Reasons For Failure Of Mergers & Acquisitions Deal

Mergers and Acquisitions are vital tools of business strategy to facilitate organizational and economic growth of a business. The terms are often used inter-changeably, however both offer different legal implications. Mergers mean the unification of two players into a single entity, while acquisitions are situations where one player buys out the other to combine the bought entity with itself[1]. Mergers can take place in the form of a purchase in which one business buys another, or they can be a management buyout, in which the business is bought by the management from the owner.

With reference to the legal process of initiating an M&A strategy, the businesses are required to undergo a long drawn and tedious process of sanctioning the initiation of the M&A process by the High Court. At different stages various provisions of the Companies Act, 2013 have to be complied with. Further, the involvement of the central government through the appointment of an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs also has to be dealt with. All of the compliances should be carried out to the satisfaction of the Court, resulting in unavoidable delays that may sometimes render the M&A irrelevant or detrimental to the business by the time it is concluded.

However, the serpentine legal process is not the only factor that contributes to an unfavorable M&A. This article aims to analyze the various reasons that add to the failure of M&A deals and enable businesses to mitigate the related risks in the future.

Analysis and Reasons for Failed M&A Deals

Mergers and acquisitions gained significant popularity after 2015. Nearly 3,600 deals worth more than $310 billion were associated with mergers and acquisitions. [2] They are lengthy and complex processes, so a lot can go wrong when negotiating a deal. As per a recent article by Harvard business review, nearly 70% to 90% of the mergers and acquisition deals were deemed to be a failure.[3]

Regulatory issues

Adhering to the legal mandates of the relevant jurisdiction is necessary. There is a chance that the shareholders of an organization may cause legal difficulties by dissenting from the approval of the mergers or by disagreeing with the business’s decision to merge. This would significantly slow down the functioning of the company, forcing it to pay appraisals to the shareholders as a remedy.

Example: HDFC and Max Life Merger Deal:

HDFC Life and Max Life had announced their merger plans in August 2016 through a three-step merger process, under which Max Life would first merge with its parent company Max Financial Services, and subsequently the life insurance business would be demerged from Max Financial and would be merged into HDFC Life. This merger transaction would have led to the automatic listing of HDFC Life through a reverse merger process and would enable HDFC Life to hold a majority stake in the combined entity. The Insurance Regulatory and Development Authority of India (IRDA) denied permission for the proposed merger of Max Life Insurance Co. Ltd and HDFC Standard Life Insurance Co. Ltd (HDFC Life), and observed that the structure of the deal violates Section 35 of the Insurance Act, 1938, which barred the merger of an insurance company with a non-insurance firm.[4]

Mistakes in Negotiation and Overrated Synergies

In various mergers and acquisitions, there are cases of overpayment for the purpose of breach of agreement. Acquiring a company based on money without knowing the working format, procedure, structure of the company and going through the due diligence process will lead to a failed merger.

Mergers and acquisitions are considered significant tools for increasing revenue, reducing net working capital, and improving venture power. Overvalued synergies go hand in hand with transfer overpayment. Overvaluation of exchange synergies is often the initial stage of overpayment. While the prospect of numerous costs remaining largely equivalent between the two combined organizations is attractive, it is also decidedly harder to achieve in practice than most directors admit. Also, energy cooperative income is no less confusing. M&A practitioners would therefore be encouraged to look at the expected cooperation from the exchange through a deeply traditionalist contact point.

Lack of Due Diligence

The importance of due diligence can never be emphasized enough. One of the main problems that arise during the process is that the acquirer depends on the target company to provide information that is not always suitable for their management. This creates obvious problems with agency.

Example: Daimler-Benz and Chrysler Group

In 1998, German automaker Daimler Benz merged with Chrysler Group for $36 billion. This was seen as a win-win situation for both companies as it was essentially a merger between equals. However, after a few years, Chrysler’s value dropped to just $7.4 billion. The merger proved unsuccessful. Many reasons contributed to this, but all experts agree that Daimler Benz never did  proper due diligence before merging with Chrysler. In other words, it overestimated the value of the target company, which led to the failed merger.

Hence, even though an M&A deal may seem lucrative on paper, it is essential for the respective businesses to carry out thorough due diligence and research on predicted profitability trends and projected growth patterns of the proposed merger or acquisition.

Deficiency in Strategic Plan

A good “why” is an essential part of all successful M&A transactions. This means that without a good motive for the transaction, it is doomed from the start.

The academic M&A literature is replete with studies of managers engaged in “empire building” through M&A and research on how hubris is a common trend in M&A.

Difficulty with Integration and Swap Ratio Differences

Integration difficulties that are mostly faced by companies when a new company has to follow or accept a new set of challenges and regulations to position itself in the market. It is very difficult for society to adapt to new conditions. Various plans are created in the form of strategies to help the company adapt to the new environment. This integration sometimes becomes the reason for the failure of the merger due to insufficient effort and imprecise planning.

Example: IDFC Group and Shriram Group deal:

IDFC Group and Shriram Group called off their talks of a merger after failing to agree on a swap ratio. A swap ratio is the ratio at which the acquiring company offers its shares in exchange for the target company’s shares during a merger or acquisition.

The two parties had, on July 8, 2019, entered into a 90-day agreement to evaluate a strategic combination of their relevant financial services. Shriram Employee Trust, Piramal Group and Sanlam Group were set to become the largest shareholders in IDFC and drive the business, but the deal would have hurt the government, which owned a 16.38 per cent stake in IDFC. So due to the difficulty in integration and swap ratio differences this deal was called off. This was the reason for the failure of this deal.[5]

Lack of Involvement of Top Management:

Management involvement is a catch-all answer that also includes many of the abovementioned reasons within its ambit. 

No phase of the M&A process can successfully sustain itself without proper involvement of the management, from the search for a suitable target company to the integration of both companies into a newly created entity.

When managers consider other tasks in their company more important than successful M&A implementation, they should not be surprised when their business is ultimately considered a failure.

Lack of Adequate Communication

Proper communication is one of the most important features of any agreement or contract. If the purpose of closing the deal is unclear, the intent of the buyers and sellers is also unclear, then communication is poor. If there is a lack of synergy and the buyer and seller are unable to articulate the desired results, this is a sign of poor communication. Not only that, but poor communication can also include a lack of communication between key managers and employees. Whenever a company enters into a merger or acquisition, there should be an honest and clear disclosure of the motive and intent. All doubts should be clarified at the initial stage. All levels of society should be given the opportunity to have their say. Messages should be interpreted in a general sense and according to common sense.

Culture Mismatch

Culture mismatch is another significant factor that causes merger failures. If companies have different cultural aspects, then there is a chance of low employee productivity, which leads to lower profits. Culture includes the willingness of employees to collaborate, share, support and team together with a single motive. Company culture is shaped by company founders, but it was also influenced by company managers and employees.

Example: Facebook and WhatsApp

Facebook bought messaging platform “WhatsApp” in 2014 for $22 billion. However, companies quickly realized that the corporate cultures were clashing. There are some memorable articles about table size and toilet stall arguments, but there have been discrepancies in values. WhatsApp famously valued the privacy of its customers and employees (no wonder they had a problem with short toilet boxes), while Facebook had more of an “open door” policy when it came to privacy. Since WhatsApp had committed to using a no ads and no encryption policy for the app its customers, it was clearly not a match that would have succeeded and the founders of WhatsApp eventually left Facebook.

Therefore, while considering an M&A it is not only important to ascertain the collective vision and objectives of the businesses, but also to make sure that the culture, policies and values of the businesses stay in alignment going forward.

Human Resource Issues

Human resource issues also pose a threat to the merger. There is insecurity as people tend to leave their jobs due to sudden changes in the course of work or because of cultural or identity issues. There are many human resource related issues even in the pre-combination stage such as the acquisition of key talent etc. as those could be the major concern for the companies for acquisitions. Another critical HR issue is the selection of a leader who will actually manage the new business combination for smooth business operations. These issues may lead to a lack of direction and the postponement of major business decisions. Companies should put their best people in charge of implementing M&A deals, and seek union and community involvement to avoid the risk of deal failure.

Geographic Restrictions

Geographical barriers cannot be overlooked. These play an important role when it comes to cross-border mergers. In general, when a cross-border merger occurs, a two-layer articulation is needed due to the merger of two different companies into different countries with a different set of rules and regulations prevailing in the respective countries.

Other External Factors

External factors may include market position, competition, financing situation, and credit in the company’s lending. If all these things are against the company, there is a chance for the merger to fail.

                                                                          Source: PWC Report[6]

The Way Forward

It is expected that mergers and acquisitions will exceed $105 billion, breaking the record for the largest transactions. [7]  High-rated deals like Reliance Industries’ (RIL) potential $10 billion (Rs 76,000 crore) acquisition of European drug chain Walgreens Boots; the Adani and JSW groups, bidding for Ambuja Cements, and the HDFC twin merger are the leading big mergers and acquisitions (M&A) deals. Consolidation of all the market players has been a major driving force behind the M&A transactions. Tech Mahindra and Infosys focused on exiting entities, while Byju’s acquired Aakash Education, White Hat Junior and Topper Technologies.

According to the 2022 M&A report, despite the ongoing challenge posed by the Covid-19 pandemic and geopolitical tensions in South Asia, the market is showing strong signs of recovery. M&A volumes hit an all-time high in 2021 with more than 80 deals worth more than $75 million. The increase in investment can be partly attributed to Indian government policies such as the productivity-linked incentive program introduced under the Ease of Doing Business initiative. [8]

Thanks to the great interest of foreign buyers, the Indian market for mergers and acquisitions also did well (the US accounted for 35 percent of invested dollars). India’s economy is set for strong growth in 2022 – The IMF has forecast GDP growth of 8.2 percent in 2022, making it the fastest growing major economy and double the expected growth rate of China.

With a total of 174 deals in Q1 2022 (up 28% year-on-year), the stage is set for India’s M&A market to witness strong technology-driven performance. This would make the M&A management process more efficient and powerful. For example, sellers are seeing in real-time how artificial intelligence and machine learning are automating many of the time-consuming parts of M&A—from preparation and marketing to due diligence on both the sell-side and the buy-side. [9]

According to Data site, a leading provider of SaaS technologies to the M&A industry worldwide, deal activity from January to May 2022 shows that companies continue to invest in technology acquisitions as they undertake digital transformations accelerated by Covid-19. Trading on the Datasite platform shows that new global TMT projects rose 18 percent worldwide in the first quarter.

The median time to open and close a new deal or asset sale or merger at Data site increased five percent year-over-year this year, while deal preparation time is also increasing, up 31 percent over the same period. This means that many vendors are “ready” but have not yet launched their projects. [10]

                                                                            Source: VCC Edge[11]

If handled properly, mergers and acquisitions can be a powerful means of propelling a business to greater profitability. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure sustainable and stable growth projections for their future.

References:

[1] https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

[2]https://tradebrains.in/biggest-mergers-acquisition-india/

[3] https://hbr.org/2020/03/dont-make-this-common-ma-mistake

[4] https://www.livemint.com/Companies/CBGIbJmiwVHYNeSiSQyT8O/Irdai-denies-permission-to-proposed-Max-HDFC-Life-Insurance.html

[5] https://www.thehindubusinessline.com/money-and-banking/idfc-shriram-12-b-merger-called-off-on-differences-over-swap-ratio/article64285553.ece

[6] https://www.pwc.in/assets/pdfs/services/deals/deals-in-india-annual-review-and-outlook-for-2022.pdf

[7] https://www.business-standard.com/article/companies/blockbuster-m-as-keep-india-s-deal-street-buzzing-despite-market-volatility-122042801482_1.html

[8] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[9] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[10][10] https://economictimes.indiatimes.com/magazines/panache/with-174-total-deals-in-q1-2022-indian-ma-market-set-to-witness-strong-performance-reveals-datasite/articleshow/92864647.cms

[11] https://www.vccedge.com/

It can be fairly concluded that mergers and acquisitions are powerful means to propel a business to greater profitability, if dealt with properly. Businesses should be cognizant of the abovementioned factors discussed before taking the M&A leap, to ensure a sustainable and stable growth projections for their future.

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Family Businesses Must Think and Act Like the Boy Scouts

A couple of weeks ago, India’s first Chief of Defense Staff, Gen. Rawat, his wife Mrs. Madhulika Rawat and a dozen other army/air force officers and personnel died in a helicopter crash near Coonoor. The loss of any life is sad, but this tragedy was of much greater proportions because Gen. Rawat had only begun the critical task of rearchitecting India’s defense forces in ways that enable greater integration. In a few weeks, our government will assign someone else the responsibility for leading the transformative process that Gen. Rawat had begun; after all, institutions like nations, their armed forces and even corporates are larger than individuals.

But what this tragic incident has painfully reinforced for many of us is the unpredictability of life. And if it hasn’t, it should. There are striking parallels that can be drawn between the outcomes of this helicopter crash and what happens when the head of a family business suddenly dies or becomes incapable of running the company. Both are sudden and cause large voids that can be hard to fill because the next generation family members are young and inexperienced or perhaps not interested in the traditional business.

This is why succession plans must not only cover people in leadership roles but also entire businesses. Maybe a strategic sale should be triggered or perhaps several group companies that already share synergies should be merged and after a few years, the entity could go public. The specific strategy is not the point of this article; rather, the key point I wish to make is that family businesses in particular should be ready with this kind of thinking. Not just a slide deck with the future strategy and trigger events, but at a much more granular level so that implementation becomes easier for those who will become responsible for it.

By the way, the sudden death of founders and leaders is by no means the only uncertainty that family businesses need to be prepared for. Many family businesses have complex holding structures that involve the formation of trusts registered in India and elsewhere. But the world is witnessing a new wave of concerted actions that are aimed at shoring up tax revenues by plugging various loopholes and tax planning avenues that have existed for years. As a result, tax laws can change quite drastically in various jurisdictions. And as geopolitical realignments occur and new regional partnerships are forged, regulatory changes may impact more than just one country. Family businesses that either does not plan for such risks or are not agile enough to respond quickly might find themselves seriously disadvantaged.

Plans are ultimately plans, and any plan can go wrong. Who, for example, could have forecast the Covid pandemic or that it would stretch for 2+ years (and God knows how much longer)? But that does not mean that there is no merit in planning. What is vital is to plan for various scenarios and figure out a solution that works best under a majority of situations. This needs expert advice and more important, perspectives and business savvy. The role of business advisors needs to change; they must acquire and hone their ability to transcend silos or be a part of the right ecosystem so that they are able to orchestrate the best advice for their clients and thereafter, help them execute the strategies and plans.

If you’re still wondering about the reference to the Boy Scouts in the title, I just wanted to tell family businesses to “Be Prepared”.

PS: Being slow to adopt cutting edge technological capabilities and putting them to use to capture insights that help drive strategies is another form of risk – but one that applies to more than just family businesses.

Image Credits:  Photo by Pixabay from Pexels

Many family businesses have complex holding structures that involve the formation of trusts registered in India and elsewhere. But the world is witnessing a new wave of concerted actions that are aimed at shoring up tax revenues by plugging various loopholes and tax planning avenues that have existed for years

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Tools for Effective Succession Planning for Family Businesses

The pandemic has hurt many families. There is no solace or succor for the lost loved ones. Yet as harsh as it may sound, life has to go on, for the rest of the family. This feeling of vulnerability has to be channelized to ensure that every entrepreneur, business owner, and head of business family think of securing themselves legally to ensure succession & estate planning.

It is way past the days when parampara (tradition) and prathistha (prestige) and prashasan (administration) were sufficient for a family to run its business. Since change is the only constant, the pandemic has forced many family businesses to re-consider and re-structure their succession and legacy planning as it has drastically increased the probability of unforeseeable deaths and long-term health complications of the family members. Demise of the family’s patriarch in the absence of a legitimate will, post-covid health complications rendering everyday functions and business operations redundant are some of the scenarios which are impairing the families resulting in stress, loss of business liquidity, and business opportunities.

Despite the abovementioned challenges and economic uncertainty statistics reveal a strong resilience for recovery. In the current financial year. 51% of family businesses are eyeing opportunities for growth in the domestic market, 22% shall be focusing on diversification, while 10% are contemplating entering the international markets[1]. However, it has also paved the way for drastic changes in the ways a family business shall operate.

Two areas that will be witnessing restructuring in the family business operations are; legacy planning and digitization. According to PWC’s 10th Global Family Business Survey, 2021[2] over 87% of family-run businesses have identified digital innovation and technology as the focal point of priority over the next two years. Succession planning is one of the most sensitive issues in family-run businesses. However, Covid 19 appears to have concentrated minds in this area. The survey confirmed that 20% of business families have incorporated a formal succession plan, while 7% of such families have revised their legacy plans in light of the pandemic.  

This piece intends to explore various tactics, legal resources, and preventive measures that are currently available at the disposal of family businesses to adopt a viable succession plan and lay down a comprehensive list of suggestions and actions that can be immediately incorporated and undertaken by such entities to this effect.

Dos and Don’ts of Succession Planning

 

While undertaking measures to establish a legacy plan, family harmony and communication are the two keys, which are imperative to be kept at the forefront. It is pertinent to ensure that succession planning does not prove to be detrimental to a family’s peace and unity.

The following two approaches should be incorporated while formulating a succession plan for a family business, in favor of the family’s interest:  

  • Family Harmony Comes First: Successful family business owners have believed that selflessly putting the family first is key to the survival of their business. Decisions that keep the family together should be given priority even if they could potentially cause short-term losses. Dynasties crumble due to family feuds and individual egos overpowering affection and mutual respect.
  • Communication is the Key: There needs to be clarity amongst all the family members, especially the next generation about their future roles. The older generation needs to have an open discussion with the young beneficiaries, about their exit and the subsequent taking over of the business after them. Similarly, the younger generation needs to communicate their plans for the future and expectations in advance so that a succession plan can be tailored in line with their mutual terms of agreements and prospects. It is advisable to engage an external facilitator who can assist the concerned parties to convert their aspirations, interests, and competencies and formulate a plan in the larger interest of the business. If the younger generation wants no part in the family business, then their decision should be respected otherwise a forced responsibility in the family business either through a Will or otherwise will only lead to resentment and strife in the family; and be violative of industry’s regulatory clauses depending upon the nature of business.
 
 

Planning for Protection of Assets in the Event of Succession

 

Most Indian family-owned businesses managed their assets and wealth themselves. Therefore, succession was either governed by will or personal laws. However, since succession and property laws are unique to every religion, the process became complex.

The indifference and ignorance of senior members of the family towards these issues is the primary cause for extensive litigation cases, mainly pertaining to title disputes. The following succession planning tools are recommended to sidestep from such scenarios:

  1. Will: Leaving behind a validly executed Will is the most uncomplicated mode through which a property can be passed down to the next owner. There is no fixed format for a Will under the law. The only requirements for a valid Will according to the Indian Succession Act, 1925 are; it should be made by a sound adult, signed by them, and attested by two witnesses. It is recommended that an Executor be appointed in the Will to reduce hassles. It is not compulsory to register a Will. Probate is also required only if the Will is made in Bengal, Bihar, Orissa, and Assam and within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay or where the property of the deceased is situated in these areas.

There are two scenarios that are to be considered while determining the ownership of a share in the family business after the death of a person:

  • In case a person dies leaving a Will: A person can make a bequest of his share in the family business by a Will according to the constitution of the family business:
    1. Corporate Structure: Large family businesses often operate through a private company structure in which the shares are issued to family members and the management positions are held by family members. Shares held by an individual family member can be willed by that person. A family company continues to operate after one’s death as it is a separate legal entity. The assets in the company belong to the Company alone and cannot form part of the estate and therefore cannot be transferred by a Will.
    2. Partnerships: Most small-scale family businesses in India work through the partnership model. The Partnership Deed between the family members as partners should ideally have a clause that provides for the procedure to be followed on the death of a partner. A family business owner can make a bequest of his share in the partnership in the Will, but the beneficiary does not become a partner to the firm unless all the partners of the firm consent to it.
    3. HUF: Many traditional family businesses do not have a formal document in place but may operate through a Hindu Undivided Family (HUF). According to Section 30 of the Hindu Succession Act, 1956, a person can make a testamentary disposition of his share in a co-parcenary property i.e he may dispose of his share in the assets of the family business (HUF) through a Will.
  • In case a person dies without leaving a Will: The ownership of the stake in the family business will be determined by intestate succession i.e succession according to the personal law of the deceased individual. The heirs will be determined in accordance with the religion of the intestate for example Hindus, Buddhists, Sikhs, and Jains will be governed by the Hindu Succession Act, 1956, Muslims will be governed by the Mohammedan Law and all others will be determined by the Indian Succession Act, 1925.
  1. Trusts: The Indian Trusts Act, 1882 governs the creation of a Private Trust. A trust may be created during the lifetime of a person, referred to as the author / s It may be created with a written legal document through which the assets of the settlor are placed into a trust and trustees are appointed therein who manage these assets for the benefit of the settlor and the beneficiaries named in the Trust Deed. The biggest advantage of Trust is that it operates both during and after a person’s life.
    • A written Trust Deed is signed by the Settlor, requires a minimum of two trustees and two witnesses. The trust may or not be registered; registration is required only if an immovable property is transferred to the trust.
    • Family wealth can be secured with the help of trusts. The manner of conducting business, areas of responsibility, and pre-empting scenarios can also form part of the trust constitution.
    • Another benefit of Trust as a planning option is its dependability during a crisis. It helps in ringfencing the assets from any action taken by creditors or banks in the event of a financial crisis.
    • When a settlor dies, the trustee pays the debts, files the tax returns, and distributes the assets of a deceased. Trusts are an effective estate-planning tool if one wants to avoid the costs and hassles involved in obtaining probate. It is a quick and quiet procedure, preserving one’s privacy and done without any court interference.
  1. Family Constitution/ Charter/ Framework: Business assets such as securities can be accounted for in a Will or a Trust, however, it is also necessary for a family business to plan for succession of management of the business. These are often covered in Family Constitutions or any other business manifests. It clearly lays out the interaction between the family and the business. It is a document that can be used for governing the administration of the family business. Apart from detailing the values and ethos of the family business, it may also specify rules like the incoming generation would need to get a master’s degree and, work outside to ensure they are well equipped when they join the business. It may also make provisions for events like death, marriage and divorce in the family. However, for any family members to succeed onto the Board of Directors or any other Key Managerial Position, resolutions by the existing Board of Directors and/or shareholders would be required. It is recommended that the younger generation (if adults) should be made aware of the Family Charter, allowed to participate and their opinions should be given due consideration so that the document is in line with the thoughts of the incoming members of the business. This helps in maintaining a balance between the old and the new.
  1. Family Arrangements: Family arrangement resolves present or possible future disputes among family members ensuring equitable distribution of property among the family members. In a Family arrangement, a member gives up all claims in respect of all the properties in dispute other than the ones falling to their share. The rights of all the others are recognized. Therefore, under a Family arrangement, members of a family may decide amongst themselves about the distribution of the property of the deceased. A Family arrangement would have to be appropriately stamped and registered. However, even oral arrangements are valid in the eyes of law.
  1. Clear Retirement Policies: While making a succession plan, there should be a provision for a clear retirement policy that includes defining the benefits and shareholding of the outgoing generation post-retirement.
  1. Guardianship: Where minor children are involved, it is very important to make provisions either in a Will or by Trust, for appointing a guardian for minor children in the event of a parent’s death. If one parent dies, then the other living parent likely becomes the guardian subject to personal laws. If both parents die, then it is needed to mention who will be accorded guardianship. Failure to do so will involve the intervention of courts and various applicable laws given India’s pluralistic society. The need for an appropriate guardian is not only to provide for personal needs but to also ensure that the share of minors in family businesses are protected during the period of minority.
  1. Conflict Resolution Forums: Family disputes are often dragged to courts and fought in public. Creating conflict resolution forums in the family constitution is recommended where family members can discuss their differences and resolve disputes amicably. These forums may consist of trusted family members or outsiders like family friends who can fairly resolve the dispute. In case the dispute continues, family members may resort to mediation or arbitration. Litigation should be used only as a last resort. To maintain peace in the family, a well-drawn-out conflict resolution forum is necessary. Resorting to legal recourse at the first opportunity creates hostility and breaks down family relations.
  1. Setting up of Family Offices: Keeping track of investments and family wealth as it grows can become an extremely cumbersome task. Family Offices rescue family businesses and high net worth individuals from such burdens along with managing the administrative issues that crop up daily. Family Offices handle investment portfolios, taxes, provide legal support, maintain documentation, and manage shared assets of the family businesses.
  1. Choosing a Successor: The family business will flourish only if a family member has the passion to take on the responsibilities to run the day-to-day business. It is, therefore, important to identify a successor who not only has the skill sets to be the leader but also has the drive and excitement to take the business forward. Forcing the responsibility of running the family business onto uninterested family members would be detrimental to the business as the stakes are high for all stakeholders. When deciding between family and non-family members to run the business, the family should objectively identify and evaluate a variety of candidates early on. Whether family or non-family, they should be given the requisite training and opportunities to grow, and the best candidate often emerges over time. If no family member is qualified and/or willing to take the position, then the current leader must make the tough decision to appoint an external candidate or professional for the role.
  1. Mentoring the Next Generation: An important factor for successful business transfer is mentoring of the next generation of leaders before and after they take over the family business. It would be fruitful to train and groom them so that they learn and understand the culture and values on which the business was built. Often, business owners are afraid to give up their central roles in the system and hand over the reins of the business to newcomers even if they are family members. Successful family business leaders have kept aside their egos and objectively help build the mindset of the prospective leaders. One way to groom the next generation is to give them challenging tasks and the autonomy to make their own decisions. The current generation can also create a management training program for the next generation joining the business, in consultation with key senior personnel. This gives them a flavour of various aspects and functions of the business.
  1. Tackling Issues of Nepotism: One of the biggest challenges in any family business is tackling nepotism allegations, especially by the younger generation. Nepotism is inevitably a part of the package deal that cannot be avoided. If an undeserving family member is given a senior position in the business, it may result in low morale amongst the employees. What can be done is, minimalize its effect on the non-family employees. A good way to tackle nepotism is to set out clear employment policies. What qualifications would be required for a certain position in the business and what is expected from a family member if they do take up that role? Giving them compensation based on their performance instead of their relationship within the family, preparing them thoroughly for a position, and giving them jobs that fit their skill sets are some of the best practices which can be adopted by family-run businesses.

References: 

[1] https://timesofindia.indiatimes.com/business/india-business/most-family-owned-companies-remain-bullish-on-fy22/articleshow/83103426.cms

[2] https://www.pwc.in/assets/pdfs/services/entrepreneurial-and-private-business/pwc-family-business-survey-2021.pdf

Image Credits: 

Photo by João Jesus from Pexels

Since change is the only constant, the pandemic has forced many family businesses to re-consider and re-structure their succession and legacy planning, as it has drastically increased the probability of unforeseeable deaths and long-term health complications. Demise of the family’s patriarch in the absence of a legitimate will, post-covid health complications rendering everyday functions and business operations redundant are some of the scenarios which are impairing the families resulting in stress, loss of business liquidity, and business opportunities. 

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