry out a non paid activity as employee. It is not possible to have the statute of an assisting spouse and that of an employee at the same time. With the new regulation of 2005, also only the spouse of e.g. sole proprietorships may be insured under the statute of the assisting spouse. Previously assisting spouses in case of partnerships companies like limited liability partnerships, public limited companies or general partnerships, could be insured under this statute. The new regulation has changed this; the spouse got the statute of an employee and no more the statute of the assisting spouse. The measure is funded by social security contributions paid by the independent and the spouse. The entrepreneur pays maximally 5 times the legal minimum social wage and the spouse pays maximally 2 times the legal minimum social wage. The social security administration collects these contributions and is managing the career evaluation regarding pension schemes.

Overview of Family Business Relevant Issues - Luxembourg

This regulation is successful due to the fact that it makes the social security position of assisting partners the same as the social security position of the entrepreneur. In the tax law, legal regulations concerning family businesses refer to the transfer of businesses. In the tax law there are regulation concerning the transmission of a company within family members. Family businesses benefit from a reduced tax for the transmission. In case that the corporate executive of a family business dies, the Luxembourgish law foresees special regulations. The spouse or an ascendant can continue the exploitation during two years under the condition to occupy after this period a qualified person. A descendant, a brother or sister, an uncle or aunt, or an ally to the 3rd degree can continue the exploitation during five years, under the condition to get within this period the necessary professional qualification. Even if those regulations refer to family businesses, they do not give any definition of family businesses. In public discussions, family businesses are associated with companies where the family members prefer long term objectives to short term benefits. They also want to preserve human and social factors. In family businesses the management is very committed to their company and family members are intensively involved in daily business. Family businesses are often equated to SMEs. However, they can have different forms and sizes. In Luxembourg, also many multinationals are family businesses and there is a general awareness of this fact, as these companies are well known. The most famous company in Luxembourg is ArcelorMittal, the worlds number one steel company with 320.000 employees in more than 60 countries, which has been taken over in the year 2007 by the Mittal family. No clear typology of family businesses can be outlined as they range from SMEs to large multinationals.

Overview of Family Business Relevant Issues - Luxembourg

Importance of family businesses for the national economy

A study of PriceWaterhoueCoopers Les enterprises familiales luxembourgeoises (Luxembourgish family businesses) of 2007 estimates that around 70 % of Luxembourgish companies are family businesses what corresponds to 20.000 companies. Even among the 369 biggest companies, one third is in the hand of families. Thus 34.000 employees out of 135.250 belong to those companies. 70 % of the family businesses are SMEs.

Overview of Family Business Relevant Issues - Luxembourg

Characteristics of family businesses

Family businesses do not differ in many aspects from non family businesses: they operate in the same market and they are underlying to the same rules. However, potentially different interests between the shareholders and the family management are creating a particular environment within the family businesses. In family businesses, certain responsibilities can be accumulated within one hand: one person can be the owner and the manager of the company and be part of the family. One of the main challenges of family businesses consists in recruiting the right human resources. Especially managerial competences are missing in national family businesses. Employers have difficulties to attract and keep qualified personnel. This is enforced by the attractiveness of the financial and the public sector and the low active age of persons between 55 and 64 years. This represents also a major handicap for the development of the company. Moreover family businesses encounter also image problems. They are often seen as small entities with non adapted means and offering only limited career perspectives to potentially new employees. Thus family businesses need to sell themselves better and to modernize their image. The development of the company generally occurs when the upper management is accessible to members outside the family. Around 64 % of the members from the board are chosen outside the family for their particular competences which is essential for the perenity of family businesses. The management of conflicts Family businesses have to care seriously about the tensions within the family. Only 16 % of the companies have installed procedures allowing to prevent or to limit conflicts (intervention of an external mediator or of a family council). One major source of conflicts is the strategy to adopt to develop the company. However half of the companies have defined employability criteria in order to select family members who want to participate actively in the company and anticipate through this potential conflicts. Business transfers Business transfers are one of the major factors that weaken the family businesses. Only 30 % of the family businesses survive till the second generation and only 10 to 15 % to the third generation. In Luxembourg, only 40 % of the business managers of family businesses have a business transfer plan and only 35 % have chosen their successor. The owners of business companies attach an affective value to their company which they want to be taken over by the next generation. However, when no suitable candidate can be found within the family, it is better to cede the company as putting it into difficulties.

Overview of Family Business Relevant Issues - Luxembourg

Different strategies are possible for the corporate executive. In the case of a total control, the business manager has to find the suitable successor, a family member or an external management, or think eventually about a mixed management. If the corporate executive wants to keep a certain control on the company, the partial opening of the capital can lead to a merger, a partnership or other forms of cooperations. The opening of the capital to financial partners or institutional investors also constitutes a possibility for the company to prepare the future take over of the company. If the corporate executive decides to cede the control of the company, several options are possible: - A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company. A management buyin (MBI) occurs when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company's new management. A management buy-in team often competes with other purchasers in the search for a suitable business. Usually, the team will be led by a manager with significant experience at managing director level. The difference to a management buy-out is in the position of the purchaser: in the case of a buy-out, they are already working for the company. In the case of a buy-in, however, the manager or management team is from another source. In Luxembourgish family businesses, the following ways of transmission are planned: Transfer to the next generation within the family: 43 % Management buyout: 20 % Management buyin: 13 % Vending to another company: 8 % Introduction to the stock exchange: 3 % Others: mergers and acquisitions: 13 %

Strengths and weaknesses The main strength of the family businesses is the experience and the know-how. The strategy in family businesses goes far beyond short term financial profitability, but rather long term objectives are pursued. Family businesses also want to preserve fundamental values as the quality of the products and the services offered to the clients. Furthermore, hierarchical structures which are flat and easily adaptable, allow a great flexibility. Last but not least, the human and social factors can be seen as an advantage within family businesses. The corporate executives are very attached and committed to their company and are often supported by their family members.

Overview of Family Business Relevant Issues - Luxembourg

The main weaknesses are the sizes of the company structures which are often quite small and which do not allow a quick reactivity. Often commercial and marketing functions are underdeveloped in family businesses which leads to a weakened external communication. Furthermore, the apprehension to explore new markets and to innovate in the strategy through new products and services are seen as weaknesses. Finally the transmission of family businesses is often not planned and anticipated, which can lead to an uncertainty when no suitable corporate executive for the take over can be found.

Source : Les enterprises familiales luxembourgeoises, PricewaterhouseCoopers, November 2007

Overview of Family Business Relevant Issues - Luxembourg

Institutional actors and their strategies, policies and initiatives

Explanation

institutional features name of the actor

nature of the actor

address contact person telephone web-page e-mail content based features name of the strategy/initiative/ regulation

Chambre des Mtiers (Chamber of Skilled Crafts) government employers organisation support service provider (information, advice, education) research centre network/family business specific organisation (including interest groups/representative organisations/lobbies) others, namely: 2, Circuit de la Foire Internationale L-1347 Luxembourg Charles Bassing 00352 42 67 67 1 www.cdm.lu contact@cdm.lu Bourse dentreprises (Successors bourses) fiscal regulation/tax law labour law/social security law company law awareness raising measures corporate governance codes, family governance, family protocols, family constitution, family council, family assembly or similar education/training measures information/advice business transfer support instruments financial support marketing networking others, namely: In Luxembourg, one third of the business owners are confronted within the next ten years with the problem of the succession of their company. Thus this is a crucial issue for businesses in general and for family businesses in particular. The successors bourses provides a platform where business owners can offer their company for take over and where potential business buyers can look for take over. The objective is to bring buyers and sellers together and to conclude a take over. Date of implementation: December 1999

type

objective

initiation

Overview of Family Business Relevant Issues - Luxembourg

Explanation content based features Persons interested to take part in the successors bourses, can inscribe at the Chamber of Skilled Crafts. The collected data are analysed and the most relevant parameters are assembled in a repertory. Convergence points are determined in order to find the profile of the buyer matching most the profile of the seller in order to come to an agreement. Company sellers have to be inscribed at the Chamber of Skilled Crafts and company buyers need the necessary qualifications in order to take over a business. The initiative is promoted via the newspapers, Internet and business magazines. The initiative is financed via annual budgets. There are no costs for participants. The measure is quite efficient, there are permanently over 100 participants inscribed in the craft sector. It can be estimated that 100 to 150 takeovers are realized every year in Luxembourg and around 15 takeovers are realized in the craft sector. One third of these takeovers are family businesses.

contents/description of the initiative/measure

user based features eligibility criteria/target group Promotion tools/information strategy source of funding costs for participants/members performance based features

evolution

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Future issues

The opportunities for family businesses are to satisfy new needs and to explore new markets. Above all in a small country like Luxembourg, it is important to develop into a transborder company. The development of partnerships with other companies is an opportunity for increasing the growth of family businesses. Also the reduction of administrative burdens, which has been initiated by the Government, will allow companies to investigate their resources into the inherent business instead of loosing time with red tape. The growing complexity of the markets is seen among the major threats of family businesses which is reinforced by the growing competitive pressure. In the Luxembourgish construction sector, every second company, which is active on the market, is a foreign company. Furthermore, the very complex legislative and the regulatory framework is not adapted to family businesses and the European directives are not tailored to the national context. Also a better communication of the application of new regulation would be necessary. A study that has been realized by the Chambre des Mtiers du Grand-Duch de Luxembourg (Chamber of Skilled Crafts) underlines the importance of administrative burdens for SMEs. The collected data proves that small enterprises have to bear a relatively more important weight of administrative burdens than larger enterprises have to. Also, administrative burdens are constantly increasing. The main results of this study reveal that: 1'728 : the average cost of administrative burdens per year and per employee; 1,28%: the average cost of administrative burdens in relation to annual turnover; the relative weight of administrative burdens is highest for small-sized enterprises (3'873 per year and per employee for enterprises occupying less than 10 employees) and decreases with the number of salaried persons (1'034 per year and per employee for enterprises occupying more than 99 employees); Overall, the cost fort he craft sector in the Grand-Duchy may be estimated to 101 million per year; 34%: increase of cost of administrative burdens from 1999 to 2004 (excluding the impact of inflation: 18%); 3,3%: annual increase of cost of administrative burdens from 1999 to 2004.

Last but not least the difficulties to attract and keep qualified personnel and to find a suitable successor, especially when managerial competences are missing, are one of the major threats within family businesses.

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Bibliography

Les enterprises familiales luxembourgeoises, PricewaterhouseCoopers, November 2007 Les charges administratives: cots conomiques pour lartisanat, Chambre des Mtiers, September 2004