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Mon, Sep 28 2015. 01 41 AM IST

 A file photo of Ra hul Bajaj (centre) with sons Sanjiv (left) and

Rajiv of the Bajaj Group. Family businesses in India,

according to a KPMG report, account for two-thirds of the

country’s gross domestic product (GDP) and 90% of the

gross industry output. Photo courtesy: Bajaj Archives

Satya Bansal | Common myths about succession planningSuccession planning needs to be recognized as imperative to sustained growth

Like in most other parts of the world, family-owned businesses inIndia, according to a KPMG report, account for two-thirds of the

country’s gross domestic product (GDP) and 90% of the gross

industry output. That in itself would give one a sense of just how

critical a role these businesses play in the economy. Yet, only 13% of 

family-owned businesses survive to the third generation, and only

4% to the fourth generation.

While it can be argued that the generational decline of family

businesses has been the result of a rapidly changing economic

landscape that these families have not been fast enough to adapt to,

in many cases, it ultimately boils down to the reluctance of most

heads of families to confront the awkward issue of succession

planning.

Succession planning needs to be recognized as imperative to

sustained growth. However, more often than not, family business

owners avoid having this conversation since they believe that they

still have time to deal with the process. But most business owners act

only when a critical event, such as death or illness, takes place by

when the benefits of a smooth succession planning process can

never be had. Almost always, the manner in which family wealth is

then devolved to the next generation is hasty and viewed by the beneficiaries as being unfair, in turn leading to unpleasantness and rivalry

among family members. These are some of the common myths seen with succession planning:

Ownership succession is synonymous with management succession: Many Indian business families fail to recognize the differencebetween ownership and management. It is usually understood that on the demise of the patriarch, it becomes the birthright of the son to take

over the business, without analysing his key strengths or weaknesses. There is ne ed to understand the i mportance of segregation between

economic ownership and management, which will allow the family to leverage professional or family expertise to grow the business while

allowing wider family members and the next generation to enjoy the fruits of such growth. In recent times, many business families have used

tools such as family trusts and family constitutions to achieve this objective.

B-school education substitute for family induction: With their businesses becoming global, most families strive to get the best education

for the next generation from renowned business schools. There is, however, a failure to recognize that careful preparation is required both

on technical and family governance aspects for ensuring seamless movement from one generation to the next. The next generation needs

not only technical expertise, but also an understanding of the values with which family businesses have been set up and run. This will allow

them to make informed decisions as potential managers of the business and as responsible family business owners.

Family business owners lack communication skills:  Often, there are cases where members of business families do not communicate

openly enough with each other. While they do share an amicable relationship on the surface, they still do not express their feelings and

emotions strongly enough to have a meaningful discussion on the subject of succession planning. There could be barriers due to age and

even different educational backgrounds. We have come across cases where GenNext members tell us: “Can you help me explain to my

father or uncle why we should have this?” But when we ask them whether they’ve spoken to their elders about this, the answer at times is,

“Not yet.” Again, most traditional Indian families are reluctant to openly speak about the extent of their wealth with the next generation. Their 

concern is that disclosing details of how wealthy they are will give the younger generation a feeling of grandeur or result in a feeling of 

“affluenza”. Some even believe that this may lead to them being taken advantage of by unsavoury elements. They tend to avoid talking about

the extent of their family wealth and dynamics until it’s too late. This usually results in a completely blind-sided entry of the next generation

into the business.

The ‘equal is fair’ conundrum: Many family business owners feel that leaving their wealth equally divided between their children is a fair 

way of distributing wealth. But is it the best way? Let’s take a situation wherein a family business owner has three children, of which only twoare involved in the business. He decides to divide the assets equally among all three. The two involved in running the family business may

not find the division fair, resulting in a fragmented family. Consideration needs to be given to whether additional benefit ought to be given to

working members of the family as compared to non-working members. Aspects like these need careful planning and structuring.

Succession planning for family-owned businesses could have complex tax and legal implications. As such, the earlier a family business

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owner starts planning on using subject matter experts to help with the process, the better the chances of success. It is almost impossible for 

anyone to predict the future, but an effective succession plan for family businesses is certain to ensure a unified family.

Satya Bansal is chief executive, wealth and investment management-India, Barclays Wealth.