Succession planning is vital to smooth functioning of family businesses

Financial Express | 3rd September, 2020

On a global scale, around 35% of Fortune 500 companies are family-owned businesses. The pivotal role played by family-owned businesses in building strong and resilient economies can never be downplayed. In developing countries like India, more than 65% of the contribution to Gross Domestic Product (GDP) in the organized sector is accounted for by family-owned enterprises.

From globally reputed, big ticket business houses like the Tatas, Birlas, Adanis and Jindals to SME and MSME units, a majority of businesses in India have been run by families for generations. A family-owned business unit generally is one, which is normally unlisted with the promoters exercising complete ownership and, in some cases, management control over the day to day working of the business. It needs to be noted here that succession planning forms an important part in the functioning of family-owned businesses.

With the promoters of family enterprises personally involved in the running of business operations on a daily basis, there is no clear focus on important matters like succession planning or other related issues. Most often, lack of time arising from busy schedules is cited as the core reason for putting the creation of the succession plan on the back burner. A majority of business houses also postpone succession planning as they feel that it is too early to form a plan. The perceived complexities in planning and understanding the structure of succession plan also acts as an impediment in its timely formation. It is also perceived as giving up control of business in a phased manner which promoters don’t wish to look into on priority basis.

First and foremost, the founders and promoters of family-owned businesses need to be aware and conscious of the fact that a day will come when they will have to retire from the business or may not be in a position owing to medical or other unforeseen reasons to run the daily business routine. Accepting the fact that they may have to cede control of the business someday is not easy for promoters of family businesses. In such circumstances, either the businesses will need to be run by the next generation after they are properly trained or management will have to be passed to external professionals. This may prove to be a cumbersome task to achieve and its on-ground implementation may require a lot of introspection and debate. A carefully drafted succession-planning scheme can ensure that business continuity is not impeded and the value of the business is not eroded on account of disruptions caused by natural or man-made factors.

In the context of family-owned business units, the role of a properly framed succession plan as a tool in facilitating a seamless transition and hassle-free transfer of business ownership from one generation to another cannot be undermined. Succession plans act as a viable blueprint in defining the vision of the business over a span of several generations. It is also useful in laying the groundwork for clearly demarcating the rights and responsibilities between different members of the family. A well-defined succession plan also ensures in retaining promoter stake in the company, preventing liquidation of family assets and preserving their value.

In a constantly evolving business ecosystem in India and the world, a lot of thrust has been placed on companies adhering to corporate ethics and global governance standards. Promoters of family-owned businesses will need to be aware of the fact that today we are living in a world, which is highly compliant, and businesses are expected to run and abide by rules and regulations which are legally binding. Succession planning can help in attaining the crucial task of compliance mapping in a family enterprise and help it run in a transparent and ethical manner, creating and unlocking unprecedented value.

As business passes from one generation to another, legal battles are bound to be the natural outcome of differing opinions and ego hassles. Succession planning can help in formulating an efficient dispute resolution mechanism, which can provide solutions at various stages of the business and succession.

A family constitution is a formal document which addresses key issues concerning estate planning, ownership stakes, addressing liabilities, dispute resolution, voting rights, sale of businesses, valuation etc for stakeholders and can be a foundation document for any family enterprise.