Co-existence in family business

In a family business, the business is run with an informal understanding and a set of rules formulated over the years.

Updated: Mar 13, 2018 01:54:02 PM UTC

At Terentia, the endeavor is to provide clients with a robust and holistic estate and succession plan that will seamlessly transfer the legacy from one generation to another through a mix of the best global practices and traditional values. Each service is tailor-made using technology and research and dual control has been exercised over operational processes. Under Estate Planning, Terentia helps clients to draw up Wills, set up Trusts and helps in execution of the wills. In Business Succession Planning, Terentia helps the family to hold the business equity in a structured and controlled way and also create rules, processes and systems to help the family co-exist in harmony through an arrangement called Family Constitution. The family can manage the investible assets through Family Office.

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When an entrepreneur sets up a business, he channelises all his energies into it. So much so, that it becomes his/ her extension. Since the entrepreneur is the one setting up the business, he/ she may also be called a founder (first-generation). He nurtures it and builds it.

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As the family grows, more family members get added to the business -- his children will join and contribute to the growth of the business. When children or sibling join the business, it forms a sibling partnership (second-generation). The founder then has the help of his second generation entrepreneurs to expand the business. Now, the founder will play the role of a mentor and along with sibling partners, create new verticals and expand the business into new geographies (possibly). They run the business with an informal understanding and a set of rules formulated over the years.

The sibling partners have seen their father and family’s hardships and sacrifices and so they value it. They are brought up with certain value systems. Then they get married and their respective spouses bring in new values. When this happens, sometimes, value systems can clash. If the values and personal aspiration clash then families seldom stay together in business.

However, some families are successful in contributing to the growth of the family business because both the sides accept new values and family members.

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Few years later, their children (third generation) join the business and form a sort of cousins’ partnership. At this stage, there are many stakeholders and hence the family wealth would also be divided among more people. When the business was managed by three people (Founder & Siblings) they managed to get a bigger piece of the pie (wealth) but when the third-generation members join their share in the cake becomes smaller.

If the family has diversified the business, then there are fewer chances of friction as there are more businesses to depend on. However, if that's not the case, all the members digging into the same business may have less to contribute and share. In many cases, when the share of wealth or distribution gets reduced, it affects the lifestyle of a family member and can lead to discomfort.

At this stage, the family members either coexist together and take the business to the next level or since they cannot align their interests, it heads for a split.

By this time, the core values of the family either have disintegrated or gotten stronger. If the values don’t penetrate to the third generation, the family business may crumble. Without a clear account of history of their generations past, they may feel like they were born in a rich family. They are more likely to be focused on their lifestyle, enjoying life, spending the wealth and not bothered about the business as they are not taught or told what their generations sacrificed and how they built the business.

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The family-run businesses need to understand that the survival of the business is very critical from the point of view of the family’s survival. If the business survives then families also will survive. It is important for the family to put up a proper structure and device a policy and process guidelines that can help the family continue to reap the fruits of the successful family.

By Sandeep Nerlekar- Founder & CEO - ‎Terentia Consultancy Pvt. Ltd.

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