A business succession plan helps ensure that your family business, startup or any other self-employed enterprise that you run will continue to operate successfully if you or the other owners or leaders were to exit, retire, die or become incapacitated suddenly or in the natural course. It is a process of identifying people in key positions and finding their replacements so that it provides for a smooth transition from one generation to the next without impacting the flow of wealth or operations.
Does it differ from estate planning?
According to the Indian succession laws, the wealth and assets from a business are equally distributed among legal heirs. So why should there be a need for succession planning for a business? While an estate plan is a way to ease the transition of personal assets to legal heirs or preferred beneficiaries in order to minimise disputes, a business succession plan ensures the longevity and profitable continuity of the business in a way that it keeps providing wealth to the owners for a long time in the future.
Is it only for big businesses?
No, it is not just for large, listed companies or family-run businesses, as is the case with most businesses in India, but for any enterprise or set-up that employs people and generates wealth, even if it is small. These can include manufacturing businesses, service providers, shops, restaurants, factories, professional law and architectural firms, production houses, etc. These can have different structures such as proprietorships, professional firms, limited liability partnerships, private limited companies, public companies, etc.
“Earlier, the entire family used to run the show, with the next head of family taking over as successor, and this was followed or accepted by all the members as a custom,” says Raj Lakhotia, Founder, Dilsewill. “Today, this could lead to prolonged disputes and loss of reputation, with the family deploying their efforts in fighting lawsuits, instead of focusing on business,” he adds.
Besides, today’s nuclear families and fewer children mean that the kids may not want to join the family startup or business, and instead follow their own passions or interests. For parents or owners who do not want to wrap up their business or sell it because there is no one to run it after their demise, it is important to have a succession plan in place so that they can identify existing employees or professionals from outside to run it as per their dream or vision.
Agrees Ravi Kumar, a Mumbai-based lawyer specialising in succession planning. “In the MSME and SME segment, succession planning lacks a formal process because the continuity is ensured by members within the promoter family. Since these companies are promoter-centric, the embedded risks are extremely high if succession is not planned and promoters’ next generation is disinterested in the business,” he says.
Also read:
7 steps to form a succession plan for your business
What are the advantages of a succession plan?
“One of the most disruptive things that can happen to a company is the sudden need to replace a leader. Without a defined plan in place, a leader’s departure can create confusion and risk to an organisation’s stability,” says Lakhotia. Succession planning mitigates this risk.
Secondly, it helps retain the stakeholders’ trust and confidence, as well as protect the interest of lenders and creditors. In difficult times, the business may die due to lack of direction if there is no plan.
In case of small businesses or professional services, the plan protects and preserves its goodwill and value, which helps the family get regular royalty or dividend.
How should one go about it?
The process of succession planning should begin not when the owner is at the fag end of his career or is ill, but well in advance.
Start by identifying the direction that the business should take and the people who can achieve this. Talk to these people whether they are family members or outsiders, and if they agree, train them so that they are ready for a smooth transition, when it is required. Execute the plan through trial runs to detect any loopholes and shortcomings so that when you or other leaders are not around, the business can function without a hitch.
Finally, all legal documents need to be signed and executed, and it is best to employ professionals such as lawyers, tax experts and chartered accountants to abide by the relevant rules.
