Home / Case Study / Succession planning in Small and Medium Enterprises in India

Succession planning in Small and Medium Enterprises in India

 

One day a client of ours, aged about 68 years, owner of a well-established Small and Medium Enterprise (SME) unit at Jigani Industrial area, Bangalore wanted our inputs about the succession planning for his enterprise. He has a son who has studied engineering at BMS College and did his masters from USA. Post qualification, his son wanted to work for a large corporation. The father is not confident of him coming back to family business.

So, the aged father is worried about the future of the organization. He says “the low profit margins, lack of competent and reliable staff, delayed payments from customers are making me to think about the future of the setup- Can I sell this company?”

 

Why kids are coming to traditional business?

Maybe generation gap. The type of family business is no longer the sought after business of young kids. They want to try something new. The old fashioned foundry or cable business won’t attract them. Maybe, the kids have seen their father working 7 days a week, without any break. Maybe, kids have seen the pale face of the father when the vendors have not paid on time, raising his anger on family members when things were not going good at factory. Maybe, kids think that the traditional business has limitations!

Maybe, the overall picture of traditional SME was not lucrative (maybe, SME is projected as a very tiring and painful affair) and thus the young kids prefer to do something of their own and in new generation space such as mobile application, e-commerce, new generation stores, etc.

 

What the traditional families can do about succession in business?

  • Bring in the Next Gen early to business – SME owners can do a small homework about the way the business is run currently and by what changes, the business can be done in the modern way. Discuss with the kids about the business and its prospects. I feel SME business houses must try to bring in professionalism in the organization. Maybe, modernizing the business, re-doing the infrastructure, introducing new age technologies will help to get the Gen Next to the business. Involving children in the business early may help to carry the family business to the next generation.
  • Bring in external talent – In case, the kids are not showing any interest, the next option could be bringing in external talent either on consultancy, salary or on equity basis. Give the operation freedom to the new team and guide them from behind. This way, the company can survive for many more decades.
  • Selling the business or mergers – find a strategic investor, offer them majority stake in the company, retain a place to sit and minority holding in the company. The new management may take your business to the next level.

 

What can happen if succession planning is not done?

The traditional businessman generally will have emotional attachments with the company. When he reaches the end of the road with respect to the future of his business, he will not only be down personally but also throw away the business in distress.

So, the owners of SME may have to plan for succession well in advance. It is not something to be decided over night. For each of the options mentioned above, a good amount of time has to be invested. Either bringing in new talent or selling the business can only fetch adequate returns if the plan is crafted well.

 

Thought for the day

True succession planning takes time; it’s a process, not an event.

 

Contact us now

About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]