Family Businesses Must Rethink Their Strategies in the Wake of the Pandemic
That life is uncertain is axiomatic, but even this truism has been brutally knocked out of shape by the current pandemic. The novel coronavirus has repeatedly shown its scant regard for age, sex, health, education, social standing, financial status or indeed, any other criterion. In recent months, many individuals have succumbed to Covid or related complications. Apart from causing immense sorrow (and physical and financial hardships) to the bereaved families, such losses also pose challenges to the organizations they are associated with – even if “replacements” can be found.
In the context of a family, and hence, family business, a “replacement” is not possible. Therefore, the impact of losing a member of the family can be particularly severe for family businesses because it can abruptly affect plans around succession, estate and even diversification or expansion.
Over the past two decades or so, many family businesses in India have been actively working on professionalizing the way their companies are run. They have hired professional managers, and given them the necessary operating freedom and often, even strategic flexibility. Members of the younger generations are professionally qualified, and eager to drive growth, often through diversification or introducing innovative changes to the strategy or operating model. Bitten by the entrepreneurial bug, many members of the younger generation have moved away into completely new areas. Social entrepreneurship and philanthropy have become popular, as has angel investment into new ventures.
While the pandemic-induced uncertainty has accelerated the attempts of family businesses to bring order to their matters, the task is far from easy. Especially if some of these businesses were inherited and there are many branches of the family, ownership patterns may still remain tangled. In some cases, ownership changes have arisen as a result of an amicable settlement process initiated by the patriarch, while in other instances, such changes have been forced by disputes within the family.
All such changes are predicated upon a certain expected longevity of family members. It is this key variable that has now become much more unpredictable than in the past. Therefore, families need to re-evaluate their strategies to build contingency plans that are not just more effective, but also flexible and less prone to legal challenges. Where earlier, a Plan A and a Plan B may have sufficed, going forward, family businesses may need Plans C and D as well.
Even if they have been procrastinating decision-making on inter-generational transfers or other ownership and growth decisions, the pandemic has forced the hands of leaders of family businesses. They will need to find answers to several key questions to ensure that risks are adequately mitigated even while the family’s interests are protected and objectives achieved.
Every family business will have its own unique situation. However, here are ten common questions that will need to be discussed and suitable answers found in light of the specific context:
- Are wills adequate or is there a need for something that can be less open to dispute-such as setting up trusts? If trusts are the way to go, should they be public or private, and who should be the trustees and who should be the beneficiaries? If some of the members are still minors or foreign citizens, what are the implications?
- If the family holds assets in foreign jurisdictions, are wills in those countries needed or is one will adequate? Does it make a difference if these are immovable properties?
- How do we ensure that the charitable/philanthropic activities being undertaken or planned do not get stalled?
- If members of the family move to overseas locations as permanent residents there, what are the tax implications following changes in ownership (say triggered by wills). What about Board memberships?
- How will a change in citizenship status change any aspect of the overall situation? (This may be relevant where there are restrictions on who can be Chairperson or hold controlling interest).
- The family may have invested in ventures as angel investors. What happens to them?
- ESG is becoming increasingly important as investment criteria. What can be done to comply with the expectations of such investors?
- How can trusts be safeguarded against them being wound up in the future?
- If some family members inherit equity shares and seek to exit the business, how to ensure that the shares are not sold to a competitor?
- What happens to ongoing litigation against individuals/entities? Can new litigation be triggered by criteria such as PoEM (Place of Effective Management) applied by the Indian Income Tax Authorities?
As you will appreciate, there are no “one size fits all” answers to the above questions. Each family will need to obtain answers keeping in mind family structure, business interests, ownership patterns and other asset holdings. Thereafter, based on advice from qualified professionals, identify suitable options, and assess risks, costs and trade-offs in each of them in order to arrive at solutions that will work best for its members.