If there’s one thing many family business advisers don’t understand about their sector then it’s the legal framework family businesses work under. This lack of legal understanding, particularly around the tax implications for a family business, is a shortfall among those who work with these businesses and it could be undermining their advice.
In general, I think there are two distinct approaches when it comes to the family business advisory world. One approach is what can be called the operations approach. This approach comprises consultants that are concerned with operational issues like governance, strategy, financing, and for the case of family therapists also relationships.
Then there is the legal approach, which looks at what is actually doable for a family business in terms of the given legal and tax environment in a country. This approach looks typically at issues around distribution of wealth and passing the business onto the next generation from a tax and legal perspective.
In general, the two approaches don’t understand each other well enough. So, for example, sometimes an advisor might come up with a solution from a legal point of view that doesn’t make sense from a family fairness perspective, and vice versa.
Also, it’s important to point out that there’s always a cultural aspect to the legal side. For example, some countries are more sanguine about passing wealth to the next generation, whereas others are much less so. And this cultural side feeds back to what you’re able to do as a coach to the family business you’re working with.
This cultural aspect will also be very specific to the actual country the advice is being given in. So, for example, a one size fits all approach to succession doesn’t make much sense because legal and tax regimes will impact succession differently depending on where the business is based.
In practice, there is a very limited understanding of the legal and tax aspects of inheritance and passing the business on to the next generation outside the world of lawyers and estate planners. Many advisers are not familiar with the different legal and tax codes, but they may be advising families in areas where knowledge of these codes and the culture they emerge from is paramount for good advice.
Perhaps the drivers of this dichotomy come about due to the lack of appreciation around the cultural differences of wealth and passing it on to the next generation. For example, there is often a difference of views on whether a business is actually kept in the family, or it is sold
There is a general understanding in most countries that if a business is inherited and continued to be run, the owners should be taxed less, as opposed to inheriting a business and then selling it soon afterwards. In the latter case, taxes tend to be higher. In common law countries like the US and the UK, there is a shared view that if you inherit wealth you should be taxed. The same is the case in civil law countries like France.
But the view towards inheritance in France is much more tied up with the French Revolution idea of ‘liberté, égalité, fraternité’, where the égalité part determines the culture of taxing the rich. But this attitude isn’t the case in common law countries.
Religion can also play a role. For example, where Sharia law is practised, there is the view that inheritance wealth shouldn’t be taxed because families shouldn’t be weakened by such taxes.
An understanding of all these cultural and legal differences is important for advisors to appreciate before they are advising a family business. But, for the most part, this knowledge isn’t appreciated enough among operations consultants and as such could be undermining advice to many family businesses around the world. This imbalance in advice, in my view, needs to be corrected in order to benefit family businesses.
Thomas Zellweger is professor of management at the University of St Gallen in Switzerland, and is the author of the textbook Managing the Family Business: Theory and Practice. For more details about the international variation of inheritance taxes refer to 2017 Global Family Business Tax Monitor, which was compiled by the University of St Gallen in cooperation with EY.