Business succession from parent to child is an age-old practice in human history, from humble cobblers to royal families. The practice stemmed from necessity—parents taught their children the trade they knew in an effort to teach them to survive. What started from necessity became custom and, eventually, tradition. In many professions, this tradition is still a point of pride. Advisory business owners will often see this as the best path to build an enduring practice and retain their client base.
For some advisors, the idea of passing the business to a family member is their preferred choice and seems to be the easiest path forward. One day, the founder steps out and the child steps in. Most advisors even consider gifting their business to their children, with or without a written contract, rather than selling it to them. Here are some simple reasons you should think twice before taking this route.
The IRS Considers Your Business to Have Value
Many advisors think, “I’ll just give my children the business when I’m ready to retire.” We hear this all the time from founding owners whose children work with them in their business. Be wary, though – although certain types of gifts are exempt from this rule, generally speaking, a gift whose value exceeds the annual exclusion is taxable to the giver of the gift and likely will be applied against the giver’s lifetime estate tax exemption.
If you make a sizable gift during your lifetime, it is advisable that you obtain and submit to the IRS an appraisal to substantiate the value of the gift. An IRS-qualified appraisal of a business can cost anywhere from $5,000 to $30,000, but could be worthwhile to support your decision and your tax situation in the event of an audit.
Blood is thicker than water
Yes, you will always be family. But it’s important to think through all of the potential pitfalls before formalizing your family succession plan. If things go sideways, do you want to duke it out with your son or daughter in court? Have a plan and protocol in place to settle any disputes before they arise. Hire an experienced intermediary to draft your documents and smooth out any disagreements at the outset and avoid any misunderstandings down the road. Do your “due diligence” before combining forces, as you would with a third party. It’s much easier to hash these things out early on instead of waiting for conflict to occur that could potentially color your relationship from then on.
A formal, written succession plan can make all the difference in making sure things don’t go off the rails.
Everything can go right or everything can go wrong
We’ve seen both. It’s not unusual for founders to feel some apprehension about bringing their children into the business. There are fears of overcoming entitlement and mismatched expectations. Some owners risk demoralizing the rest of their team. These worries can be overcome. In the video below one of our clients describes the emotional aspects of bringing family into the business in his own words.
It’s not simple, but it is important
Even with family, business is still business, and you should treat it as such. To execute a succession plan, you should document the plan and the individual transactions in writing and implement proper corporate governance to keep things running smoothly.
How many parents would love to see their children follow in their footsteps? There’s no denying that most parents consider their children’s happiness and satisfaction to be top priority, but think of the validation you would feel if your child took the same path you did–not only to walk the path because it was easy, but to seek the education and experience to be qualified enough to follow you, and furthermore, to invest in what you’ve built.
This is why family succession is, in fact, a complex proposition. It necessarily comes with emotional ties. And when business decisions are wrapped in with emotions, things can get complicated. Fortunately, help is available to strengthen your business and your family.