Sustaining family businesses: the key imperatives

ALT TAGPranav Sayta, India Family Business Leader, EY.

Succession is one of the most critical issues encountered by family businesses. Several factors including family dynamics and the emotional connection that family members feel toward their businesses can make addressing succession a complex issue.

Various factors affect the sustaining of a family business.

Family values

Families have always been central to and an integral part of Indian culture and business. While each family will have its distinct set of values, it is important that these “family values” are clearly articulated and uniformly appreciated for these to act as a significant binding force among the family members across generations. It is also important that these family values act as the guiding force and provide long-term future direction to the family. Furthermore, it is important that these core “family values” are completely aligned with the long term business vision of family business so that ”family values” and ”business vision” go hand-in-hand and reinforce each other to build a sustainable, strong, growing and harmonious family as well as business environment.

Robust succession plan including framework for governance

Equally important is to have a robust succession plan and a governance framework for economic interest and management control.

A well-written family constitution could capture guidelines for decision making (including certain key aspects with regard to businesses), and put in place appropriate checks and balances with regard to decision making. Moreover, it sets out roles and responsibilities of successors. Needless to add, considering the dynamic world of today, both from perspective of business as well as family, certain aspects may need to be re-visited at an appropriate time.

Succession predicament is also closely related to the family policy on entry of new generation, retirement of existing members and mechanisms for resolving deadlocks. Developing a sustainable mechanism for business ownership that leads to an unbiased wealth distribution and minimize disputes/exits is typically a key objective.

Entrepreneurial thinking across generations

For family businesses to sustain, the successors need to be willing, trained and prepared to take over the baton. Training and educating the next generation are critical elements of preparing successors for ownership, leadership, growing family wealth and perpetuating family values. Work ethics, leadership and entrepreneurship are the most important attributes to nurture in the younger generation.

Merely leaving behind a legacy of wealth is not what helps sustain family business — there should be a legacy of opportunities for the next generation to take forward. Moreover, equally important is to develop an understanding within the family about the fact that entry into the family business is not an “entitlement” — it needs to be both deserved and earned.

Flexibility to next generation

Family businesses and their leaders need to continually renew and sustain the spirit of entrepreneurship. They must constantly innovate to grow and pass on a thriving business from one generation to the next. An entrepreneurial thinking across generations results in business success and strong family ties. There are many situations where the third generation, for example, are not keen to join the family business due to their aspirations to do something different. Sustaining family business may be easier if younger generations are given the autonomy and support to develop their innovative ventures, while being a part of the existing family business. While guidance of seniors with experience is always helpful, allowing the upcoming generations some space to take reasonable risks, to so-to-say “make their own mistakes” and create their own distinct management style helps building a dynamic family business with an ability to evolve with the changing environment.

Open communication

An open communication within the family is critical to develop and sustain harmony and growth. Transparency and a strong communication ethos can further sustain interpersonal trust within the family.

Family office

As the complexity of managing the family’s wealth grows, the desire to ensure smooth intergenerational transfer of wealth inevitably increases from one generation to the next. A family office can provide governance and management structures that can deal with the complexities of the family’s wealth transparency, helping the family to avoid future conflicts, align interests and help to achieve increased returns. The family office could either be structured as an internal (with only family members) or external one (which would include independent advisors/ representatives/consultants).

Philanthropy: sustaining family businesses globally

According to a recent survey of the world’s largest family businesses by EY and Kennesaw State University, one of the factors that fasten world’s largest family businesses together is ”philanthropy”. Philanthropy is a way to express core values of the family and to make meaningful contributions by all, including those members of the family who are not directly involved in the business and even the next generation. One of the best ways for family businesses to practice philanthropy is through family foundations and impact investing.

To conclude, sustaining family business is all about balancing the interest of the family businesses and family members. A robust succession plan, which is simple, but at the same time provides adequate flexibility along with effective communication and transparency are key to sustaining a family business. A robust family constitution and a clear framework for governance can help sustain family businesses across multiple generations. Needless to add, efforts to sustain a family business is an ongoing process and needs active revalidation from time to time.

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