Italy stands out in Europe for its high number of family-owned businesses. Within these businesses, the overlap and interference of family and business relationships creates unique challenges and opportunities. Statistics show that only a minority of Italian family businesses survive to the second generation, and even fewer make it to the third. Succession planning is therefore crucial tor the survival of family businesses, and tools such as “family pacts” (so called “patti di famiglia”) can help to this purpose.
Family vs. Business: Contrasting Values and Objectives
The intricate and dense network of relationships between family and business, the possible interactions and the resulting conflicts that can arise when these two entities coexist, have long been the subject of interest in social, economic and legal sciences.
Family and business operate on distinct principles, values, and purposes:
- The family is based on emotional ties, cooperation, solidarity and protection. Family members often seek economic returns within the business rather than prioritising its operational needs. In addition, family businesses sometimes suffer from overstaffing, where people are recruited not on the basis of their skills but because of their family ties.
- Business, on the other hand, revolves around profit, economic growth, efficiency, hierarchy, and value creation.
The values shared in a family business are influenced by the history of the family itself. The family is the element of continuity and connection that permeates the development of the family business, especially in a socio-economic context such as the Italian one. The well-being of the family depends on the development of the business. The business is therefore an asset to be safeguarded and passed on.
Succession: A Critical Phase in Family Businesses
In this context, the succession process is a critical phase for the survival of the business.
Choosing the right successor is one of the most challenging tasks an entrepreneur faces. It requires a careful assessment of the skills and potential of family members, often influenced by emotional biases. This difficulty is exacerbated by intergenerational family growth, with new spouses, children, and extended relatives.
A common dilemma is whether to appoint a single leader or opt for shared leadership among several family members. While a single successor ensures clarity of leadership, shared leadership requires strong collaboration, clear division of roles and mechanisms to prevent internal conflict.
Other factors may contribute to high mortality rate of businesses, such as:
- Lack of capable or willing successors. If heirs pursue different career paths, the business may lack competent leadership.
- Conflicts among heirs. Disputes over inheritance and leadership often lead to business stagnation or decline.
- Fragmentation of ownership. When multiple heirs inherit a company, disputes over control and decision-making can lead to operational inefficiencies or outright failure.
- Resistance to change. Some entrepreneurs fail to recognize the need for transition planning, leading to abrupt and destabilizing changes in the businesses.
The importance of a well-structured transition
While family businesses form the backbone of the Italian economy, their sustainability depends thus on effective governance, strategic renewal, and well-managed succession planning.
By striking a balance between family unity and business efficiency, family-run enterprises can successfully transition across generations, preserving both their legacy and economic viability.
Planning for the future is not just about preserving the past—it is about fostering growth, innovation, and long-term success.
A well-structured transition should thus involve:
- Early identification of potential successors and their gradual involvement in leadership roles. A successful transition requires a gradual transfer of responsibility. Many first-generation entrepreneurs struggle to relinquish control, often fearing that the next generation lacks the experience or vision to maintain the success of the business. This reluctance can stifle the development of the future leadership team.
- Encouragement of entrepreneurial thinking among family members.
- Training and mentorship programs to prepare the next generation for leadership roles.
- Professionalization of management by involving non-family executives to ensure competence-based decision-making.
- Establishing clear governance structures to define roles, responsibilities, and decision-making processes.
- Legal and tax planning to address inheritance laws and ownership distribution, minimizing future conflicts.
From a legal standpoint, succession can be effectively planned through various strategies, including wills, donations, trusts, opening the capital to external investors, and ultimately, selling the business.
Among these instruments, it is also worth mentioning the family pacts (so-called “Patti di famiglia”), regulated by articles 768bis-768octies of the Italian Civil Code.
The “Patto di famiglia” (Family Pact): A Legal Instrument for Business Succession
Through a family pact, an entrepreneur or shareholder can, during his or her lifetime, transfer all or part of his or her business or shares in the company to one or more descendants, i.e. children or grandchildren, who will continue the activity without recourse to a donation or will.
Essentially, the family pact allows the entrepreneur to manage succession of the business in advance, facilitating generational transfer within it while preventing future inheritance disputes and ensuring stability and continuity in the management of the business.
In an increasingly complex economic context, the family pact is an option aimed to avoid the risk of business fragmentation and to ensure competent and consolidated management over time.
Main features of the Family Pact
The main features of family pacts are as follows:
- Family Pacts are not subject to Article 458 of the Italian Civil Code
Article 458 of the Italian Civil Code prohibits any contract or agreement that disposes of an inheritance before the death of the owner, thus rendering such agreements legally unenforceable. This applies both to (i) a person’s disposal of his own future inheritance and (ii) agreements among heirs concerning the future inheritance of another person. However, “patti di famiglia” (family pacts) are an exception to this rule, allowing business owners to legally plan the transfer of their business to their descendants during their lifetime without the risk of them being considered null and void. - Mandatory Public Deed
The family pacts must be formalized through a deed executed before a Public Notary. - Involvement of all “Forced Heirs” (eredi legittimari) in Family Pacts
The family pacts must be signed not only by the entrepreneur and the descendant(s) receiving assets or shares but also by the other non-beneficiary “forced” heirs (eredi legittimari), i.e. the spouse, the children, or, if there are no children, the parents. These heirs are entitled to a reserved share (quota di legittima) of the estate, regardless of what is stated in the will. For example, if the deceased person has only one child, he or she is entitled to receive at least 50% of the estate; if there are two or more children, they together are entitled to receive at least two-thirds (2/3) of the estate, divided equally; if there is a spouse and two or more children, the spouse is entitled to receive 1/4 and the children together are entitled to receive half (1/2) of the estate. - Right of the Forced Heirs (eredi legittimari) to be compensated
The descendant(s) (children or grandchildren) who receive assets or shares through the family pact must compensate the other forced heirs (eredi legittimari) who are party to the pact, unless the latters waive their right to compensation in whole or in part. This compensation must be paid in cash or equivalent assets and must be equal to the reserved share (quota di legittima) to which the heirs are entitled by law, calculated on the basis of the value of the transferred business or company shares at the time the pact is concluded. This ensures that the rights of the forced heirs are protected while allowing for the orderly transfer of a business. - Protection Against Legal Challenges
The Family Pact also provides protection against legal challenges, by preventing two common actions, known as “azione di collazione” and “azione di riduzione”. The first action (azione di collazione) ensures that donations made by the deceased person during lifetime are taken into account in the estate once the inheritance process has begun following the death of the estate owner, in order to ensure a fair distribution among the heirs. The second action (azione di riduzione) allows the forced heirs to challenge donations or testamentary provisions that violate their reserved share (quota di legittima) in the estate. These two actions cannot be exercised with regard to the assets or shares transferred to the beneficiary heirs and to the compensation paid to the other forced heirs under the family pact. This exception to the normal rules ensures that the transfer of the business under the family pact remains stable and legally protected. - Protection of “Forced Heirs” (eredi legittimari) who are not a party to the Family Pact
The law also protects forced heirs (eredi legittimari) who are not parties to the family pact. This situation may arise, for example, if the existence of forced heirs was unknown at the time the pact was made and only came to light when the succession was opened. In such cases, these heirs are entitled to compensation from the descendant(s) (children or grandchildren) to whom the assets or shares were transferred under the family pact. The compensation is calculated according to the same criteria as in point 4. This provision guarantees fairness by protecting the inheritance rights of all forced heirs, even those who were not originally included in the pact.
Advantages and challenges of the Family Pacts
Based on the above, family pacts have a number of benefits:
- Succession planning, as they aim to avoid uncertainty and potential conflicts among heirs and to ensure a clear and shared strategy for the future management of the business during the lifetime of the business owner;
- Business continuity, as they ensure that the business remains under the direction of qualified and motivated individuals, preventing the risk of its disintegration or fragmentation;
- Protection of all legitimate heirs, as the pact ensures that no forced heir is disadvantaged by providing fair compensation for those who do not receive company shares or the business itself;
- Ability to include specific governance clauses in the pact, allowing detailed regulation of the future corporate structure.
Despite these advantages, the family pact faces challenges that have limited its use in practice, such as:
- Difficulty in reaching agreement among heirs, especially in families with conflicting relationships;
- The need for the beneficiary-heirs to have sufficient liquidity to compensate the non-beneficiary heirs. To overcome this potential issue, some scholars suggest that the business owner, rather than the receiving heirs, could provide compensation to the forced heirs when the business or shares are transferred through the family pact. However, this solution is not universally accepted.
- Potential legal disputes. Although the purpose of the family pact is to prevent disputes, conflicts may still arise. For example, if a forced heir was unknown at the time of the agreement and later comes forward during the inheritance process, he or she may claim his or her reserved share; this situation must be properly regulated in the pact, otherwise it may lead to potential disputes.
- Exclusion of certain heirs. The law only allows descendants (children or grandchildren) to receive the business under a “patto di famiglia”, which excludes spouses, siblings or other family members from directly benefiting. This can lead to family conflict, especially if other heirs feel disadvantaged.
- Tax and financial issues. Careful consideration of all financial and tax issues is critical to optimizing the succession process through family pacts and ensuring effective, long-term management of the business.
Conclusion
The Family Pact is a valuable legal tool for ensuring business continuity and preventing inheritance disputes. It offers a structured framework for transferring a business to the next generation during the owner’s lifetime while safeguarding the rights of all legitimate heirs. However, its complexity, along with the legal and tax requirements involved, can make it challenging to implement. Proper regulation, with the assistance of a notary and legal professionals, is essential to ensure compliance with regulations and fairness among heirs.
