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Transitioning Success – A Roadmap for the Family Business

By Bijal Ajinkya & Aditi Sharma

While wealth creation is perhaps the first step and the precursor to planning its succession – transitioning wealth carefully is both critical and pertinent, especially to ensure its preservation and growth.

The success of any family business is nothing but a harmonious marriage between the needs of the family and the business, which is probably a paradox in itself. However, all is not lost! Here are five guiding principles that will help strike that fine balance while planning the succession of a family business:

1. Align the three pillars: Ownership, management and leadership

Succession to ownership is simpliciter an economic transition of the family business and should not be confused with succession to management or leadership. A patriarch (or matriarch) may find that certain family members are not best-suited or are disinclined to manage or lead the business. In such cases, it is only prudent that the family wealth is preserved through ‘private trust’ structures or the like, and the management and leadership pass on to those (family or professionals) who have the inclination to contribute meaningfully to the business.

Succession to management and leadership, are two sides of the same coin and entail keeping a watch on the other. While they must work cohesively and in unison, in order to mitigate conflicts, it would be imperative to separate the two. Today, this is a topical issue, even in the context of political parties and board rooms of conglomerates. Selecting the right trustee becomes key as the trustee legally owns the family business, which in turn appoints the board of directors who manage the business.

Traditionally, Indian families, like their prominent Japanese and European counterparts, have assumed all three roles. However, with the growth in business and the competitive landscape, recent trends demonstrate that a proper segregation between the three roles is imperative for a business to grow successfully.

Certainly, one size doesn’t fit all and there can be no straitjacket formula, but a robust succession plan must ensure that the economic benefit of ownership is distributed across the family, and is separated from business management and leadership.

2. Governing the structure

Governance of the business can be successfully done by appointing a strong board with independent and passionate members. Governance of the private family trust can be done by documenting a robust family constitution – a ‘value will’. A ‘value will’ sets out the family values which the patriarch / matriarch would like successive generations to follow along with eg: the appointment of a protector, advisor, etc.

3. Communicating core values and objectives

While family dynamics may differ, a universally successful technique to implement a succession plan, is to ensure that there is clear and timely communication of the patriarch (or matriarch)’s objectives, weighing in of the perspectives of successors and mutual agreement on the goal-setting for the business. Ultimately, this process allows an opportunity to assess the considerations that may affect the family and business and, ensure collegiality is maintained.

4. Mitigating differences and frictions

The efficacy of any plan vests in its implementation. Thus, providing for a mechanism to ensure that the succession plan is properly implemented is critical. Conflicting perspectives of family members are inevitable regardless of the issue at hand. Therefore, it is advisable to provide for a clear voting and decision-making process since several permutations and combinations are possible. For instance, veto rights or a casting vote may be accorded to the patriarch/ matriarch or a simple majority may be adopted for all decisions. In case of a deadlock, close relatives or impartial friends may be consulted to guide the family or it could trigger a situation where each member’s interest in the family assets is crystallised and there is amicable separation.

5. Benefiting from the legal landscape

Ensuring that the succession plan for the family business is undertaken in a compliant and efficient manner requires that diverse legal aspects to tie in with the plan to ensure a fine balance. Legal nuances that family businesses must consider include – commercial, tax, regulatory, securities law, insolvency law, litigation, trust law and succession law perspectives.

For instance, if the promoter of a listed company is looking to prepare a succession plan, then any structuring, using private trusts or otherwise, must ensure that SEBI laws are complied with. Similarly, if a member of the family is migrating abroad, then, exchange control and tax (including reporting obligations) rules must be adhered to. Structuring charitable or philanthropic objectives also require careful consideration so that necessary registrations and permits are promptly obtained.

Amidst these, while India does not have estate duty (abolished in 1985) or inheritance tax, with the growing trend of a global family and business, succession plans must address the regulatory landscape and be set up as tax ethical structures to ensure seamless succession and transition of family business. The worst nightmare for a creator or successor to family wealth would be the erosion of wealth due to regulatory and tax suicides caused by negligent planning.

An often-asked question is when is the right time to plan succession? Should the decision making be based on a particular milestone or metric in terms of money, monetising business, size of the family etc? A universal response would be to prepare the succession plan at the earliest, regardless of the quantum of assets, number of members in the family, their age etc. Based on the comfort and preference of the family, one may always set up a succession plan and look to activate them in tranches.

Bijal Ajinkya is Partner and Aditi Sharma is Principal Associate of Khaitan & Co’s tax and private client practice

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