Succession Planning: Are you PREPARED?

Consistent growth of wealth; expanding global footprint; and passing on family business to one’s beloved children are usually the dream of every family carrying on a business. But, harsh realities such as family discord, differences in future vision, unwilling next generation or a sudden tragedy are few overlooked possibilities that may result in 90% of businesses not transitioning from the first generation to the third.

So why don’t families have a vision of future that is cognizant of and provide for these eventualities?

Most of the families seem to have convinced themselves of not doing so due to different reasons such as:

• a misplaced belief in the old family system’s ability to sustain all odds

• human tendency to discount contingencies

• a lack of understanding about possible solutions

• a lack of willingness to talk about as it is considered a sensitive issue

• acknowledged need for a proper Succession Plan but no one feels the urgency to act

All the above is true in case of Indian business families not only because of the family system that is still under transformation but also the business system that is yet to align itself to the needs of the evolving family structures.

In today’s times, business families cannot afford to leave their affairs to chance as any unplanned succession might lead to the following outcomes that pose a serious threat to family business: -

• Family Disputes: Absence of a succession plan significantly increases the risk of family discord translating into huge emotional cost for the family and individuals.

• Expensive Resolution: Regardless of disputes being internal or external, the families are usually saddled with huge litigation costs which may take a toll on family’s wealth.

• Time Cost: The absence of a planned succession will almost always increase the time taken for transition of business and other wealth to the rightful heirs, which only worsens in case of disputes. It may take several years before an amicable solution is reached.

• Fragmentation of Wealth: Usually there is no thought applied to consolidation of business interests, which very often leads to fragmentation of business interests, posing a threat to business continuity.

• Erosion of Economic Value: Research clearly shows that more often than not, unplanned succession has negative outcomes for the business in terms of revenues, market capitalization and shareholder value etc.

• Unprepared Next Generation: A risk involved in not planning the succession is to leave the next generation of the family unprepared to take over the responsibility. This holds true irrespective of family members being involved in managing the business.

• Impact on dependents’ lifestyle: If one has not been planning for succession then one might not have planned for liquidity either. This might leave the family without sufficient liquidity to maintain dependent family members’ lifestyle and pay liabilities and taxes.

• Unexpected Taxes: With the families increasingly getting global, a sudden demise without tax planning may trigger significant estate and death taxes for international wealth owners.

• Administrative inconvenience: Lack of planning will result in heirs running from pillar to post for paperwork, which careful planning may altogether eliminate.

By considering to have a succession plan in place timely, you are enabling preservation and growth of wealth across generations while ensuring family unity, individual growth and a sense of fulfilling one’s responsibility.