The importance of forming effective succession plans

Rajmohan Krishnan | Updated on May 04, 2021

Apart from helping create and carry-on family businesses’ legacy, succession plans can provide clarity about the scope of work for the next generation

Family-owned businesses have an indelible presence in India’s economic landscape. Scores of Indian family-run companies have been responsible for shaping the country’s growth narrative on the world stage and they continue to thrive even today. In fact, according to a 2018 report by Credit Suisse, the country is home to the third-largest number of family-owned businesses in the world and the total market-capitalisation of Indian family-owned companies stood at $839 billion.

With such vast amounts of wealth at play, there is always the need to insulate these family enterprises from internal and external threats, volatility, and unforeseen circumstances. And one straight-forward way of doing is by executing an effective succession plan. However, countless surveys and studies indicate that most family-run businesses in India do not prioritise succession planning.

PwC’s India Family Business Survey 2019 had stated that only 21 per cent of family businesses in India have a succession plan in place. This is a worrying statistic because succession planning is often put on the backburner for other seemingly urgent goals. In reality however, a well-drawn out succession plan can mean the difference between a company surviving or meeting an early demise.

Long-drawn process

In essence, succession planning entails the steady process of identifying and training potential candidates to fill up key leadership roles in a company in the near future. A well-defined succession policy is critical for a smooth appointment process of the next chairman, MD or CEO of a business. And while succession planning may seem like a mundane process of passing the baton to the next successor, it is in fact a detailed and long-drawn process of steps that need to be followed in case of unforeseen circumstances such as illness, accidents and deaths, or a crisis like this global pandemic.

Indian business-owning families are tightly-knit structures, business control and ownership are usually maintained within the family, and conflict resolution rarely involves a third-party arbitrator. Amidst such a scenario, the possibility of conflicts arising due to difference of opinion between the current generation and the next or miscommunication between family members is quite possible. Such conflicts often escalate to full-blown legal battles where ownership, business control, and family wealth are contested in a court of law.

In order to avoid such contentious situations, family-owned businesses must look towards succession planning as a necessary process. Succession plans not only act as blueprints for the “what should be done if happens” kind of situations but they also facilitate the smooth transfer of power and control from one set of owners/promoters to the next successor. This ensures that a business’s wealth and legacy are protected from intense and unnecessary succession battles.

Mentoring GenNxt

Another crucial aspect of ensuring asset preservation and growth in a family business is mentoring of the next generation of young leaders. Very often promoters feel reluctant to hand over the torch to the younger generation and may continue to retain control over the business well after they retire. Sometimes, the fault can also lie with the next generation of successors who may be reluctant, unprepared or even unable to step into their predecessor’s role. All of these issues need to be ironed out with clear communication between members of the family.

A succession plan can provide clarity about the scope of work for the next generation; in essence, it demarcates territories and business roles for each and every member of the family.

When a family runs a business, personal and professional matters are invariably entangled and this leads to high potential for familial discord and friction. Having an effective contingency plan can thus ensure a smooth succession within the family and the business. It can also ensure that creditors don’t make unfounded claims on a family’s wealth.

To aid HNW and UHNW businesses structure succession plans, highly capable family offices often provide a slew of services ranging from drafting of Wills and trusts to creating family constitutions. With the backing of years of experience and a wide-range of expertise under one roof, family offices are well-versed with the processes of succession planning.

Family offices help business-owning families with the day-to-day running of a business and its management, and look after an efficient asset allocation that ensures wealth is passed down to future generations.

The writer is Principal Founder and MD, Entrust Family Office

Published on May 03, 2021

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