DiDivestiture plans are a tool to facilitate a hassle-free transition and transfer of business ownership from one generation to the next. They act as a viable model to define the vision of the company over several generations. They are also useful in laying the groundwork for a clear delineation of rights and responsibilities between different family members. A well-defined succession plan also makes it possible to keep the promoter’s participation in the company, to avoid the liquidation of the family patrimony and to preserve their value, explains Rajesh N Gupta, Managing Partner, SNG & Partners.

In an exclusive interview with Sanjeev Sinha of FE Online, Gupta talks about the importance of succession planning for businesses, especially family businesses, and shares his take on its effectiveness in India and around the world. Excerpts:

Could you explain to us the importance of succession planning for businesses?

Globally, approximately 35% of Fortune 500 companies are family businesses. The central role that family businesses play in building strong and resilient economies can never be understated. In developing countries like India, over 65% of the contribution to gross domestic product (GDP) in the organized sector is accounted for by family businesses.

From large world famous companies like Tatas, Birlas, Adanis and Jindals to SMEs and MSMEs, the majority of businesses in India have been family run for generations. A family business unit can generally be a unit, which is normally unlisted, with the developers exercising full ownership and in some cases management control over the day-to-day running of the business. It should be noted here that succession planning is an important part of how family businesses operate.

First of all, founders and promoters of family businesses should be aware and aware that a day will come when they will have to retire from the business or may not be able for medical or other unforeseen reasons. to manage the daily routine of business. Accepting the fact that they may one day have to give up control of the business is not an easy fact for promoters of family businesses to accept. In such circumstances, companies will either have to be run by the next generation after being properly trained, or the management will have to be left to outside professionals. This can prove to be a heavy task to accomplish and its implementation on the ground may require a lot of soul-searching and debate.

i) A carefully crafted succession plan can ensure that business continuity is not hampered and that the value of the business is not eroded due to disruption caused by natural or man-made factors.

ii) The succession plan is a tool that facilitates a hassle-free transition and transfer of business ownership from one generation to the next. Succession plans are a viable model for defining the vision of the company over several generations. They are also useful in laying the groundwork for a clear delineation of rights and responsibilities between different family members. A well-defined succession plan also makes it possible to keep the promoter’s participation in the business, to avoid the liquidation of the family patrimony and to preserve its value.

iii) In an ever-changing business ecosystem in India and the world, great importance has been placed on companies that adhere to the standards of corporate ethics and global governance. Family business promoters will need to be aware that we live in a highly compliant world today and businesses are expected to manage and comply with legally binding rules and regulations. Succession planning can help achieve the crucial task of mapping compliance in a family business and help it operate transparently and ethically, creating and unleashing unprecedented value.

iv) As affairs pass from one generation to the next, legal battles are inevitably the natural result of divergent opinions and ego issues. Succession planning can help formulate an effective dispute resolution mechanism, which can provide solutions at different stages of the business and succession.

v) By creating a Family Council and having a family constitution, key issues regarding estate planning, holdings, liability settlement, dispute resolution, voting rights, sale of businesses, valuation for family business stakeholders, which branch of the family or which family members will run the business and how they will be compensated vis-à-vis those who benefit but do not run the business, how the Decision-making process will run on business management / voting / new initiatives etc, can be managed well with any succession related issues addressed.

How effective has succession planning been in India and around the world? Can you provide a benchmarking analysis?

Business succession planning is not new to India. A powerful corporate house like Tata has been the best example for generations, however, even the Tatas have landed in court while choosing Mr. Mistry as their successor. It is common knowledge that this decision of the Tatas cost them dearly, financially, commercially and in terms of reputation.

A number of large business houses like GMR, Burmans, Thapars and many others have realized the importance of business succession planning and this quickly applies to SMEs as well as SSMEs, where families companies want to put in place a good succession planning structure that distinguishes ownership from management.

Globally, in both Western and Asian countries, entrepreneurial families are now aware of the importance of business succession planning. While in mature economies this is an established process, in countries like India it is still evolving at a rapid pace and becoming a necessity for personal, regulatory and business reasons. Even SEBI as a regulator has issued guidelines on this.

Why is this particularly important for family businesses?

The founder runs the company with a special dream, vision and passion. The business is replaced by family members who can be siblings, sons, daughters and extended family members. Everyone can have their own vision, style and commitment.

The family business will suffer and collapse if:

# the vision and values ​​of family members are not similar;
the process of delegation of the Patriarch to the next generation is not defined;

# the process of resolving conflicts is not addressed between the different branches of the family, including the problems of sale of shares by one branch of the family to a third party or within the family;

# there is no broad agreement between the different branches as to who will run the business and how they will be remunerated vis-à-vis those who benefit but do not run the business;

# the decision-making process to manage the business / voting / new initiatives, etc. is not defined ;

# Mechanism for professionalizing the management structure is not in place and the interest of the management team is not aligned with the growth of the organization.

What potential benefits can organizations gain from a well-documented succession plan?

Business continuity;
Appointment and selection of key management personnel;
Resolution of conflicts between stakeholders;
Separation of ownership and management;
Decision making for growth and strategy according to charter documents;
Professional approach to business;
Emotions vs. professionalism on governance;
Creating value for shareholders, employees, investors, lenders, and improving environmental, social and corporate responsibility with professional management.

Why can the lack of clarity between a legitimate estate planning document and evasion be such a huge concern for businesses?

As the business enters the second generation and the Patriarch’s involvement wanes or ends, the chances of conflicts between the second and third generation are sure to increase. Family businesses suffer if there are conflicts and if there is no decision-making process. If there is no vision on succession planning, the value created by the founder is eroded and businesses suffer and shut down. The courts are inundated with disputes between family members. Ego, greed, the lack of a dispute resolution process and the involvement of all members of the extended family is like the last nail in the coffin where the family business is buried.