The Hindu Business Line : Preparing for the future

THERE ARE A NUMBER OF BUSINESSES managed successfully and profitably by first-generation entrepreneurs but whose heirs are abroad and who have no desire to return to India and join the businesses promoted by their parents.

In an article published in its Nov 6, 2004 issue titled `Passing on the Crown', The Economist wrote: "Undoubtedly, family businesses are more complex and difficult to manage than the tiny minority of non-family firms whose governance is the main subject of most management research . Family firms are frequently more riven with intrigue and visceral hatreds than a medieval court — and for similar reasons. Substitute the founder for a medieval monarch and the professional managers for courtiers, add in a pair of heirs with jealous wives and scheming cousins, and you have the perfect recipe for a Shakespearean drama." Don't we all know about such dramas in Indian businesses?

The statistics relating to family-owned businesses are truly astounding. As much as 90 per cent of the enterprises in the non-communist/socialistic world are family-controlled and "depending on how you define influence, families have some sway in between 35 and 45 per cent of America's 500 largest companies". It is believed that family businesses account for more than 50 per cent of the jobs in the organised sector. However, only a third of businesses make the transition from each generation to the next. After the founder's death or retirement, the majority are either sold or wound up.

At a certain point, most founder-managers come to a major crossroad in the life of their company. They come face-to-face with the reality of having to decide on management succession and `how to grow further' and `by how much'. They have to decide whether they can keep in the family the ownership and management of the business they have so painstakingly built up or whether they should sell out. Another option they may like to look at is keeping the ownership in some form within the family, but handing over management to persons outside the family. Chennai is home to a number of automotive ancillary units, managed successfully and profitably by first-generation entrepreneurs, whose heirs are in the US and have no desire to return to India and join the businesses promoted by their parents. I have consulted for some of them and it is a major psychological wrench for them to decide on the `right' course of action.

Then how does one ensure that a flourishing business remains in the family even after one has stepped down or passed on, and even if one were to sell the business, how to realise the best value?

Most owners of closely-held businesses tend to focus on the short term, dealing with immediate problems, challenges and rewards. Today's problems, as is often said, drive tomorrow out of reckoning and procrastination comes naturally to most people. This, everybody would agree, is not to the best way for ensuring growth and enhancing the enterprise's value over the long term, whether one is passing on the baton to the next generation or selling it. The key to this lies in professionalising the management of the business. The word encompasses a whole set of actions, to run the business, that the founder-owner(s) needs to put in place at the earliest . This calls for an extraordinary sense of discipline and determination, far more than is required in companies that are not so closely held where `professionalising' happens due to the pressures from various stakeholders and is the reason that ownership is divorced from management.

The first requirement is the implementation of formal systems in all spheres of activity of the company. During the initial phase of existence, most enterprises rely on informal systems and the founder-managers tell themselves that they would formalise them after reaching a certain level of growth. Apart from the minima imposed by external legal authorities or banks, scant attention is paid to this aspect of management. "This is not for us; this is only for the big boys and after all we are not answerable to others," is the usual refrain. The importance of this cannot be overemphasised; I have seen many family enterprises flounder not for reasons of poor demand for their services or products or such externally imposed factors, but due to sheer lack of good systems in place. You need to go beyond your kanakkupillai or munshi or even the family auditor, informal arrangements with suppliers or customers and impromptu production scheduling.

If you want to dream big, instead of just dreaming big about living in style, first put good formal systems in place. Often there is a tendency to ape the `big boys' in matters relating to non-essentials such as ostentatious offices, lifestyles and official travel! In the Indian context, often implementation of reliable and transparent financial systems is complicated by the existence of the `parallel' economy and hesitation to share information even within the organisation. Many of us are familiar with statements such as "but that is not in the books" or "our customers do not like to pay by cheque and want only cash transactions" or "this is my process know-how, but we have not patented/copyrighted it". Balance sheets and P&L accounts are `dressed down' or `dressed up' for tax reasons or to satisfy the company's banker, often stretching legally permissible limits. This could put severe brakes on the company's growth. I can think of any number of instances of enterprises coming to grief on valuation when they try to raise funds or sell their business thanks to such practices.

Talking about systems, in this modern day and age, every business needs to exploit the vast potential offered by reliable and comprehensive IT support systems. It is not as if you have to zap yourself with SAP or any other equally expensive enterprise management solution if the size of your business does not permit such `extravagance'. There are a number of effective solutions available in the market at affordable prices .

Use of IT for e-mailing and accounting systems has mercifully become commonplace. It is, however, my submission that you need to go further than that for enhancing productivity and effectiveness of your management. If you want business success, remember that successful businesses are built on foundations of sound systems. And this foundation is absolutely essential for meaningful strategic planning. If you don't have this base, then you should make it the first priority in your strategic plan.

Strategic planning is good for any business and for a family business it is a sine qua non. Strategic planning involves spelling out the vision, formulating goals taking into account the environmental factors and resources and then laying out a sequence of actions to accomplish those goals for the business and the managing family. It has been my observation that there is generally a great reluctance to apply the planning process formally to the family side of it since this calls for acceptance of ground realities of family relationships and the surfacing of issues related to them. But addressing them squarely, with total honesty and candour is a prime prerequisite to evolve and implement successful plans in family businesses.

Anybody who is connected with any transaction involving a family business, whether it be funding for growth, ownership restructuring or sale could tell you that privately held companies with formal strategic plans and good documentation of its plans and procedures would invariably realise significantly higher valuation than those who have been lax in these areas. Les Henokiens, a Europe-based club for businesses that have been in the same family for 200 years or more, has laid down certain guidelines for the implementation of an effective strategic plan. Based on that I give below `Twelve Commandments' for successful strategic planning in family managed enterprises:

Identify family goals and expectations for the business.

Prepare a detailed long-range plan covering more than one year. (I would suggest at least a three to five year span).

Ensure that the long-term business plan integrates the objectives of the business and personal goals of family members.

Make sure that performance evaluations of family members are conducted on a regular basis to determine qualifications, competence and professional development needs.

Ensure that the business strategic plan accommodates the family succession plan.

Ensure that the plan supports the estate inheritance plans.

Ensure that non-family managers are accommodated in the business plan.

Create a strong supervisory board with competent outsiders from the business world with a reputation for honesty and integrity. (Don't pack it with your acolytes and `Yes' men.)

Lay down the conditions under which family members can join the business.

Make certain that family members not active in the business understand their roles, rights and responsibilities.

Ensure that the family shares business vision and understands the business mission.

The family must review and revise the strategic plan on a periodic basis.

Apart from charting your course and providing a reference guide for all actions within the business and family, the process of strategic planning itself helps clarify everybody's thinking, provides an opportunity for fuller and meaningful communication among the members of the family and the management and makes it possible for them to share the passion for the business transcending the preoccupation with the bottomline.

To conclude with a quote from the article in The Economist mentioned earlier : "At its best a family business can take a long-term view, behave with occasional altruism and care about product quality in a way that quoted companies often find difficult. Society, as well as the economy, would be poorer without them."

(The writer, an alumnus of IIM-A, was earlier with the consultancy division of ASCI, Hyderabad and a Director, A.F. Ferguson & Co. He is currently Director, Startup Focus Ltd, which specialises in strategic planning and counselling for family-managed companies and M&A. This is the third in a series of articles on family businesses by him. He can be contacted on: trrajan@gmail.com)