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Six ways to keep a family owned business 'in the family' for generations

Six ways to keep a family-owned business 'in the family' for generations

Six ways to keep a family-owned business 'in the family' for generations
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By Shabnam Shaikh   | Ishita Khare  Aug 14, 2018 9:03:58 AM IST (Updated)

While it appears that family businesses generally do not percolate beyond three generations.

The inception of the Indian business milieu can be traced to the family business model that characterized a patriarchal, joint family system. Running a family business that is in accordance with traditional family values and at the same time contemporaneous with professional management may be antithetical for many, but the India Inc. bears testimony to some of the most flourishing family enterprises today.

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However, drawing corollary to a famous epigram, one can indeed say that a family that earns together, stays together. But, it is the staying together part of family business which is often compromised by the lack of business succession planning.
While it appears that family businesses generally do not percolate beyond three generations, employing certain strategies, as discussed in this article, may help in preservation of control over family businesses and fluid transition of leadership roles.
1
. Effective communication: Inheritance of family business entails a functional succession of family values and beliefs that espouse the raison d'être of the business. Often, business progenitors unequivocally convey future business roles, structuring, and strategies at the helm of retirement, which ensures that worthy family members assume the business mantle. Communicating business anticipations and expansion plans constructs a dynamic conduit of interaction among progenitors and successors, thereby marginalizing potential conflicts. Instilling a fortified business vision in successors to achieve business growth may be attained by frequent discussions, family meetings and internal communiques.
2. Estate Planning: A stitch in time saves nine, and pre-planning estate succession saves expensive litigation and business disintegration. Joint families usually have multiple heirs, and early mapping of the business devolution, allocation of leadership roles, accommodation of non-participative family members, etc. may redeem imminent business fallouts.
Measures such as segregating business segments for family branches, minimizing cross-shareholdings and diversifying business into new ventures that cater to business dispositions of family members may lead to better family estate planning. Efficient estate planning also foresees flexibility in asset allocation in view of changing social and economic conditions. Philanthropic endeavors of family members may be diverted to construct a favorable social image of the business, by weaving the charitable activities with the corporate social responsibilities of the family business.
3. Upskilling the successors: Misguided leaders devoid of qualities of management, dispute-resolution, planning and administration are bound to sink the family-business ship. Thus, educating business forerunners is imperative. Instructing the young generation about facets of the family business may also help progenitors sift future leaders from members who may not have an appetite for business. Training future generations helps them appreciate business values, thereby inspiring them to drive the family business forward.
4. Managing matrimonial matters: Earlier, daughters were not allowed to board the family business bandwagon. Now, however, women are leading successful family businesses and in view thereof, there is a need to plan business divisions that are inherited by the female members of a family. In this regard, it may also be prudent to have appropriate arrangements in place to ensure that the contingent rights and liabilities of a family business are crystallized between spouses and are saved from any conjugal complications.
5. Aligning the professional with the patriarchal: It becomes important for family enterprises to bring in professional management for their business, in case there is need for appropriate management and leadership talent. Co-management of business with professionals is becoming a common business model for family businesses in India, wherein the business ownership rests with the family but the operative management is taken care of by the non-family professionals.
Such professional managers may be aware of the fact that there will, in most cases, be a family member pre-empting their position in the business. Thus, such non-family professionals must be adequately rewarded. What may be helpful is bifurcating responsibilities, providing rewarding opportunities coupled with a fair share of business decision making and consequent incentivization with profits.
6. Delineating dispute resolution: In case there is a dispute among members of a family, feuds start inflaming personal egos as a result of which family businesses suffer. Thus, appropriate resolution mechanisms need to be in place in family succession planning. Dispute settlement mechanisms may be contemplated at an early stage of family business planning, with mediation and arbitration as some of the traditional resolution practices. Crises action plans and open documentation may help in accommodating any contingencies.
The process of conflict management may begin with the identification of conflicts. A senior, well-respected family member may assume leadership while resolving disputes. Also, a cooling-off period may be adjusted so that the dispute may be civilly discussed. Having family constitutions and internal codes of conduct may be a useful idea to address brewing conflicts. Family councils may also be a part of the family businesses to regulate inter-personal issues, which may not warrant a professional discussion with outsiders. The roles and responsibilities of such family councils may be decided in a prior fashion.
Shabnam Shaikh is a principal associate & Ishita Khare works as an associate at Khaitan & Co.
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