High Life: Passing on the baton, successfully

Dhirubhai Ambani strode like a colossus on India’s industrial landscape. But when it came to succession planning at the behemoth Reliance Group, his record left much to be desired. Not drawing up a clear-cut, documented plan on how the group's businesses would be divided up after his time took a heavy toll.

Dhirubhai’s sons Mukesh and Anil slugged it out and washed dirty linen in public. Even after a messy split-up of the businesses, the mudslinging continued until the Supreme Court struck the gavel on the dispute between the brothers.

Thanks to its size and breathless media coverage, the Reliance saga may have epitomised the perils of not having a proper succession plan in place. But it also shone a light on a problem that’s widespread in India, especially among the numerous family-owned businesses that dot the country’s business scene.

Studies suggest that the majority (some say two-thirds) of such businesses have not given thought to succession planning.

Business succession planning is the process of preparing to hand over control in a way that is least disruptive to the business’s operations and value.

Now, ignoring this crucial aspect of business continuity can prove costly. Bad blood and protracted litigation among family members, diminished focus on nurturing and growing the business, and the consequent risk of the proverbial monkey eating the cake increase exponentially.

It doesn’t help that family-run businesses the world over tend to have short lives — family disputes could hasten their demise. Says Rajesh Saluja, CEO & Managing Director, ASK Wealth Advisors, “If statistics are to be believed, only 12-15 per cent of family-run businesses survive through to the third generation and only 4-5 per cent go on to the fourth generation. Additionally, one-third of the business families disintegrate because of generational conflict in leadership issues. Hence, business succession planning should be a priority for every family business.”

Gautami Gavankar, Principal Advisor, Kotak Mahindra Trusteeship Services, advocates estate planning which comprises succession planning and financial planning. She says, “Estate planning helps build a bridge from one generation to the next and can be the single most important thing for your family that will endure over time ensuring peace in your family.”

Succession planning is not really a choice, feels Dr Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management, ISB. He says, “Nobody is eternal; to ensure continuity of business, succession planning is inevitable. Also, capability requirements of any business are dynamic. So, it is important that the right person with the right capabilities is in place. Planning avoids crisis in future.”

Imperative it may be, but succession planning in a family business can be tricky. For one, the family patriarch may be wary about ceding control just yet while the potential successors may be getting restive.

The family head may also not want to rock the boat and disrupt the peace among his loved ones by anointing a successor to the exclusion of others. Also, there may be reluctance in the family to contemplate and discuss subjects, such as ageing and death.

It may not be easy but succession planning must be done nevertheless, simply because the long-term negative consequences of not doing so outweigh the near-term pain. Says Rajesh Saluja, “A family needs to commence business succession planning at least ten years before the patriarch’s retirement and implement management change five years before retirement.”

He points out that management and ownership are not necessarily the same. The family head may, for instance, transfer management of the business to just one of his children but ownership rights to all the children, whether they’re involved in operating the business or not. In such cases, it may only be fair that those running the business get a bigger ownership share. Alternatives include transfer of both management and ownership to the successor and making other financial arrangements for the other children.

Ramachandran suggests that the family outline the future goals and strategies of the business. Next, assess whether the internal candidates have the capabilities to achieve them, and whether they need grooming.

If the in-house talent is found lacking, external candidates may have to be hired. In any case, a detailed listing out of the qualities needed for success is required. Ramachandran says, “Remember, it is a relay race and you have to ensure that the next runner has everything to run the next lap successfully.”

Saluja also opines that the first step of business succession planning is for the family to develop a collective vision of goals and objectives for the business. This should also take into account the goals of the individual family members, especially the cash flow needs of retiring members. An objective assessment of continued family involvement in the leadership of the company should be done. The option to bring in professional management should be considered, if necessary. Even if a family member is being handed over the baton, retaining a team of professional advisors will be helpful.

It’s also critical to put in place processes for decision making and dispute resolution, document the plan and communicate it to the family and stakeholders.

Once the managers and owners have been finalised, a roadmap to execute the succession plan in a timely, tax-efficient manner should be put in place. The transfer of ownership can happen through an outright sale or bequest to family members.

In case of a sale, the agreement should reflect the value of the business — despite the counterparties being flesh and blood and though payouts may be deferred. This will ensure financial security of the retiring members and instil a sense of responsibility on the next generation.

Saluja has tips to make succession planning easier — start early, involve the family in the discussions, be realistic about the family members’ capabilities, train the successor, and get unbiased outside help with the process. Ignoring these points can jeopardise the process. Also, transferring the business when the parents are not financially or emotionally ready, or handing over the reins to children who may not be capable, are pitfalls. So are not documenting the agreement in writing and keeping the process under wraps for fear of a blow-up in the family.

Ideally, the accident of birth in the family should not automatically confer on an individual management rights in the business. A family member should be allowed to run the show only if he or she has earned the stripes. Blind love for progeny or the misplaced notion to treat all children equally in management rights could destroy what has been built up over the years.

Ramachandran cautions, “Family members, particularly the head, find it difficult to distinguish the hat they are wearing — the family hat or the business hat. Both are not the same!” If succession is not an option, it may be better to wind up the business in an orderly manner and sell it, than aggravate the risk of it being run to the ground. As Saluja puts it, “A business owner needs to understand that he/she has a stewardship responsibility to family members, employees, vendors and creditors. This business represents so much more than what it does for you, the owner.”