• Insights

F or as long as family-managed businesses have been in existence, the quintessential problem of succession has followed it. Despite the finest brains in the industry trying to decipher the best ways forward, problems remain due to the vagaries of human emotions.

As succession is not an exact science, there can be no single solution for all companies. The path can be made simpler, however, by focusing on the following.

Choosing the Successor
Choosing a successor is easier said than done. It is an extensive effort and often has a high degree of emotions attached to it. In fact, the CEO of a family business is often called the “Chief Emotional Officer”. No doubt, picking a family member best suited for the job can be difficult, but objectivity can
be ensured by consulting a board or a search committee constituted to help select a successor.

ICRA Managing Director Naresh Takkar says people have started recognizing succession as a problem. “Due to a few high-profile instances, people have started looking at succession as an definite issue. Now, some groups are bifurcating their businesses and responsibilities so that the path is clear.”

That, typically, is easier where the group is into different, distinct activities. In case where there are no clearly segregated group activities and there is more then one successor in waiting, matters can get complicated. “There are some groups that want to be positioned as very professional groups. They are still in the process of working out who will take over when the main promoter is not there. So people have started recognizing the gravity of the issue, but I am not sure how prepared they are to handle the situation when it arises,” Takkar says.

For him, there is no definite checklist of do’s and don’ts that a company can follow during the process of succession. But the acceptability of a particular person as a leader and his ability to carry on the vision of the group is a very important factor. Says Takkar, “These issues are easy to talk about,
but in reality, there maybe many complexities that could be difficult to avoid. Succession is not a local problem—it’s a worldwide phenomenon.”

Emotions
Takkar says that while people often believe intheir ability to remain completely objective, at the end of the day, families mean ‘emotions’. Sometimes, decisions are taken on compromise. “There are only a few entrepreneurs who have done this very dispassionately and objectively,” adds Takkar.

The Timing
The moment you start your own business, succession is on your to-do list. “Planning a smooth succession is something that takes time,” Takkar points out. “The handoff needs to be carefully planned and executed, if it is to be successful. The timings has to be correct.”

The best timing is not carved in stone. “Typically, most family-run businesses are at an early- or mid-corporate range,” he says. “If one starts dividing the company before the group reaches a critical mass, it could prove to be premature. Timing is very critical; if one starts dividing different businesses even before they start to flourish, it may never reach the optimum size.”

Clarity during succession, then, is very important. Ambiguity overlapped with responsibility paves way for confusion in the future. “In the mid-corporate space, I find very few companies tackling this issue. For a very large business, the stakes become very high. But the flipside is that there would be many more verticals that have attained critical mass, and the division would be easier,” Takkar says. A classic example is the split between the two Ambani brothers and, subsequently, Reliance.

According to Takkar, if there are two equi-valent business and two successors, the division is rather easy. However, the problem usually arises in a mid-corporate that has only one business and more than one successor. “This is where it gets complex; even a large company that is not diversified may find it very difficult,” he says.

Installing the Successor
Sometimes, the successor may not be a family member, as was the case with Wipro and Infosys. A businessman often has to make the choice between carrying on the business under family management (even if it means risking the business altogether) or ensuring the legacy survives (even if run by outsiders). Experts estimate that succession planning should begin 15 years before you intend to retire. This way, you have time to oversee your successor as he or she learns the business and hones his or her skills.

There are instances where there is a strong family hold on a company, even with a very small percentage of share holding. This, however, extends the scope for outside influences (as in other stakeholders) to have a much greater say on who will be the successor. “Outside influence is good as long as they are used as a mechanism to be more objective,” says Takkar. “If the decision is left solely to the family, it is very likely that objectivity will be compromised.”

THE STEPS
• Choose your successor  • Develop a formal training plan for your successor  • Establish a timetable  • Prepare yourself for retirement  • Install your successor

THE SUCCESS FACTORS
• Good long-term planning  • External board members  • Shareholder agreements  • Clear roles and responsibilities  • Encouragement of employees  • Setting and managing  expectations  • Good and open communication  • Dialogue between the parties  • Effective management of conflicts  • Awareness of problems  • Balance of interests

©Entrepreneur October 2009

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Ambani, family, family business, ICRA, Infosys, Naresh Takkar, Reliance, smetv, successor, Wipro