Succession Planning in Family Businesses: Key Challenges for Small Businesses for a Successful Transition

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By Vijay Dhingra and Pratik J Shah

Ease of doing business for MSMEs: According to most research conducted on succession planning, it can be conclusively inferred that family businesses are major contributors to GDP across the globe with an estimated 70-90% share. The contribution of family businesses to other socio-economic factors is far from negligible. A number of family businesses have become the biggest business giants in the world; many remain ‘small scale’ but play an equally crucial role.

Despite their well-established importance, the survival rate of family businesses is rather dismal. The small business statistics are even more poignant. It is no longer a secret that in any family business, in addition to external forces, the interaction between family and business plays a crucial role in ensuring the sustainability of the business and harmony between the members. of the family. Since every family business is unique and has its own journey, there can be no “one jacket fits all” formula. However, deeper analysis reveals that “succession planning” (tailored to meet the unique needs of each family) is one of the most powerful tools for making a family business resilient.

Simply put, succession planning means a documented strategy of identifying individuals (based on established parameters and processes) and deciding how to mentor and mentor them for leadership roles. Although succession planning is necessary at all levels, however, it becomes essential for leadership roles for the survival of an organization.

Small family businesses present unique characteristics and a set of challenges when it comes to succession planning. Some of them are briefly discussed below.

Next generation: In the Indian context, the next generation, especially the eldest son, is expected to become the head of the family business. This is particularly the case in a small structure. In such a configuration, the boundary between personal life and professional life is blurred. Business conversations are regularly discussed at the dinner table and the next generation constantly observes and learns about the business aspects from an early age. This instills a sense of belonging and connection in the next generation. Without a structured or documented process, the next generation evolves to take on leadership roles.

However, the founder/owner must recognize that appointing a leader who is unwilling or unable to manage a particular business is detrimental to the growth of a business. Engaging in open communication and sharing transparent and objective feedback would greatly benefit the next generation and the company.

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Formal induction programs: In a small structure, there would be no formal education or training program for the next generation wishing to join the company. He should learn the ‘business ropes’ by spending time with the founder/promoters and interacting with other stakeholders such as employees, suppliers and customers.

Attracting and retaining talent: One of the most critical challenges for a small business is attracting and retaining talent. No planning would be successful without strong potential successors who can be prepared for the next level. Consider a situation where the next generation may be reluctant or lack the skills required to run the business. To meet this challenge, it is essential to develop a talent pool and to have an objective and rewarding assessment and recognition program.

Informal structures: A small business does not warrant a formal corporate structure with an independent board/committee/advisors. The lack of an independent external voice can affect a small business’ ability on strategic issues. Thus, peer-to-peer discussion and learning from the experiences of others becomes vital.

Limited resources: In small installations, most of the time, the owners make all the decisions. They are drowned in day-to-day business and do not have the bandwidth to develop a growth and/or succession plan. Allocating specific time to formulate these aspects is of paramount importance for such setups.

Another facet of succession planning is passing ownership to the next generation. Succession of management and ownership (although related) are independent matters and should be planned differently. For cases where the succession of property depends on the requirements of a family, a few alternatives, such as making gifts during the owner’s lifetime, suggesting a transmission by will or establishing a private family trust can be considered. Each method listed has its own set of pros and cons and tax implications. A holistic discussion is needed to arrive at a plan/process; usually a combination of these methods is needed to “do the trick”. A separate plan is often drawn up for the succession of the company’s assets vis-à-vis the personal assets.

Vijay Dhingra is a partner and Pratik J Shah is a director at Deloitte Haskins and Sells LLP. The opinions expressed are those of the authors.

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