More than 85% of businesses in India are family run. Due to their commitment and passion, the success of these businesses is making substantial contributions to the growth of the Indian economy. However, they face challenges in the transition phase and have a historically low success rate in managing transitions across generations. Continuity planning is vital for perpetuating a family business. Nurturing and developing the next generation of successors and leaders is the most daunting issue faced by the owners of family businesses.

The transfer of ownership and managing the succession process is the most difficult challenge that a family business encounters. Only around one-third of the Indian family businesses transfer the ownership but not the management to the next generation. Most leaders want to bring in professionals for managing the business. This may be a better option if the family members aren’t interested in the business, or they do not have the required capability or confidence to take up leadership positions.

Succession in family businesses has its own unique challenges like overlapping roles of family members, differing views of current and next generation, not keeping pace with new developments, lack of family governance structure, non-professionalism being a few.

The Challenges Of Passing The Baton

The next generation certainly has the advantage of sitting in the catbird seat as they are witnessing the changing structure of industries, globalization, resulting in being better informed. Entrepreneurship, independent thinking and technology comes naturally to them. But they also have their own set of challenges.

Family dynamics creates emotional challenges. While choosing a successor from the family, the owners are afraid of comprising personal relationships or creating irreconcilable family rifts. If all family members are active in the business, it can be difficult to evaluate each one’s capabilities. Further, getting family members in business simply because they are family can lead to resentment among other employees or stakeholders and it may result in erosion of family member’s self-esteem.

Another important issue that negatively affects the successful transition is generation gap. The current and the next generation may have different perspective, expectations, attitude towards change and risk taking ability. Anil Rai Gupta, Chairman and Managing Director, Havells India was once quoted saying, “My father was a visionary. When you grow up in a self-made, first generation entrepreneur family, there will always be inter-generational gaps. If these are not managed properly, it can create rifts, which are not good for both the business and the family. We have seen dynasties crumble due to family feuds”

Increasingly, the younger generation is now keen to start their independent business and not carry forward the past legacies. Kavin Bharti Mittal, son of Sunil Bharti Mittal decided not to join his family business and ventured out to set up Hike Messenger. Similarly, in another case the children of Kumar Mangalam Birla, Ananya and Aryaman, are pursuing their interest in micro-finance and cricket. The freedom and recognition motivates the next generation to branch out on their own to take new challenges.

Managing the succession of leadership and ownership is crucial for sustainability of both family and the business. It is important to separate ownership and management so that aspirations of the family members do not clash with the long-term goals of the business. In India, the trend is emerging where family businesses are creating a governance structure that clarifies norms relating to the family’s involvement in the business.

The author is the Co-Founder of Client Associates