Here's why succession planning is important for family business continuity

Gautami Gavankar

“All happy families are alike; each unhappy family is unhappy in its own way.” – Anna Karenina by Leo Tolstoy

Family businesses have always played an important role in the development of a nation’s economy. Currently, the global economy and business environment is undergoing changes at an exponential rate. From the introduction of disruptive technologies and Internet of Things, to the ever-changing landscape of global politics and its effect on policies that enable two countries to do business, the need to innovate and stay relevant adds additional strain on business families. Amidst this change, family owned businesses can often get caught and face challenges which are largely different from those faced by non-family owned businesses.

Family owned businesses are often found juggling between the need to inculcate and honour the values and ethos of their founding fathers, as well as the need to cope with ongoing radical changes in the business environment. At the same time, it is important for families to device an approach and put together a suitable and sustainable mechanism in place that would help mitigate the risk of disintegration of family businesses and can ensure its survival for future generations. This is where succession planning comes in.

One may also notice that many a time business leaders are unwilling to acknowledge the need to relinquish their position within the organisation because their personal identity is often tightly linked to the family business. In such times, the need to pass the baton to the next generation in a smooth and seamless manner cannot be emphasised enough. As a new generation joins the family business, it is important to ensure that families and businesses work in harmony, and roles and responsibilities are well-defined for each member in the family.

While business owners set long-term goals, it is essential that they interact regularly with the next generation and review these goals at frequent intervals. This will serve the dual purpose of ensuring the ultimate business objective is met as well as the creation and sustenance of the family legacy. In many cases, the next generation also fails to respect the family business since they may not have been inculcated properly into the business or received adequate training which ultimately leads to its disintegration over a period of time.

If one were to look at statistics at the global level, majority of family owned businesses have not survived beyond the third generation. Some of the key reasons are the absence of a proper succession plan, lack of advisors, differences in the vision between the generations, family disputes, and the lack of training that ought to be given to the incoming generation. Passing on the reins of the business to the next generation remains the foremost priority for most family owned businesses. In fact, families today are investing huge amounts of resources and time in the development and training of the next generation to ensure the survival and success of the business for years to come. Succession today encompasses two levels of succession – succession of ownership and succession in management, and it is imperative that the two are carried out hand in hand. In this regard, it is of paramount importance that the right candidate is chosen to carry forth the legacy of the family in the business.

Typically, erstwhile business families have carried out succession in families through a will. However, one needs to be mindful of the fact that a will as a document is easily contestable in courts. It is for this reason that more and more families have been transitioning their wealth into Family Trusts as it is considered to be a viable succession planning vehicle. Family Trusts also assist in seamless succession, consolidated holding in perpetuity for generations to come. Unlike in the case of a will which leads to disintegration of family wealth, trusts can continue for generations to come even in the event of demise of the family patriarch. While the exercise is one that requires the entire family’s buy in, its importance cannot be underestimated in the larger scheme of things.

The need to start putting together a succession plan in place cannot be emphasised enough. If not done in the nick of time, it can often prove to be catastrophic for business families.

The writer is Executive Director – Trusteeship Services of Kotak Mahindra Trusteeship Services.

Disclaimer: The views expressed in the article are personal and do not reflect the views of Kotak Mahindra Trusteeship Services.