Succession Planning - Myths Vs Facts

In the wake of COVID-19 and the uncertainty it presents, it is imperative to revisit succession planning and understand what it entails to sustain and survive large businesses
Succession Planning - Myths Vs Facts
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Principal Founder & M.D, Entrust Family Office Investment Advisors
6 min read
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Succession planning comprises of the process of identifying and training new leaders who can take the reins of the business in their hands.This helps in ensuring the business is taken over by a well-trained and deserving individual, who can perform the tasks with the same efficacy, with minimum impact on the business operations.

Several experts have emphasized the importance of this process for the sustained growth and survival of businesses. In the wake of COVID-19 and the uncertainty it presents, it is imperative to revisit succession planning and understand what it entails to sustain and survive large businesses.

According to a report from one of the Big 4’s, family-owned businesses in India account for two-thirds of the country's gross domestic product (GDP) and 90 per cent of the gross industrial output. That gives one a sense of just how critical a role these businesses play in the economy. A failure at their end will significantly affect the nation’s economic structure. However, it has been observed that many times these large family businesses fail to implement a proper succession planning resulting in family feuds and loss of revenues. This usually happens because there are a lot of misunderstandings around the concept of succession planning which needs to be clarified.

Here are some myths about succession planning that we would like to demystify: 

Myth - My family will continue to be integrated even after my death

It is a very staunch belief of most family leaders that things between the generations to follow him will remain the same. However, it should be noted that change is the only constant in everyone’s life and dynamics between family members, irrespective of their prior proximity is bound to vary after the demise of the family patriarch.

This does not mean that equations always go haywire but business is all about expecting the probable risks and making contingency plans ready for the same. Hence, during succession planning, this factor needs to be considered.

Myth - Equal distribution of family business wealth is fair 

A family business is governed by a constitution that has been mutually agreed on, including clauses regarding the distribution of wealth. For instance, if out of the 4 successors only 2 are involved in the business, an equal division will not be considered right. It will lead to the formation of disintegrated families and can cause discontent. While taking such decisions, individuals should be very wise and avoid making hasty or emotional choices.

Myth - Business being taken over by children will ensure success

The path of success and growth of a business cannot be paved by simply bequeathing the enterprise to one’s children. An effective succession plan aims at viewing the strengths and weaknesses of both the individual taking over as well as that of the organisation. Further, it even does a detailed analysis of the goals that the business needs to achieve in the near future. Once an in-depth study of these parameters is done, only then one should decide how and what needs to be passed on to the younger generation. Additionally, it also helps in identifying those areas wherein expert services will be required in the times to come.

Myth-A succession plan is as simple as putting together a will

A will is a hygiene document that comes into effect primarily after the death of the testator. It usually speaks about passing down and distribution of the family assets, liabilities, and wealth. While on the other hand, succession planning helps in deciding what happens to a person’s property, investments, and business, when the circumstance in life changes, for instance- if the individual wishes to retire and step down from the helms of daily operations. A will looks after one’s family and other beneficiaries whereas an effective succession plan cover the interests of the individual as well.

 Myth - Ownership of succession and management succession is the same 

Most businesses are unable to differentiate between these two types of succession methods. It is widely perceived that post the retirement of the patriarch; it becomes the birth right of the son to be the torchbearer of the business. Many times, the person who takes over tends to lack the skills to run the organisation, consequently leading to the degradation of the company. Hence, it is of utmost importance to understand the value of segregating ownership and management.  

Myth- A trust is only for the future generations

It is a common misunderstanding that a trust is created to fulfill the needs and demands of the younger generations. It should be noted that these trusts have a much larger purview and entail protection against disability, unforeseen mishaps, and even financial crunch even for the person initiating the same. Further, it is a great support system during unfortunate times such as death. Trust does not have a singular use rather it provides solutions for multiple problems. The COVID-19 pandemic has shown us further that the CEO and key officers are not immune, and companies should adopt a succession plan that accounts for unforeseen emergencies.

Myth-It’s a hassle to manage a trust

Several individuals tend to avoid engaging in trust funds, ignoring the myriad benefits it has to offer because they feel it is a herculean task to manage them. However, one can always turn to a corporate trustee, which could be a department of the bank or a company that specialises in handling such matters. By involving such a party, business owners can enjoy the advantages of professional expertise, experience, and increased chances of greater returns from their investments.

Myth-Trustees will misuse the trust funds

Trustees are the custodians of the money invested in the trust funds. To avoid any discrepancies, they are bound to an act/deed which ensures that the reason behind their presence is to work in the best interests of the beneficiaries as well as protect them if and when the need arises. Any violation of terms and mismanagement of funds will make them liable to face the brunt of severe legal actions against them.

To sum up, succession planning is an essential element for the smooth functioning of a business. However; it can do colossal damage if one continues to believe in the conventional myths and does not modify the plans in a business-friendly manner. 

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