The family buy out: transferring the family business to a successor child

The family buy out is a transaction that transfers the family business to a successor child while compensating his or her siblings. It combines a partition gift with an equalisation payment (French Civil Code, articles 1075 et seq.), the purchase of the shares by a holding company that borrows to finance the equalisation payment, and, in most cases, the Dutreil exemption covering 75% of the transfer taxes (French Tax Code, article 787 B). The successor child receives the shares, takes on the equalisation payment, and the holding company repays the loan with the dividends distributed by the operating company.

The equalisation payment preserves equality between the children. When the business, the main family asset, is allocated to a single successor child, that child owes a cash compensation to his or her non-successor siblings: this is the equalisation payment. It is placed at the successor's charge within the partition gift (French Civil Code, articles 1075 et seq.) and, in practice, financed by the buy-out holding company through a loan. It makes it possible to entrust the business to the child who runs it without prejudicing the other forced heirs.

The successor child forms a buy-out holding company to which he or she contributes, or which purchases, the company shares received under the partition gift. This holding company takes out a bank loan to finance the equalisation payment owed to the other children. Repayment is ensured by the dividend distributions from the operating company to the holding company, largely exempt under the parent-subsidiary regime. This is the leverage effect: the business largely finances its own transfer, without the successor having to commit equivalent personal savings.

The Dutreil pact (French Tax Code, article 787 B) exempts 75% of the value of the transferred shares from gift and inheritance tax, which sharply reduces the tax cost of the partition gift. It requires a collective retention commitment over the shares of at least two years, extended by an individual commitment of six years after the transfer, compliance with voting and financial rights thresholds, and a management function held by one of the signatories. The family buy out is therefore designed so that the partition gift and the holding takeover remain compatible with these commitments.

The contribution-sale comes into play where the manager has previously contributed his or her shares to a holding company under his or her control. Article 150-0 B ter of the French Tax Code then provides for a tax deferral of the contribution gain. If the holding company sells the shares within three years, it must reinvest a significant portion of the proceeds in an economic activity to keep the benefit of the deferral. In a family buy out, this regime can prepare the structuring upstream, by placing the shares in a holding company before the transfer transaction itself. See our dedicated page on the contribution-sale regime (French Tax Code 150-0 B ter).

Preference shares make it possible to separate the holding of capital from the exercise of control. In a family buy out, they serve to adjust governance between the successor child, who must retain control of management, and the non-successor children, who may receive shares with enhanced financial rights but limited voting rights. They offer flexibility to reconcile continuity of management and fairness between heirs, without calling into question the logic of the takeover.

The risks relate first to compliance with the Dutreil commitments: a sale of shares or the loss of a management function during the retention period can forfeit the 75% exemption. They relate next to the repayment capacity of the holding company, whose debt must remain sustainable in light of the expected dividends. They relate finally to the rigour of the civil-law side: the partition gift and the valuation of the equalisation payment must preserve the hereditary reserve and equality between children. Each lever calls for precise coordination, which justifies tailored support.

No. The family buy out requires a business generating regular dividends sufficient to repay the holding company's loan, a child genuinely intending to take over and run the business, and a valuation that allows the equalisation payment to be financed without weakening the operations. It is particularly suited to profitable operating companies transferred to a single child among several. Where these conditions are not met, other succession schemes may be preferable. The firm systematically assesses the relevance of the transaction before any commitment.