Secret lies in even wealth ownership

We all look to mitigate risks from time to time, business or personal. Many of us buy insurance policies to cover risks to our lives. However, succession-related risks, which impact the continuity of wealth creation in a family business, are outside the ambit of an insurance policy. That does not mean we keep that risk open. Proactive wealth structuring is the answer.

Family business


Family businesses have been, and will continue to be, the core growth drivers of most global economies. Even in countries with developed capital markets, several companies have been started and are owned by risk-taking entrepreneurs and operated by them or their family.

While the dominant part played by family businesses may lead us to believe that they tend to run successfully over generations, that is not necessarily true.

What keeps family businesses alive and well is the emergence of new entrepreneurs year after year who have the drive to emerge successful in their businesses.

As and when the management of these businesses have to be handed over to the next generation, the fragility of family businesses start to reflect.

Experience shows that few survive more than 10 years after the founder dies or turns the enterprise over to relatives. Fewer survive into the third generation.

Clearly, family businesses enjoy some major advantages when compared to corporations that are institutionally owned and professionally managed, or they would not be so prevalent. However, managing the transition from one generation to the next is a hazardous enterprise.

Who is the successor?


In India, there is a natural inclination for any current-generation successful businessman or woman to expect a direct descendant to take over from him or her.

The selection of Generation Next to run the family business is based on the perceived ability and traits of suitable successors. Further, if there is more than one successor, the next criterion is typically seniority.

While this may have worked in the past, in the current context where businesses are growing at a rapid pace – not only in terms of size and scale but also in terms of complexity and geography – decisions on business succession would only become increasingly difficult. Added to that, the current generation has a wider choice available to pursue their dreams; this may not necessarily be aligned to running the family business.

This makes it imperative for any successful entrepreneur to ensure that wealth generated is proactively structured from an ownership perspective to address possible misgivings on transition.

Some of the key issues that one would have to deal with include fairness in distribution where there is more than one successor, protection against unwanted interference in business and ensuring seamless ownership among a wide set of family members but with only a few key members involved in decision making.

So how do you structure the business for succession?

The trust route


The use of private trusts is seen as one of the most effective means to deal with succession issues. But while the use of appropriate vehicles such as trusts or a corporate structure are an important element, it is the process involved in arriving at the appropriate structure and the operational aspects that have a critical bearing on the success of such an exercise.

For the entrepreneur, a number of other aspirations – such as philanthropic pursuits and addressing specific watertight needs such as providing for a special child – can also be embedded into the scheme of things. Attention to detail and discipline would be key factors in developing the right framework and implementing it. Thus, making the right choice of professionals to help with the transition would make the process smooth and effective.

Such proactive wealth ownership frameworks reduce the risks associated with transition of management of business to the next generation, be it within the family or otherwise.

It allows the current generation running the business to look at more options at the time of transition. It eventually leads to a higher degree of wealth creation as the business does not get impacted by potential conflict situations.