To be or not to be: How you can let go of the reins to the family business

The decision also depends on the mindset of the family and the inter se relationship.
The decision also depends on the mindset of the family and the inter se relationship.

Summary

  • There are two aspects to consider when passing the baton are succession of management and ownership.

On the New Year’s Eve of 2023, the Queen of Denmark announced her abdication to the throne and has officially stepped down on 14 January 2024, teaching us a very valuable lesson on succession. This may also be similarly applicable for family businesses – paving the way for the next generation.

In traditional Indian Hindu philosophy, there are four stages of life: Brahmacharya (student), Gṛihastha (householder), Vanaprastha (forest dweller), and Sannyasa (renunciate). However, in Indian family businesses, while a lot of emphasis is placed on the initial phase of education and training the next generation, the stage of Sannyasa and transition out of the business is a sensitive topic and often not discussed openly.

The ‘sticky baton’ syndrome is mostly associated with family business, especially when the first generation of seniors who have built the foundation of the business have to step down from the titular CXO position. Often, they continue to remain de facto mentors in practice and influence the business. At the other end of the spectrum, certain families set an age of retirement and start the process well in advance to ensure a smooth transition. In such cases, the mindset and attitude of each generation of senior members towards grooming their next set of leaders starts from an early age. They see each other as equals and leaders rather than separated by hierarchy, which will provide immense confidence to both generations and encourage the next generation to be mature, responsible, and equal partners.

There are also cases where family leaders often struggle to acknowledge the right time to relinquish control. The decision rests with the incumbent and is influenced by various factors such as personal identity, apprehensions, interests beyond business (or lack thereof), financial (in)security, business stability, and capabilities of the next in line, etc. For instance, in one family, the senior generation was at the helm till the age of 80 years, while in another family, one of the members of the senior generation retired from active management at the age of 50 years to pursue his passion of travelling across countries by motorbike.

The decision also depends on the mindset of the family and the inter se relationship.

In case of large joint families involved together in the business wherein it may not be feasible to have one clear leader, it may be best to have professional leadership and induct professional managers as well. In case family members are not aligned, it is preferred to segregate the business earlier than later to ensure peace and harmony, and so that equality of effort, responsibility and returns is maintained.

There are two aspects to consider when passing the baton: (i) succession of management; and (ii) ownership.

Management succession

Succession of management may be voluntary (by setting an age of retirement) or involuntary (such as demise, incapacity, etc).

As Benjamin Franklin said, “If you fail to plan, you are planning to fail." Therefore, a clear exit plan is required to provide clarity on the level of involvement, information sharing and perks. The exit plan should not only specify the responsibilities of the next generation, but it should also include the role of the retiring member and how they will continue to be associated with the business. A retiring member continues to be an ambassador of the family and the business and should be compensated for roles in the board, family office, philanthropic initiatives, etc. Their skills may be leveraged through mentorship, providing strategic direction and guidance, etc.

Ownership succession

To be effective, management succession needs to be coupled with ownership succession. At some point, the senior generation should consider the transfer of voting and control. This can be achieved either during the lifetime (through gift or trust structures) or post lifetime (through a will, which can envisage a testamentary trust or in the absence of will, as per succession laws). This step may often be preceded by a restructuring of businesses depending on the family philosophy of control, management, and ownership.

In conclusion, the success of a family business is the multi-generational attitude of passing the torch to the new generation. Holding on for longer than necessary could cause lack of ownership and frustration for the next generation waiting at the side-lines or the appearance of a lack of future growth and excitement for the non-family stakeholders of the business including employees without effective leadership.

To ensure a successful transition, it is necessary to plan, communicate, empower, and most importantly, execute the plan. In the words of author Napolean Hill, “Don’t wait. The time will never be just right."

Bijal Ajinkya is partner and Akshika Harikrishnan is director at Khaitan & Co.

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