A proper succession plan is the key to securing the family business

Suraj Malik | Updated on October 18, 2020 Published on October 18, 2020

The solution for each family business is different and requires a custom-made, practical and relevant strategy and structure

Succession planning for family-owned businesses and wealthy families is important to ensure continuity, build capabilities, preserve value and nurture harmony — all of which together help create a legacy. A succession plan is an essential pre-requisite for a seamless transition of wealth from one generation to the next, without having to deal with adverse tax consequences and other conflicts and hiccups.

Everyone needs a succession plan, however, only a few end up undertaking it in a structured manner. As a result, most empirical studies have found the survival rate across generations is less than 3 per cent. The interplay of business strategy and family dynamics need to be orchestrated for a better outcome.

The exercise is multifaceted with emotions often impacting the ability to think in an unbiased way. Dynamics within high net-worth families, lifestyle and preferences of individual constituent members, education of the next generation and the urge to explore new-age businesses or devote time toward unconventional avenues are some of the common challenges in succession planning.

Therefore, it becomes crucial to engage with professional advisors who understand the sensitivities and can factor all relevant aspects in devising a succession planning framework while also addressing tax and regulatory constraints or costs. The solution for each family is different and requires a custom-made, practical and relevant strategy and structure.

Some key factors that have a bearing on the succession plan are:

Next-gen outlook: As much as it is important for a budding family member to build capabilities to step up to the family business, which requires intense preparation, it is equally important for the current generation in charge to understand the successors’ vision, aspirations and drivers before the transition. Education, work-training should be planned carefully in a manner that helps to condition the outlook towards legacy-building and harmony.

Lifestyle preferences: Family members or constituents are no longer tied to the concept of living under one roof. Constant travels and different location choices make the case for defining leadership roles based on such preferences.

Building a resilient structure: Asset ownership structures need to be robust and in tune with the prevailing and likely future changes to the laws and regulations, including taxation. A transparent and flexible structure brings with it several advantages and stability to the stakeholders, who can then contribute to the success of the family business.

Governance and an environment of trust: A thoughtfully governed family is perhaps the cornerstone for succession, which complements wealth creation, personal fulfilment and shared purpose between all members, irrespective of their degree of involvement in the business.

The status of the family is often linked to the fortune and survival of the business across generations. This can be achieved through succession planning over the long term by treating it as a dynamic process, not an event. Successful family businesses that have stood the test of time have invariably had a formal succession plan in place. Building formal structures for communication, governance and ownership within a family may seem daunting; nevertheless, these are important steps that reflect the maturity of the incumbent/patriarch towards building a legacy. The science of succession in practice is an evolved art of living and a sophisticated art of giving.

The writer is Partner, Transaction Tax, BDO India

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Published on October 18, 2020
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