succession planning

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Succession planning needs to be recognized as imperative to sustained growth

Like in most other parts of the world, family-owned businesses in India, according to a KPMG report, account for two-thirds of the country’s gross domestic product (GDP) and 90% of the gross industry output. That in itself would give one a sense of just how critical a role these businesses play in the economy. Yet, only 13% of family-owned businesses survive to the third generation, and only 4% to the fourth generation.

While it can be argued that the generational decline of family businesses has been the result of a rapidly changing economic landscape that these families have not been fast enough to adapt to, in many cases, it ultimately boils down to the reluctance of most heads of families to confront the awkward issue of succession planning.

Succession planning needs to be recognized as imperative to sustained growth. However, more often than not, family business owners avoid having this conversation since they believe that they still have time to deal with the process. But most business owners act only when a critical event, such as death or illness, takes place by when the benefits of a smooth succession planning process can never be had. Almost always, the manner in which family wealth is then devolved to the next generation is hasty and viewed by the beneficiaries as being unfair, in turn leading to unpleasantness and rivalry among family members. These are some of the common myths seen with succession planning:

Ownership succession is synonymous with management succession: Many Indian business families fail to recognize the difference between ownership and management. It is usually understood that on the demise of the patriarch, it becomes the birthright of the son to take over the business, without analysing his key strengths or weaknesses. There is need to understand the importance of segregation between economic ownership and management, which will allow the family to leverage professional or family expertise to grow the business while allowing wider family members and the next generation to enjoy the fruits of such growth. In recent times, many business families have used tools such as family trusts and family constitutions to achieve this objective.

B-school education substitute for family induction: With their businesses becoming global, most families strive to get the best education for the next generation from renowned business schools. There is, however, a failure to recognize that careful preparation is required both on technical and family governance aspects for ensuring seamless movement from one generation to the next. The next generation needs not only technical expertise, but also an understanding of the values with which family businesses have been set up and run. This will allow them to make informed decisions as potential managers of the business and as responsible family business owners.

Family business owners lack communication skills: Often, there are cases where members of business families do not communicate openly enough with each other. While they do share an amicable relationship on the surface, they still do not express their feelings and emotions strongly enough to have a meaningful discussion on the subject of succession planning. There could be barriers due to age and even different educational backgrounds. We have come across cases where GenNext members tell us: “Can you help me explain to my father or uncle why we should have this?” But when we ask them whether they’ve spoken to their elders about this, the answer at times is, “Not yet.” Again, most traditional Indian families are reluctant to openly speak about the extent of their wealth with the next generation. Their concern is that disclosing details of how wealthy they are will give the younger generation a feeling of grandeur or result in a feeling of “affluenza”. Some even believe that this may lead to them being taken advantage of by unsavoury elements. They tend to avoid talking about the extent of their family wealth and dynamics until it’s too late. This usually results in a completely blind-sided entry of the next generation into the business.

The ‘equal is fair’ conundrum: Many family business owners feel that leaving their wealth equally divided between their children is a fair way of distributing wealth. But is it the best way? Let’s take a situation where in a family business owner has three children, of which only two are involved in the business. He decides to divide the assets equally among all three. The two involved in running the family business may not find the division fair, resulting in a fragmented family. Consideration needs to be given to whether additional benefit ought to be given to working members of the family as compared to non-working members. Aspects like these need careful planning and structuring.

Succession planning for family-owned businesses could have complex tax and legal implications. As such, the earlier a family business owner starts planning on using subject matter experts to help with the process, the better the chances of success. It is almost impossible for anyone to predict the future, but an effective succession plan for family businesses is certain to ensure a unified family.

** Source: Mint (Sept 2015)

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