Why Banking on Old Succession Planning Advice is Toast
When banks weigh in on the subject of family business and succession planning it’s kind of like watching a football player teach dance moves to a ballerina. Business owners couldn’t find a more ill-suited source of information on a hugely important issue. Banks are big and careful and always quick to offer two-handed advice: “on the one hand you can do this; on the other hand you can do that.” It’s white bread advice and it’s letting business owners down.
Most family businesses are nimble entrepreneurial organizations fueled by risk taking and the dream of extraordinary rewards. Banks, not so much.
Harris Bank / Decima survey: good findings, goofy recommendations
When Harris Bank, in partnership with Decima, released the findings of their survey of 650 US business owners on November 29th, 2010, I braced myself for the same old recommendations for family business owners – recommendations that are almost sure to do more harm than good.
And when I say “more harm than good,” I mean both to family business owners and to banks themselves. When succession planning goes bad for a family in business, it goes bad for the lender. That’s why banks are all over this issue in spirit. But they are not providing meaningful leadership in reality. Leadership requires courage and conviction – two ingredients missing from the traditional bank strategy on succession planning.
Sure enough, there it was in black and white in paragraph five of the news release: a recommendation from a VP proclaiming, “Over time you can transfer ownership shares of a company without gift tax ramifications, and through that transfer, minimize future estate taxes.”
Gifting shares for tax reasons destroys families
Now I’m at a total loss to understand why gifting shares to family has anything to do with the study’s main conclusion that of the 650 business owners surveyed, 80% had yet to identify a successor.
Is the bank saying business owners should identify a successor in the family and then give them shares for free to reduce taxes? What about kids outside the business – should they get free shares as well?
Is the bank saying that business owners should find a management successor from outside the family and then gift an equal number of shares to all the children? Or to just some of them? Who will manage the professional manager? Will it be all the children who are now equal shareholders or just the eldest male!?
Banks better start getting this stuff right
It is precisely this gross disconnect between a study’s findings and a bank’s rush to offer the same old prescriptions that confuses business owners on this subject. Where there is confusion, there is inaction. Paradoxically, that is precisely the study’s conclusion.
Bored of Monday night football?
If you’re bored of Monday night football, find a family business that has done what Harris Bank and its parent BMO Financial Group suggest – create a succession plan that sees the shares of the business pass to family members when the founder dies. Watching family members in the business interact with family members outside the business is like watching a full contact sport played around the Thanksgiving dinner table – it’s a really bad idea for anyone to be holding a sharp knife. It’s an equally bad idea for a bank to be holding the debt.
If banks want to help family business owners (and their own share price) with their succession plans, they really ought to spend the time helping business owners ask the right questions first, as opposed to offering tax mitigation strategies. Leave that to KPMG, PWC, BDO and Deloitte.
Heaven forbid a bank manager ask a business owner a “soft” question, such as “Do you think your son or daughter would risk some of their personal capital to buy your business?” or “How much of your personal net worth is sitting in the retained earnings of your business and do you think any of your children have the ability and passion to grow your business?”
Heads up BMO: advising clients to give family businesses to the next generation doesn’t work. Never has, never will, especially when the main driver is minimization of taxes. When banks assume that business owners care only about reducing taxes, they miss the larger point: legions of aging business owners need help and permission from their bankers to sell their business – if not to family, then to someone else.
Gifting an operating business is so last century – just ask Bill, Warren and Ted
Giving away operating businesses to children is so last century – just ask Bill Gates, Warren Buffet or Ted Turner. It’s hilarious that entrepreneurial family business owners are waiting for their banks to wake up and catch up and begin putting as much emphasis on protecting their hard-earned wealth as on perpetuating their business.
If the problem is as big as the BMO study suggests, then it’s time to lead on this issue. To my thinking, that means abandoning the old-fashioned notion of a family business being passed from generation to generation, replete with family chaos, lawsuits and bankruptcy to show for it – the latter being the thing that banks are rightly most interested in avoiding.
When banks are lenders, wealth advisors and trust administrators, it’s no wonder they offer confusing advice
Say it out loud, BMO; say that you want succession planning to work well so that you aren’t left with staggering loan defaults when a family pulls itself apart because they failed to plan. Say that the wealth management arm of your operations benefits when a family has its “liquidity event.” Declaring your interest to yourself and your clients is the first step in standing back and offering really smart, relevant advice.
Family business succession is one of those areas where banks can offer profound leadership for aging family business owners in desperate need of help – a new kind of assistance. Doing so will require a new paradigm that’s right for the times. And gifting wealth, not operating businesses, is the touchstone of the new succession planning reality.
Family business succession is one of the rare areas in a banker-client relationship where economic interests are perfectly aligned. The fact that there has been so much tiptoeing around the subject by lenders is about to make things interesting as legions of old business owners head for the exit with their kids in tow. The smart bank will be the one that figures this out first.
When banks can talk, and truly facilitate the sale of a business to family – or to someone else – they will drive a stake through the heart of the one old idea that has destroyed more families, more businesses and more banks – the idea that gifting an operating business to save tax is the way to go.
