09 Apr Future-proofing Family-run Businesses: The Importance of Succession Planning (Part 1 of 3)
“Great things do not just happen by impulse, but as a succession of small things linked together.” ~ Vincent Van Gogh
In the latter half of 2018, India emerged as a powerhouse of family-owned enterprises, securing the third spot globally, as per Credit Suisse’s insightful report. With 111 such companies boasting a collective market capitalization of $839 billion, India’s prowess underscores its significance in the global economic landscape, trailing only behind stalwarts like Germany and China in this esteemed ranking.
Considering what’s at stake, one of the most critical aspects for a family-owned enterprise is succession planning, which involves active engagement with the family to determine how to enable business continuity and sustain family involvement.
The cornerstone of longevity lies in effective and sensitive succession planning, which gives equal weightage to family, ownership, and management.
Crafting and executing such strategies often pose significant challenges on foundational aspects.
Agreeing on the rules
Second and third generation entrepreneurs and first-generation promoters of Rs 500 crore or below turnover businesses are increasingly opting for a family constitution to counter complexity and competitiveness. This formal guideline is a rulebook for family members to perpetuate a business their founder built from scratch. It functions as a framework whenever a future discord may lead the family or business to break up. Proactively separating ownership from management and family councils brings more transparency to businesses across geographies and sectors.
The fear of losing control
The indomitable entrepreneurial drive of first-generation leaders permeates every aspect of their ventures. Yet, the fear of relinquishing control, a product of years of unwavering dedication, presents a formidable hurdle. For these tireless innovators, retirement remains a foreign concept. Yet effective succession planning executed with meticulous foresight and buy-in from key stakeholders is known to foster multi-generational legacies and ensure enduring sustainability.
The interests of gen-next
A notable characteristic of family-run enterprises is the intertwining of management and ownership control, often with family members or distant relatives assuming pivotal managerial roles. When contemplating the entry of family members into the business or their pursuit of alternative opportunities, thoughtful family discussions become imperative. However, even in scenarios where there is a genuine interest in joining the family enterprise, challenges may arise in accommodating or assigning leadership positions to all family members, particularly due to constraints posed by the organization’s size, scale and abilities of the concerned individuals.
Reconciling varying work practices
Family businesses often progress through distinct phases—from owner-managed to sibling-partnership and eventually to a cousin-syndicate model. As multiple generations and branches of the family become involved, achieving consensus becomes increasingly challenging.
Managerial complexity and layers of uncertainty surrounding succession planning, call for differing perspectives and priorities to be reconciled while ensuring a smooth transition of leadership and ownership across the enterprise. Navigating the intricate dynamics of multi-generational involvement in a family business requires astute leadership, effective communication, and a strategic approach to succession that preserves the business’s legacy while fostering its continued growth and success. According to a Deloitte survey, 60% of respondents aim to engage non-family professionals or already have them leading their organisations.
Attracting and retaining talent
A growing trend among next-gen promoters is to explore unconventional ventures over joining family businesses. Large family enterprises increasingly opt for professional boards, with strategic decisions reserved for the family board.
A well-defined governance framework ensures clarity between the professional and family boards, bolstered by robust dispute resolution mechanisms, ensuring business stability.
Next in this 3-part series, we’ll dive deeper into a clutch of sensitive issues surrounding succession planning for family-run businesses. Stay tuned…
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