Succession planning is an important part of running a family business: Rajesh N Gupta

By: |
June 25, 2021 12:38 PM

In an exclusive interview with FE Online, Rajesh N Gupta of SNG & Partners talks about the importance of succession planning for businesses, especially family businesses.

Succession planning can help in formulating an efficient dispute resolution mechanism, which can provide solutions at various stages of the business and succession. 

Succession plans are a tool in facilitating a hassle-free transition and transfer of business ownership from one generation to another. They act as a viable blueprint in defining the vision of the business over a span of several generations. They are 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 the promoter stake in the company, preventing liquidation of family assets and preserving their value, says Rajesh N Gupta, Managing Partner, SNG & Partners.

In an exclusive interview with Sanjeev Sinha of FE Online, Gupta talks about the importance of succession planning for businesses, especially family businesses, and shares his views on how effective it has been in India and globally. Excerpts:

Could you elaborate on the importance of succession planning for businesses?

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 can generally be 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.

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 an easy fact for the promoters of family businesses to accept. 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.

i) 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.

ii) Succession plan is a tool in facilitating a hassle-free transition and transfer of business ownership from one generation to another. Succession plans act as a viable blueprint in defining the vision of the business over a span of several generations. They are 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 the promoter stake in the company, preventing liquidation of family assets and preserving their value.

iii) 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.

iv) 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.

v) By creating a Family Council and by having a family constitution, key issues concerning estate planning, ownership stakes, addressing liabilities, dispute resolution, voting rights, sale of businesses, valuation for stakeholders family businesses, which branch of family or which family members will run the business and how they will be compensated vis a vis those who are beneficiaries but not running the business, how the decision making process will work on running business / voting /new initiatives etc, can be well managed with all succession-related issues addressed.

How effective has succession planning been in India and globally? Could you provide a comparative analysis?

Business Succession Planning is not new to India. Powerful corporate house like Tata is the finest example for generations, however, even the Tatas landed up in Courts while choosing Mr. Mistry as the successor. It’s a common knowledge that this decision of the Tatas costed them dearly on financial side as well as business and reputation.

A number of leading business houses like GMR, Burmans, Thapars and many others have realised the importance of business succession planning and this is fast peculating down to SME as well as SSME where business families wish to put a right succession planning structure in place distinguishing ownership vis-à-vis management.

Globally, in the West as well as Asian countries today the business families are conscious of the importance of business succession planning. While in matured economies this is a established process, in countries like India it is still evolving at a fast pace and is becoming a necessity for personal, regulatory and business reasons. Even SEBI as a regulator has issued directions on this subject.

Why is it specifically important for family-run businesses?

Founder runs the business with a particular dream, vision and passion. Business is succeeded by family members who could be siblings, sons, daughters and extended family members. Each may have their own vision, style and commitment.

The family business will suffer and collapse, If:

# the vision and values of the family members are not similar;
process of delegation by Patriarch to the next generation is not defined;

# conflict resolution process is not addressed amongst various branches of families including issues on selling of stakes by one branch of the family to a third party or within family;

# broad agreement is not there amongst various branches as to who will run the business and how they will be compensated vis a vis those who are beneficiaries but not running the business;

# process on decision making to run the business / voting /new initiatives etc is not defined;

# mechanism to professionalize the management structure is not in place and the interest of management team is not aligned with the growth of the organization.

What potential benefits can organizations gain from a well-documented succession plan?

Business continuity;
Key Management Personnel appointment and choice;
Conflict Resolution amongst stake holders;
Separation of ownership and management;
Decision making for the growth and strategy as per charter documents;
Professional approach to business;
Emotions vs professionalism on governance;
Creation of Value for shareholders, employees, investors, lenders, and enhancement of environmental, social and corporate responsibility with a professional management.

Why lack of clarity between a legitimate succession planning document and evasion can be a huge source of worry for businesses?

By the time the business enters second generation and the involvement of Patriarch reduces or ends, the chances of conflicts in second and third generation are bound to increase. Family businesses suffer if there are conflicts and there is no decision making process. If there is no vision on succession planning, the value created by founder is eroded and the businesses suffer and close. Courts are flooded with litigations amongst family members. The ego, greed, absence of resolution process on disputes and involvement of all extended family members are like the last nail on the coffin where the family business is buried to ground.

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