In the column Just a call with…, we talk to an expert about a current event in the field of economics, (responsible) investing, pensions, and income. This time, macroeconomist and expert strategist Charles Kalshoven discusses the importance of family businesses for the Dutch economy.
The country index for family businesses by the German Foundation for Family Businesses shows how favorable the conditions for family businesses are considered in different countries. The Netherlands ranks 9th globally, placing much higher than, for instance, Germany and Italy, where family businesses account for 50 percent and 70 percent of national income, respectively. In the Netherlands, this is roughly 30 percent. In short, the Netherlands has a fairly friendly climate for family businesses, even though these companies are less dominant in our economy compared to Germany and Italy.
Nevertheless, the FD wrote this week about the uncertainty among family businesses regarding the continuation of the Business Succession Scheme. This has led to a wave of business transfers. Do you think these concerns are justified?
"A business transfer to a new generation is complicated, and capital must be available for it, especially since some owners need the sale proceeds for a good retirement provision. Moreover, you need liquidity to settle with the tax authorities. If that’s not available, it’s a problem. Core activities built by previous generations may then need to be divested. Parting with a portion of grandpa’s life’s work is naturally painful. I can understand that the retrenchment of the Business Succession Scheme is a frightening prospect for some families."
How important are family businesses for the Netherlands?
"As of January 1, 2020, the Netherlands had 285,000 family businesses, 86 percent of which were micro-enterprises with two to ten employees. Of the five hundred largest companies in the Netherlands, nearly two hundred are family businesses. These are impressive numbers. For the economy to flourish, a mix of companies and business forms is needed: publicly listed, sole proprietors, but certainly also family businesses. Family businesses have a stabilizing effect on the economy. They provide job security, focus less on the short term than other enterprises, and are agile and flexible, allowing them to quickly adjust to changing circumstances. This means they are less likely to go bankrupt, also because they operate more conservatively with debt. Look at the corona period; family businesses fared better than other companies."
So we should cherish them instead of thwart them?
"Well, family businesses are somewhat more labor-intensive and have slightly lower labor productivity. They also make less use of innovation schemes for renewing or automating processes that increase labor productivity. But that doesn’t say everything: maybe they want to save money and be in control themselves. Moreover, you often see that the first generation is focused on innovation, while the subsequent generations focus much more on continuity. That’s where the problem lies with the plans of the cabinet to significantly limit tax exemption for the transfer of a business through a gift or inheritance. Family businesses argue that the continuity of the business is at risk if a successor first has to settle with the tax authorities. This won’t be the case in every individual situation, but it is certainly a deterioration for family businesses compared to the current situation. The fact that we see many more business transfers in anticipation of the possible curtailment of fiscal arrangements is, of course, not for nothing."