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Importance Of Succession Planning For Business Families

Succession planning is an often underrated, yet a crucially important process that has to be followed by family business leaders to ensure business continuity for multiple generations.

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Most family-owned businesses across the world desire a successful continuity of their business from one generation to the next.  This, however, is easier said than done because statistics prove that 70% of family-owned businesses globally are sold before the second generation gets a chance to take over and only 10% of family businesses survive till the third generation. The transition of a business from one generation to the next is usually an arduous process, but it can be planned for, well in advance, and executed in an orderly fashion through the process of succession planning. History has seen many families struggle through succession issues, while at the same time; a structured approach has helped an amicable succession plan to be formulated for some families. Succession planning has taken center stage in multigenerational planning in the last few years amongst HNIs and UHNWIs.

Succession planning is an often underrated, yet a crucially important process that has to be followed by family business leaders to ensure business continuity for multiple generations. Simply put, succession planning entails the steady process of identifying and training potential candidates to fill up key leadership roles in a company for the near future. For many family-run companies, this means choosing an heir from the younger generation to take over the business. A well-thought-out succession plan ensures a seamless and hassle-free transition of power and management, in case of unforeseen circumstances such as illness or death. It also instills confidence in employees and investors that the company will function smoothly once the Chairman or Chief Executive demits office.

It is also important to note that sound succession planning is a steady process that is spread out over years and not a one-time event. Scores of HNIs and UHNWIs often make the mistake of not choosing and grooming a capable successor while they are in office, hence, at the time of eventuality, the company hastily appoints a successor without much thought. A hasty transition of power and control of business often may lead to underperformance and /or multiple internal issues, triggering another round of leadership change. These instances can be better addressed through a well-drafted and structured succession plan, which can enable grooming future leaders as a business continuity plan. A company’s fortunes and reputation are both at stake during a transition period, hence, the best succession plans are years in making and they ensure that there is minimal tumult when a change of guard takes place.

Like all other businesses, family-owned businesses also face challenges. However, there is an additional burden of managing personal relationships when a business is within the family. The ‘business of family’ and the ‘business of businesses’ are deeply entangled and company CEOs often find themselves torn between business concerns and family concerns. In large multigenerational families, succession can often become a sensitive subject and it can lead to familial discord, long-drawn court litigations, and succession battles that eat away at business profits and the family’s reputation. Hence, good governance practices are essential, as they open up formalized lines of communication between family members and thereby thaw out any discontent. Setting up family councils, shareholder assemblies, and designing family protocols are all part of creating good governance structures that can support the process of succession planning. Good governance decisions can unlock the true potential of a family business; on the other hand, poor governance can catapult a family into years of conflict and potential demise.

Today, succession planning also involves identifying family members who might be unwilling to inheritors. Younger generations of business families today have exposure to the best of global education and are well-traveled individuals with their own interests. Hence, many of them aim to venture out on their own and are reluctant to take over reins of the family business, as was the practice in olden days. Family-business owners need to identify such members and ensure the creation of smooth exit strategies for them in order to avoid any succession planning-related complications.

To create a succession plan that works efficiently, one may identify a Family Office that has extensive experience in succession & estate planning and has a good understanding of how a business family functions. Multifamily offices have qualified and experienced investment professionals, lawyers, and financial experts on board that can assist in getting the succession & estate planning process right for family businesses.

To conclude, establishing clarity in the dispersal of wealth and key accountabilities in an intricate structure of large family and business inheritance is a wise act. One must contemplate this at the right time and in a planned manner to keep ambiguity at bay. Succession planning comes into play as a well-thought tool that not only protects wealth but keeps equal interests in mind. To reap the benefits of hard-earned wealth, it is imperative to have a sound succession plan that brings transparency and aids in flourishing the legacy.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
family business entrepreneurship Succession Planning

Rajmohan Krishnan

The author is Principal Founder and Managing Director, Entrust Family Office

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