Ten Critical Factors for Effective Succession Planning
By Parimal Merchant
Choosing the appropriate successor is the most crucial task for all family business owners to ensure their businesses’ longevity and prosperity. The task of succession is not an event; rather it’s a process – called Succession Planning – which owners need to put in motion long before they are ready to hand over the reins of their business.
Business literature is full of discussions on issues of succession planning and list out a plethora of problems that cause failure of effective succession. Here are ten critical factors crucial for the succession planning to be effective:
1.The Indian context: Culture and developing economy
As mentioned above, there is research and literature on family businesses, but unfortunately most of it is in western context. Indian business owners referring to such researches should be mindful of the Indian context of their cases.
India has a distinct family culture where family harmony is highly valued and good relationship among family members is cherished. A subordinate, be it son or junior, is expected to give respect and obedience to the superior, and the head, in turn, gives them protection and due consideration. Majority of the Indian family businesses are quite young and rarely have issues of challenges of cousin consortium separated by multiple generations. With no state welfare support, the dependence on the family is high. Age-related or medical emergencies must be attended to and managed by the family. This, in turn, increases the importance of strong family fabric and relations. Finally, as a developing economy, India does not have mature legal systems to protect the family. Businessmen still have to give personal guarantees to take loans. If something goes wrong in the business the whole family gets into problems. As a result, family businesses cannot be left fully to professionals when personal guarantees are on the family.
2.The SME context
The showstopper discussions on family businesses are almost always about big-gun families like Godrej and Ambani but let’s remember that majority of the Indian family businesses are SMEs (Small and Medium Enterprises).
In contrast to larger organisations, the SMEs do not have adequate resources to employ specialists and they find it difficult to afford high quality management talent. Even when they can afford the specialist talent, they find it difficult to attract and retain the right kind of talent who can also adjust to the realities of SMEs. As a result, in most SMEs, the owners, by necessity, need to be a part of the management team. The owner and other family member employees are often responsible for many different management tasks and important decisions – from generating the business idea to providing investments, to the management of business, down to ensuring its day-to-day operations also. Despite all talks about professionalisation and delegation, the key ownership role in SME remains with the family. Succession too, therefore, remains within the family.
3.It is business, but also it is family
Most of the discussions on succession centre around what will happen to the business after the owner/founder, making business continuity a big issue.
Instances abound of incompetent successors ruining a thriving business. There is another side to this tale, too. If the children are groomed well, with intentional value inculcation, the probability of their being incompetent becomes less. Children of business owners witness the impact of business right from their childhood; whether in the form of their father’s mood or in the form of business-related discussions. It is not wrong to say that ‘business is in their blood’. Owners should have faith in them and groom them to take over the business. The owner’s responsibility is certainly towards business, but it is equally towards his children, too.
4.Succession may be an event, but induction is a process
In the western context, succession is often projected as an event of handing over the keys. In Indian context, it is rarely so.
While the son/daughter are in their twenties and ready to get involved in the business, the father is likely to be in his forties. For the next two decades, the two generations are likely to work together. It is in this period of working together, that the children are gradually involved in business process, imbibe father’s business acumen and wisdom, and over a period of time get ready to take over the business. It is a gradual process where the tacit knowledge of the father as well as skills and attitudes are transferred to the inductees.
5.Start young – groom family pride and dream
It is fashionable to say that the children should follow their own passion and they should not be forced to join the family business.
In reality, rarely there is any clarity about what passion is. Whatever is the current fashion, seems to become the passion. Exposing your children to the business is not same as compelling them to join it as a career. Rather, it inculcates in them, from an early age, the sense of humility, acknowledging the role of the previous generations and the family business in their upbringing. Exposure helps to develop the pride in the family business and inculcate dreams of converting family business from ‘grocery store’ to ‘Wal Mart’. Exposure helps develop the power of observation and learning from practical business dynamics. In fact, there is no substitute for these practical learnings.
6.Groom both genders
In many aspects, we have moved into the 21st century, but our outlook towards grooming daughters for our family business is still from the 19th century, particularly when there is also a son in the family.
It is true that with the tradition of a woman’s exogamy, after marriage, the daughter is going to husband’s house and is unlikely to remain involved in father’s business. But in any case, the family business is not the destiny of the son or daughter. It is rather a preparation ground and a spring board for them to move into the next orbit. Grooming daughters for family business will develop their business competencies and real-life skills. If she is groomed well, eventually she can manage challenges in her own life and also handle her own or her in-law’s businesses confidently.
7.Focus on quality of relations
Accept the son/daughter as they are and avoid constant condemnation for their weaknesses.
Foster your children’s self-esteem along with good inter-personal skills. Promote appreciation of the fact that each one is unique and has his/her own strengths. Do not only accept each other for what they are but also appreciate each other for their positive aspects. Make genuine efforts to understand each other and make them feel wanted as well as understood. Pay attention to building better relations among the siblings and with the parents. Inspire sense of care and responsibility towards each other.
8.Learn to manage tensions
As children grow up, they are less likely to be the mirror image of their parents.
Children have their own personality and thought process. Difference of opinion is bound to come up which can even result into emotionally charged conflicts. Such conflicts should be welcome as they reflect sense of ownership and emotional commitment. They should not be swept under the carpet. Instead all the parties involved should learn the skill of managing the tensions which involves separating the views from the person, making an attempt to understand the other person, trying to reconcile the perspectives and at times willingness to let go.
9.Learn basics of family – life cycle, diversity
Generally, siblings are likely to be of opposite temperament and that is why together they complement and make a good team. However, there is a life cycle and as everyone evolves, new point of views and new priorities come up in each person’s life. Each person’s situation changes, and their world-view also changes. It is prudent to accept this evolution and give each other enough space to manoeuvre.
10.Have effective family processes
It is important to educate the whole family about the different aspects of business and keep them informed. In fact, there should be 3E formula for building trust within family – Engagement, Explanation, Expectation. Engaging all for key decisions. Explaining the rationale for the final decisions taken and clarity of Expectations within the family. It is important to have a process of family participation by regular family meetings and interactions. Jointly, the family should evolve the code upholding the family values and culture that the family will like to build upon and which are uniformly applicable to all.
A joint commitment to retain family bonding and continuing family legacy will ensure enough strength to withstand eventual storms in family as well as business situations and both family as well as business will succeed in living a long life. But for all this to happen, as a Family Business owner, you need to start Succession Planning early, there are no short cuts here!
The writer is Director – Global FMB Program at S.P. Jain School of Global Management