Succession planning: Where there is a ‘will’, there is a way

Succession in family businesses and corporations goes far beyond tangible assets, financial numbers, and all the novelties that come with it. It’s a long drawn strategic process to train, transition, and then transfer a legacy of responsible actions, repository of learnings, and accountability to all stakeholders within and outside the family.  

Without a formal, proactive plan, families and their businesses risk destabilisation, internal conflict, and erosion of value. We are repeatedly seeing the dark side of succession, more so in recent times. Ideally, succession must be planned not only to preserve wealth but, more importantly, to preserve the values, principles, and culture that enabled the creation of such wealth, often across generations.

India lagging in succession planning

Passing on monetary wealth without the requisite guardrails and foundation of family principles is more often than not destructive and counterproductive. India has seen unprecedented creation of wealth in the past decade. Unlocking value, access to private capital, listing on public markets, adopting global best practices and technology, and opening up of global trade have significantly fuelled the trajectory of wealth creation. 

However, not enough is being done to strategise, plan and prepare for the transition of this wealth and legacy to the next generation.

The process of transition is one that may be implemented over a few years. The complexity of a family structure, business structure, and the abilities of the next generation determine the time taken and the path adopted by the promoters. One can only imagine the dichotomy in a promoter’s mind, as he/she who has spent the better part of their adult life preserving and growing their wealth based on hands-on work and deep control, now have to be mentally prepared to let go of that very position to their next of kin. But it is imperative to do so for the long-term survival of their legacy. 

For transition of business, the promoter needs to plan for change in ownership, management and control. Each of these may be dealt with differently over time to enable smooth implementation and to avoid surprises impacting business or more importantly family sentiments.

Take the Oberoi family of the Oberoi Group as a case in point.  The family is now in legal dispute after the demise of PRS Oberoi where the legitimacy of his will and a codicil are under question. The dispute relates to ownership and control of India's most prestigious hospitality group operating under the brand Oberoi Hotels. Similarly, disagreements among family members over leadership of the iconic Raymond brand left the company embroiled in controversy, impacting both business operations and family relationships including between father and son. 

Such events highlight the importance of clear, legal sound, proactive and transparent succession planning which is well communicated to avoid potential instability and disputes.

Navigating succession planning 

To preserve value and legacy, one may use tools such as a well-documented ‘family charter’ which records in detail how the family shall engage, connect, communicate and operate in line with past practices to preserve and pass on the integral value systems that are often the nucleus around which success is achieved. These family charters also take into account current best practices to stay in line with the prevailing and dynamic changes within families and society and to meet the aspirations and lifestyle of the next generation. 

In larger families, one may document a ‘memorandum of family understanding’ which records allocation of business and personal assets and liabilities along with operational details for management and control of such allocations to enable smooth functioning with clear responsibilities, accountability and rewards. Aspects of intellectual property including brand, non-compete, confidentially, and exit from business may also be documented for clarity as these are often the triggers for disputes. 

The process of planning succession at the corporate level and at a personal level at times requires tough decisions. Decisions that may upset family dynamics and lead to uncomfortable conversations. Not all promoters want to engage in such conversations or deal with the potential outcome. This may be one of the key reasons that the succession was not being pursued with as much urgency as it deserves. 

However, in recent times with the sudden demise of young leaders and senior industrialists, promoters are now focusing on their succession planning with priority.

Crucial things to consider

For effective succession planning, not only the commercial aspects are to be decided by a promoter, but there are also critical aspects of tax and regulations that need to be meticulously planned to minimise costs and risk of non-compliance in the process of execution. 

Often, mid to large succession planning involves restructuring of holdings, paying liabilities, sale of assets to create liquidity etc. some of which take one to three years to execute. Further, these transactions entail tax liabilities, prior approval from regulatory bodies such as SEBI or RBI, compliance with governing documents like the shareholders agreements, and external approvals from lenders or investors which require a detailed and systematic approach to avoid undue costs and expenses.

Succession planning needs open and transparent communication. To bring all stakeholders onto a table to decide on their future and the future of their respective families is an arduous task, to say the least, but one that is best done in the presence of a family patriarch or matriarch who can take critical yet hard decisions which family members tend to abide by out of love, affection and respect. 

Lastly, all planning including for assets in and outside India needs to be tied into the promoter’s will and testament. These wills may be in and outside India for requisite compliances with local laws.

Clarity is key

It’s interesting to note that the average lifespan of a company on the S&P is approximately 15–17 years, down from about 40 years a few decades ago. With ample external threats and challenges already faced by businesses and families, there is no reason to compound them by leaving ambiguity in succession. 

The saying goes, “Where there is a will, there is a way.” A promoter’s success is measured not only by the wealth they create in their lifetime but equally by the clarity they leave behind to preserve that wealth, grow it, and use it for the benefit of the family and society. Evidently, the word ‘success’ is embedded in the word ‘succession’ for a reason.

The author is Managing Partner at Dewan P N Chopra & CO.