Entrepreneurship is wrought with challenges, ranging from scaling up and administration to resource issues and succession planning. While most of these issues get the entrepreneurs' attention, succession planning often remains a blip on their radar. A dangerous mistake, one that can hamper the business' continuity in the long run.
Small business owners prefer to keep the ownership and business management under their control, extending it at most to family. This helps the owner manage the everyday affairs - compliance with government authorities, maintaining accounting records and formulating business policies and so on.
Consequently small businesses, generally, operate as sole proprietorships or partnership firms (requiring minimum two partners for the firm to be incorporated under the Indian Partnership Act, 1932). This helps with tax optimisation as well. In partnerships, the partners are typically spouses, who share profits / losses in an agreed proportion. They may continue to operate with just two partners even after scaling up operations.
| * What is succession planning? The process of scouting, identifying and grooming potential candidates to fill up critical positions in a firm. * How is a successor chosen? Family-run businesses prefer someone from within the family, multinational companies adopt a more broadbased approach and choose from internal and external candidates. * Why is it important? It ensures seamless transfer of management, prepares the employees and investors about how the company aims to run its business after the present chairman / chief executive * What are the challenges? Lack of consensus or shortage of talent; generation gap between the outgoing and incoming chiefs |
There is a risk here though. The sudden death of the business owner can lead to continuity issues. Lack of proper succession planning can even result in an abrupt closure of business. For instance in the above mentioned case of a partnership firm with spouses as partners, the owner's death calls for immediate dissolution, as per the provisions of the Act.
Life covers do not help either: When an individual takes a life cover, personal obligations like children's education, marriage and spouse's expenses are prioritised. No provisions are made for business-related obligations, especially, when there is a thin line of demarcation between business and personal liabilities, which in turn, would add to the financial pressures on the family.
The best bet then is to find yourself a worthy successor who can take the business further. A tough task as children settling abroad or branching out on their own can limit your options.
Nonetheless, succession planning begins with the search for identifying the ideal candidate and then grooming him to step into your shoes. A succession plan ensures seamless transfer of management, besides preparing the employees and the investors about how the company aims to run its business once the chairman or chief executive demits office.
Traditional Indian companies are mostly family-run where the eldest son is usually tipped to assume the mantle on his father's death. This remained the case in most large corporate houses, such as the Birlas, which started as small entrepreneurial ventures four or five generations ago.
But in recent years, traditional business houses have also tilted in favour of succession planning in keeping with the changing times and to fulfil the aspirations of other members of the family. Large corporate houses such as the Godrej group, Mahindra & Mahindra, Dabur and the Murugappa Group have succession plans in place.
Succession planning could become complex or fail in its purpose if there is a lack of consensus or shortage of talent. Generation gap between the outgoing and incoming chiefs is another challenge that could result in differences in vision, values and approach.
Remedies: To begin with, small business should stop thinking of succession planning as something restricted to large conglomerates. In fact, it should be a part of every company's strategic plan to be able to see the company go forward in the future. Private family matters should never interfere in or be a part of the business.
Entrepreneurs may start off the 'proprietorship' way. But once the business finds its own feet, it is important for the owner to change forms. A gradual upgrade to a partnership firm and then a private limited company is the key.
Converting to a private limited company format will bring in a board of directors and even a professional management, doing away with a definite succession planning need to a certain extent. If this is not possible, identifying a successor to take command and run the business smoothly may be your only option. The owner should not shy away from exploring options beyond his own family, if a suitable successor is not identified from within the family. Or wherever possible, engage professionals for the mentoring and development of the younger generation.
In case of partnerships with just two partners, add at least one more partner in the firm. This provision would help in the firm's continuity on the death of any one partner and prevent any compulsory dissolution. Partners have to take special note of the provisions of the partnership act, which states that an individual can become a partner in a firm only by contract and not from status. In other words, on death of a partner, his son / daughter would not become a partner in the firm automatically. More so, even if the individual provides for his children to become partners in the firm on his death, by way of a specific clause in his / her will, the same is technically not valid.
An efficient way would be to induct one or more efficient partners in business during the owner's lifetime. The business owner also has to provide for an equitable distribution of his share in the business to his heirs, in case the same is wound up.
It is important for owners to seek professional assistance for drafting a business succession plan and appoint competent advisors for the same. Growing complexities in the business or any changes in the family structure over time should trigger a review of the succession plan. More importantly, succession must be planned years in advance of expected needs. A skillful succession planning will not only bring peace of mind for the owner but also to family members post his death.
The writer is a certified financial planner
