Live Mint | 06 Aug 2020
Succession planning allows businesses and families to mitigate impact of adversities
The outbreak of covid-19 has emerged as not only an unimaginable health crisis the world over, but has also adversely impacted global trade and commerce on an unprecedented scale. With governments announcing extended lockdowns and stringent social distancing norms to flatten the curve of the virus and prevent its community spread, economic activity has come to a virtual standstill. This has led to the value destruction of businesses and threatened their survival.
The pandemic, in no unambiguous terms, has highlighted the importance of succession planning as a risk management strategy and business continuity measure. A carefully drafted and efficiently implemented succession plan has the potential to deal with the contingencies of a volatile trade environment and ensure that business continuity is not compromised. In times marked by instability and uncertainty, succession planning can play a key role in ensuring that successful businesses and hard-earned wealth do not pass into the hands of undeserving and unintended recipients. It is also a great tool to secure the preservation of wealth and assets, ensure that its value is protected and facilitate inter-generational transfer of wealth to the intended beneficiary in a smooth and hassle-free manner.
Succession planning allows businesses to mitigate the impact of unforeseen adversities. A carefully drafted succession planning document simplifies the decision-making process concerning the ownership, control and management of business and passing of wealth. It lays clear guidelines regarding the extent and manner of wealth transfer. It also allows the freedom to exclude beneficiaries to whom the management control of business and/or wealth is not wished to be bequeathed.
To cite an example, under the Hindu Succession Act, if a person dies without leaving a will, his estate is passed first to the Class 1 legal heirs, which include his mother, wife and children. In case the mother is living with son A, who has a competing business with his brother, son B, and if son B dies without a will, the shares in his company will be passed equally to his mother, wife and children. The mother would then be at liberty to give her shares to son A, something son B never wanted. The situation could have been avoided if son B had drafted a will and provided for his mother in a suitable way apart from ensuring that the shares in his company were passed solely to his wife and children.
Information concerning the assets is detailed in carefully drafted documents as part of a succession plan, which provides the flexibility for heirs to ensure that wealth is not lost and can be easily traced. If a special situation arises wherein one wishes the wealth to go in the hands of beneficiaries only when they attain a particular age and not before that, the trust structures are preferred. Exceptional circumstances, where the beneficiary is physically or mentally unfit, if the will and trust are rightly created, can be handled efficiently after the lifetime of the settlor or testator.
Absence of a carefully drafted will and succession plan invariably leads to unwanted and avoidable legal disputes and creates an environment of displeasure among family members. It can lead to the erosion of business value. By having a right succession plan in place, lengthy litigations and legal battles before courts can be easily avoided which can lead to saving precious time and money. The legal heirs or beneficiaries may be living in India or in any other country. This leads to the emergence of cross-border succession rules and laws. Through a well-documented succession plan, any legal hurdles and/or jurisdictional tax issues can be dealt with in a planned and mutually agreeable manner.
In family businesses, it is important that the family has a vision statement and a constitution that governs the relationship and growth between diverse constituents, and provides for a conflict resolution mechanism. A succession plan also addresses the right of a family member to exit from the business. It also enables an effective mechanism and formula for estimating the valuation of the assets. Succession planning is critical for ensuring business stability and should become a norm rather than an exception for any family business during times like these.
Rajesh Narain Gupta is managing partner at SNG & Partners