Succession Planning for Family Business: Patriarchs must transform from leaders to mentors

Updated: Oct 28, 2020 2:06 PM

Conflicts involved in succession planning in Indian family businesses can be logically addressed. Here's how.

It is also important that business owners pass on the management control to the next generation without reluctance even if they retain the complete ownership with them.

The coronavirus pandemic has increased the spotlight on succession planning as a potent risk that needs to be managed in a structured fashion in order to alleviate the impact of unanticipated events on businesses. Many business families are contemplating succession planning and, in a few cases, the discussion has even reached the boardroom.

Family Business Owners today unequivocally acknowledge the importance of succession planning and agree that the sustainability of their businesses depends not only on their vision but also on the careful selection of successors. The succession planning process remains ambiguous in the scheme of things of most of the Indian family businesses too. Reluctance, procrastination and apathy are what an expert commonly encounters while formulating succession planning for business families.

Why do swift decision makers of family businesses leave succession planning to chance? In India, a closer look at some of the success stories as well as failure cases reveals that the main issue is confusion between ‘equal’ and ‘equitable’ succession. Equal distribution of wealth among all the legal heirs seems to be a logical approach. However, when it comes to choosing a successor for the corner office, the decision has to be more practical and less emotional. Age is not always a conclusive indicator of one’s capability.

Therefore, grooming a successor based on her calibre is the most unbiased way to deal with this rather emotion-laden decision. The succession paradox surfaces when there is more than one contender for the top post. Ideally, such issues can be addressed through effective communication by seeking external assistance and involving family members. Or else, boardroom decisions may spill over to dinner table discussions.

In some cases, management and ownership succession can’t be differentiated. In fact, when it comes to succession planning for first-generation businesses, management and ownership succession may go hand in hand. However, while handing over the reins to the third generation, segregation of control and fiscal benefits could be a necessity. In many countries, while these issues are typically ironed out through issuance of shares with differential voting rights, in India, one can make use of ‘trusts’ to achieve the same objective. This becomes relevant in cases where daughters are restricted—out of choice or otherwise—to participate in the day-to-day management of the business, although they are expected to be beneficiaries of the business growth.

Another common road block in the succession planning process is the lack of capable or motivated successors. Millennials or Gen X successors are smart, practical and vocal. Exposure to the international community has broadened the horizon of their aspirations. Their ambitions are far different from the plan that their parents have chosen for them. In general, six out of 10 Indian family business owners are struggling to convince their next generation to be a part of their existing businesses.

Unlike earlier decades, having one or two children has made this issue even more difficult. Getting an external suitable talent to manage the business, temporarily or permanently, is one of the commonly preferred strategies. This is a tried and tested method adopted by many European and American businesses. Few Indian families have explored this option and many are likely to follow their peers depending on the experience of the early adopters. Involving a strategic partner is also a good option for such businesses as a part of the succession planning strategy.

Another key challenge in succession planning is getting the timing right. Patriarchs are so passionate about the business built by them that they tend to ignore the fact that retirement is an integral part of the journey. Most of the patriarchs believe in working in the office until their last breath. While there is no harm in continuing to be involved in the business even in post-retirement age, if blessed with good health, however patriarch’s need to transform himself/herself from a ‘leader’ to ‘mentor’.

It is also important that business owners pass on the management control to the next generation without reluctance even if they retain the complete ownership with them. It is essential for the senior members to protect their interest but at the same time giving a taste of ownership to the successor is equally important.

Succession planning is by far the most cumbersome exercise for founders. After all, it is about giving up their identity and pride in some sense. Nonetheless, leaving it to time to decide is not the most suitable option. If patriarchs and Family Business Owners start looking at this exercise as a responsibility towards business, succession will slowly become a non-event as it rightfully should be.

(By Sonali Pradhan, Head of Wealth Planning India, Julius Baer)

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