Succession planning: An inevitable requirement for a family-run business

Often, the difference in opinion, talent and priorities of different stakeholders, lack of clear and direct communication, inter-personal relationships, etc. among the legal heirs’ act as a major obstacle in smooth transitioning of ownership and leadership in a family business. This could invariably impact the business as a going concern and its market position. Thus, a well-planned succession ensures that the family fortune and the business legacy is well preserved.

In the succession of a business, all family members need not have both, the ownership stake as well as engagement in the management of the business. An effective succession plan not only ensures smooth transition of ownership; it also helps owners to identify next generation leader who would take over the management of the family business. Timely identification of the successors ensures adequate grooming of the future leader and also defines the roles and responsibilities of other family members.

A good succession plan also provides the business owners, an opportunity to review and restructure the existing business. For instance, streamlining existing corporate group structure to bring the same in line with the future prospect of each business vertical, creation of a pooling vehicle for investment in new business ventures, establishment of a family office, etc.

Succession plans are specific to the needs, dynamics and long-term objectives of each family. While some business founders may want to retain the management control of the business within the family, others may be open to the idea of professional executives taking leadership roles with ownership of business remaining with the family. The level of control desired may also differ among the family members like some members may desire to be actively involved in the day to day conduct of the business operations, others may be involved only in strategic decision-making.

The efficacy of any succession plan lies in its effective implementation. Therefore, adequate provisions should be made in the succession plan to enable effective decision making on crucial business decision and to overcome deadlock situations. Usually, provisions are made for decision-making through simple majority for all routine matters, veto right of the patriarch or any other senior family member, appointment of protectors and mediators or intervention of a close family friend, adviser or a professional in case of a deadlock.

Further, the most important aspect is that the succession plan needs to be communicated effectively to family members and to key executives engaged in the business. Effective communication enables sharing of the vision of the promoters with their successors. For instance, where the promoters intend to cease active involvement in the business, disclosure of their intention to engage professional business managers, becomes crucial to establish a systematic process and align objectives and actions of the key stakeholders involved in the business.

In light of the diverse range of considerations and challenges involved, there is a myriad of structures that can be put in place to meet the family goals and business objectives.

Also, there are number of tax, regulatory and commercial considerations that one has to evaluate to determine a suitable approach to succession planning. For instance, a succession plan may be structured through Trusts, Wills or a combination of both based on factors such as tax implications on transfer of assets in the hands of the owner and in the hands of the person receiving the asset as gift, stamp duty implications, etc.

There are several factors determining the mode of succession planning such as stamp duty implications may arise on transfer/settlement of immovable property in the Trust as against transfer of property without duty through a Will. Decision between a Trust and Will also depends on the personal concerns and desired results from the estate planning. While a will is a legal document which comes into play only on the demise of the patriarch, a Trust is created as well as changed during the lifetime. Moreover, implementing a Will involves a probate (i.e. court supervised) process whereas a trust is not subject to probate proceedings, thereby saving time and costs involved in transition of wealth.

One also has to also keep in mind the regulatory requirement while creating a succession plan. For instance, where a listed company is involved, securities regulations are required to be complied with. Similarly, if family members include non-residents, the applicable foreign exchange regulations shall need to be adhered to.

In spite of the complexities and the challenges involved, a proper well thought out succession plan should ensure that business built by the owner with hard work continues to flourish for years. Further, a succession plan, implemented at the right time, provides the family an opportunity to do a trial run and evaluate the entire programme on a regular (usually annual) basis. Succession planning is thus, an important and an integral part of doing business and not an option and hence, should sit right at the heart of any family-run business organization’s objectives.

FAQs

1: Is succession planning also required for professionally managed businesses?

In case of professionally managed businesses, the ownership and the management of the business are segregated. While the management of such businesses is taken care of by the professional managers, the transition of ownership of the business from one generation of the family to the another is still an aspect which requires appropriate and timely planning.

2: Can succession planning be successful and effective even if family members are spread across different continents and have varying interests?

Most definitely. A carefully thought out and precisely implemented succession planning structure can accommodate any diversity of geographies, levels of interest in business and desired level of income accretion. More than often, generations of a family are spread outside India with the business entities continuing to hold and conduct business operations in India. In such scenarios, a structure is required which can achieve segregation of ownership and management of the business and also adequately distribute the family wealth among all the legal heirs of the family.

3: Is succession planning viable for listed companies given the rigorous regulatory oversight on such entities?

Positively. In fact, most listed entities in India have already started realizing the merit in succession planning and have also started taking steps to put in place a structure to efficiently pass on the baton of family businesses. Due to the oversight of the securities regulator, Sebi (Securities and Exchange Board of India), the succession plan generally needs to be approved by the Sebi and also be planned in such a manner as to not violate any listing regulations and also be in accordance with the takeover regulations in place.

Vikas Vasal is national leader tax and Suvira Agarwal is executive director at Grant Thornton India LLP.

Send your queries at vikas.vasal@in.gt.com