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SMEs: Don't Push Succession Under the Carpet

SMEs: Don't Push Succession Under the Carpet
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Ninety percent of the businesses in India are family owned. About 30% of the family businesses listed on the Indian bourses got listed post liberalization in 1991. The first generation founder would still be actively involved in most of these companies considering the average age at which entrepreneurs start a firm to be 40 and the average retirement age for founder promoters to be 75.

Yet, most of them would now be ready to hang their boots and see the company passed on successfully to the next generation.In the pre-liberalization era, passing the baton to the next generation was mostly taken for granted and there was little resistance from the successor too as there were limited opportunities outside. The family business not only acted as an internal job market for the extended family but also kept many generations together.

However, succession is the most important challenge for small and medium sized enterprises (SMEs) today. Some of the larger businesses have explored various models like bringing in a non-family Chief Executive Officer, merger of the company with another company while retaining substantial stake in the merged business, etc. when they found that the successors were either not worthy of succeeding or did not share the same vision and temperament as the founders. Similar opportunities are available for the SMEs as well now a days to deal with the challenges of succession.

Some of the factors that influence the decision of the scions of business families to join or not to join the family business are:

Formal Education: With more and more people receiving formal education, those who may not be interested in the family business are deciding to move away from it and do something else in which they may have acquired a skill through education and training.

Emerging Opportunities: People get influenced by what others are doing and the opportunities available elsewhere, either within the country or outside. There is ample information available regarding the opportunities. The eco system and the environment have had an impact on the decisions of the individuals.

Access to capital: Development of the financial markets has enabled easier access to funds to people, enabling them to do different things. Also, in the cases where the business established by the first generation has done well, the gen-next is able to get seed capital from the family.

Changing mindsets of the families: With more exposure and liberalized mind sets, many of the families believe in giving the next generation the horizon of opportunities. If the decision is to not join the family business, that is acceptable. The families no longer want to burden the young minds with the thought that they have to succeed the family business. They want to give the next generation the free rope to pursue their own calling.

Dodla Sunil Reddy, promoter and Managing Director of Dodla Dairy Ltd, a medium sized company valued at around Rs 11 billion, says “if both my daughters do not want to join the family business, I would be fine with their decision and would even support them in their decision to do something of their own”.

With smaller family sizes and the next gen deciding to pursue their own calling, many of the smaller businesses do not have a successor in sight. In certain cases, even if the family is not supportive of the decision, the younger generation has snatched away the freedom to pursue their own dream. The family is usually upset, yet, if the youngsters are not allowed the freedom to take their own decisions and are forced to join the family business, it may ultimately result in doom for the business due to frustration and disinterest of the heir in running the business.

Therefore, it is important for the SMEs to explore alternative models that allow smaller businesses to list, get valued, get visibility and most importantly, ensure continuity of the business.

One such option is SME trading platform of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) launched in March 2012. The costs of listing are minimal and the cost of compliance is low compared to that of being listed on the main exchange. There are regulations in place to ensure liquidity in the SME market.

Listing would provide the smaller family businesses with equity financing to grow and innovate. They would get greater credibility and visibility that would help them on-board talent that can take the company to greater heights. The investors would also be able to identify and invest in emerging, high-growth companies and participate in the valuation of companies.

It provides the promoters with an opportunity tobring in professionally qualified people to run the business, yet, remain an owner. It is likely that by the business would ultimately grow into a medium and then a large enterprise, luring the future generations to be more actively involved in running the family business.

Similarly, IndiaBizforSale.com is a platform for SMEs where entrepreneurs can buy and sell businessesonline. Apart from just buying and selling, the platform also enables Mergers and Acquisitions (M&A), Joint Ventures, Equity stake sale (to raise funds), Partnership and Leasing. The founders Haripriya Bhagat and BhavinBhagat say that currently most of their clients belong in the range of Rs1crore – Rs25 crores as traditional investment bankers do not find this segment attractive enough.

These options are available for the smaller family businesses in the event of the next generation members not willing or able to join the family business. However, the best thing for the family businesses would be if the next gen members have the desire to change the family business with the changing times;take it to greater heights with the help of right lessons from the family and new age technology.

Most businesses recognize that succession is a challenge. But very few actually prepare for it. It is time that the first generation prioritizes it rather than pushing it under the carpet!

The authors are with the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business

 
Edition: May 2017

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