Transforming family businesses to gear up for future

Family business in India has been in practice since long, infact the origin of family businesses can be traced back to the bazaar system in the ancient times.

Initially, family business in India started in the form of trading and money lending involving the hustle and bustle of the bazaar. It was also confined to certain communities, notably the Jains and Marwari’s especially in the northern India. Today, majority of businesses are in the dominant control of families. It is estimated that 90% of the business, 25% of India Inc’s sales, 32% of profits after tax, almost 18% of assets and over 37% of reserves in India is controlled by families. .

Most of the big corporate business houses like Tata, Reliance, Birla, Godrej, Wadia,  Munjal, Mahindra, Thapar, Mittal  and many more are all controlled by families. However, these big corporate houses have over the years taken several measures to professionalize the operations while retaining ownership.

Challenges in transforming family businesses

In today’s competing business environment, only organizations which are nimble enough to tackle challenges swiftly can survive. Traditionally run family businesses find themselves struggling in such scenario as they are unable to adopt continually to the changing market dynamics. We have been involved in the transformation of few family run business since the last few years and thus can draw upon the lessons learnt in this journey.

Professionalism

In India, professionalism in family-owned-and-managed businesses is low as was the case with this Family. Decision making is always on ad-hoc basis and sometimes without consulting family members who are involved in the business.

The first step we undertook to tackle this hurdle was to corporatize the entities (from erstwhile partnership structure). This was followed by allocating the two businesses amongst the brothers who managed them leading to specialization.  This enabled Family to:

  1. Put a corporate structure in place by converting the partnership into Companies
  2. Making multiple entities with separate ownership lead to clarity in succession
  3. Ease in decision making process since the number of owners reduced in each entity
  4. Specialization lead to better margins
  5. Professionalizing management leads to better efficiency

Objectivity in decision making

 

Family businesses have a tendency to rely on existing family members for decision making, on the premise that they have a wealth of experience that can be drawn upon. This can often be counterproductive and restrict the ability of the business to grow and develop. The use of external professional advisors provides a new raft of skills, competences and experience, as well as independent objectivity not often found among family members.

 

We hired multiple specialist consultants in areas from Information Technology, Production, Packaging, Finance lead to

independent and objective decision-making in respect of various business area. As independent advisors we ensured that each family member could express his or her views without being side tracked/ suppressed by other family members. This enabled the Company to:

  1. Reduce emotion-based decision making
  2. Be open to hire experts for complex decision-making process
  3. Look at newer consultants for repeat business leading to cost saving or better technologies
  4. Create efficiencies at untapped areas
  5. Look at old processes objectively and change them
  6. Apply SoPs
  7. Upgrade team

Succession planning

 

It has often been noticed that the founder or the seniors do not prepare the organization for a time beyond theirs, especially when it comes to succession. In absence of an effective succession plan the business or the organization may end up in a chaotic state. It has been observed in researches that less than a third of the family owned businesses survive the transition of leadership from first generation to the second generation.

Succession planning can be put in effect with various tools available. Succession planning leads to:

  1. Lack of ambiguity in the family members minds
  2. Lesser chances of disputes
  3. Shows a clear direction from the family heads

Conclusion

The families with a vision and a desire to continue their businesses across generations must take measures to manage their businesses professionally while keeping their family ties stronger. When the family members have a common vision, well defined roles, open communication, and transparent systems of operations then the business can survive any test of time.

Family business leaders should accept two things. One, as leaders, their role is to not only to see opportunities for growth but also adapt themselves to play new roles. They must set standards of performance as well as flexibility. Proactively redefining their roles alone will enable them to remain leaders. It is not attachment to what they already have, but what they need to be, that will make them good drivers.

Two, they should review and make changes in the organization structure and decision-making processes at regular intervals. Many leaders make good decisions on growth strategy, little anticipating the possibilities of them getting into grid locks as they continue to implement their plans. Even family businesses with fewer members can get into such situations for want of shared goals and role clarity. Preparing three years’ business plan on a rolling basis, if not in detail, will help businesses anticipate some of the major grid locks in the making.

This article is penned by Ritesh Mistry, Investment Adviser, Moneybee Investment Advisor Private Limited. For more details you can write at ritesh@moneybeeadvisors.com

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