Plan now if you want your business to outlive you
Drafting of a family constitution and creation of trusts can help family businesses transfer wealth and responsibilities smoothly from one generation to the next
Creating a model that will help their family business survive after them is one big challenge that founders have to wrestle with. Besides having to deal with competitive pressures, changing technologies and business models, a family business also has to contend with rivalries between father and son, brothers, uncles and nephews, and other family members who hold large stakes or key management positions. Unless families address these challenges, they cannot expect the business built by the patriarch to survive after him.
For a family business to enjoy longevity, the family members need to understand that the interests of the business must take precedence over the interests of family members. If the company is run more to fulfil the aspirations of family members rather than to achieve its own objectives, sooner or later it is bound to run into trouble. Let us turn to some of the challenges that family businesses face.
Patriarch versus next generation: Often, the patriarch of the family could be in his mid- or late-seventies, the next generation could be in the mid-fifties, and the third generation could be in the mid-twenties. Despite his advanced age, the patriarch is often unwilling to relinquish control. This can be quite irksome for the successor generations. They are in the dark about how much longer they will have to wait until they can take over the reins of the business. The next generation may have greater awareness of how the business landscape is changing. They may want to bring about a radical overhaul of the business. But with the patriarch reluctant to loosen his grip, there is little they can do.
Personal aspirations, biases and lack of clarity of roles: When family members participate in a business, personal issues and personality clashes often play a big part in making the situation murky. Family squabbles sometimes spill over into the business domain.
Business families also often do not have a clear document that clarifies the roles and responsibilities of various members. Such policies may exist at the organisational level, but do not exist for individual family members. A corollary to overlapping of roles is the absence of accountability.
The “why you and not me” syndrome: An example will explain this point better. Let us say that the father gives one son a gift worth ~10 million and another son a gift worth 11 million. The son who got the cheque worth ~10 million feels happy initially. But his happiness evaporates the moment he learns that his sibling has got one million more. Instead of feeling elated about his windfall, he begins to moan the fact that his brother has got more. This “why you and not me” syndrome is quite commonly witnessed within business families. No system of remuneration and reward: Most families don’t have a policy for remuneration and reward for its members. All family members may get the same salary. This is usually not linked to how useful and productive they are for the business. Often, no clear cut monetary incentives exist for achieving targets, which can be disillusioning for the high achievers.
Expenses met from common pool: Many business families dig into their business accounts to fund their monthly expenses, travels and holidays. Even milestone needs like children's marriages and education are paid for out of the common pool. This may work so long as the patriarch is around to keep an eye. But the moment he passes away, all hell breaks loose as every family member tries to fill his own coffers.
The panacea: To mitigate the above challenges, business families need to adopt what is known as Family Business Succession Planning. This is a combination of estate planning and family business planning. Estate planning deals with the tangible challenges and can be managed by creating family trusts and wills. Intangible challenges can be handled by creating a Family Business Plan, which would include the drafting of a family constitution.. The challenges around division of wealth can be handled by creating trusts. Families can explore the option of creating multiple trusts for multiple family members. Holding all the assets of all the members in one trust can lead to conflicts. Creating separate trusts tends to reduce intra-family squabbles over wealth to a large extent.
Trusts can serve as effective asset protection tools as well, as creditors can’t touch the wealth kept within them in case the family business goes bankrupt. Both movable and immovable assets can be held under the trust structure. Transferring movable assets doesn't entail much costs. But transferring immovable assets, especially those held in individual names, requires payment of stamp duty. Shares of listed and unlisted companies, too, should be held under trusts.
Once the trusts are structured, the family needs to execute a family business plan. This includes putting in place a set of policies, processes and rules for family members. Business families should have intra-family shareholders' agreement to mitigate ownership and management conflicts. They need to put down in writing exit polices, right of first refusal, voting rights, and so on.
To safeguard the interests of the next generation, business families also need to have specific policies for them. A new business policy should be drafted that allows family members to diversify into new ventures. Such a policy should give them clarity regarding how their new business ideas can be funded by the family, the role family members will play within it, and so on.
A roles and responsibilities policy will help bring in greater clarity on each member's functions and help to avoid overlaps. The reward and remuneration policy will motivate the future generations to participate actively in the family business.
These policies will also help members explore business interests outside the family business, or even explore non-business opportunities. The family can even explore the option of bringing in a professional CEO, in case the younger family members are not interested in managing the business.
A policy to deal with conflicts also needs to be created. Having an education, training and development policy will ensure that the younger generations acquire the desired knowledge and skills.