YOU BUILT THE BUSINESS. BUT WHO WILL RUN IT NEXT?

By,
CA Sreejith Kuniyil
Founder, PravasiTax &
True Legacy

Recent developments surrounding Tata Sons have brought an important aspect of business succession into public focus: Who owns the business? Who controls it? Who runs it?

The Tata group offers an important illustration of this distinction. Tata Sons, the principal investment holding company and promoter of the Tata companies, has a unique ownership and governance structure, with philanthropic trusts holding a substantial majority of its equity. Its operating companies are governed through their respective boards.

The Tata group is, of course, vastly different from a family-run business. But the underlying question is the same.

We can take the example of a smaller family business: A father owns the company. His son has worked in the business for fifteen years and runs its day-to-day operations. His daughter has built her career elsewhere and has never been involved in the company. The father dies unexpectedly.

The son knows the customers, suppliers and employees. He has been running the business for years. But his sister has an equal interest in their father’s estate. The family must now answer questions that should ideally have been settled while the founder was alive:

• Should the son continue running the business?
• Who should own the shares?
• Should ownership be divided equally among the children?
• Should one child take the business while the others receive different assets?
• Should the business be sold, or should a professional manager take over?
• How will the value of the business be weighed when the family’s other assets are divided?

These are not merely business questions. They are family wealth and estate-planning questions.

OWNERSHIP, CONTROL AND MANAGEMENT

Understanding the difference between these three concepts is fundamental to business succession.

Ownership refers to the legal ownership of the business interest, for example, shares in a company or an interest in another business structure. In a family business, the founder is often at the center of everything.

Control concerns the ability to influence or determine important decisions through voting rights, governance arrangements and the company’s constitutional framework. The father who owns most or all of the business, makes the major decisions.

Management concerns the day-to-day running of the business, like dealing with employees, customers, suppliers, operations and commercial decisions. Father may rely on one child to handle its day-to-day affairs.

Hence, the founder may continue to own the company while a son or daughter manages it. Other family members may have an economic interest in the founder’s estate without having any role in the business. This distinction becomes critical when the founder dies, because when the father dies, the person who has been managing the business does not automatically become the sole owner simply because he has been running it. Succession will then be determined by default personal laws like Hindu Succession Act, 1956, Indian Succession Act, 1925 or Muslim Personal Shariya Laws.

INHERITING THE BUSINESS DOES NOT MEAN INHERITING THE JOB

One of the most common assumptions in family businesses is: “My son runs the business, so he will inherit the business.” That is not how succession works. If you don’t plan it, the law will make that choice for you and the law does not ask who has been running the business or who deserves to take the lead.

A person can be the manager for a business without being the only person entitled to inherit the founder’s wealth. Equally, someone may inherit an ownership interest without wanting anything to do with running the company. Involvement and entitlement are separate questions and treating them as the same one is where many succession plans go wrong.

WHEN SUCCESSION IS LEFT UNPLANNED

The difficulty begins when ownership, control and management have never been clearly considered together.

Fragmented ownership — If a business interest passes to several heirs, ownership may become divided among people with different expectations and different levels of involvement.

Unclear management — The person who inherits an interest in the business may not have the experience, inclination or ability to manage its operations. Conversely, the person who has been managing it informally for years may not hold the ownership or governance authority needed to keep making decisions.

Disagreement over control — Family members may differ on who should set strategic direction, appoint management, or determine the company’s future.

Valuation and wealth-division issues — Where the business represents a substantial part of the family’s wealth, valuing it and balancing it against other assets can become a significant point of dispute and can pull the entire estate into the argument, not just the business.

THE QUESTION EVERY FAMILY BUSINESS OWNER SHOULD ASK

A family business may take decades to build, but succession decisions are often postponed because they feel difficult or uncomfortable to confront. A business owner doesn’t need to decide everything at once, but three questions are worth asking while there is still time to plan:

Who should own the business? Who should control it? Who should run it?

The answers may point to the same person, or to three different people. What matters is that the distinction is understood and deliberately planned for, rather than left for the family to work out later.

A family business carries more than financial value. It carries the founder’s time, reputation, relationships, knowledge and hopes for the next generation. The person running it today may be only one part of that story.

When the founder steps away either through retirement, incapacity or death, the business should not have to wait for the family to decide what happens next.

A Will can address what happens to the owner’s assets after death. Shareholder and governance arrangements can address how the business is controlled and managed. Where appropriate, structures such as a family trust may also form part of a wider succession plan. What matters is that these arrangements work together and reflect the same underlying intention.

If one child is expected to continue running the business while the family’s wealth is shared among several children, that should not be left to be figured out after the founder is gone. The plan should be clear while the founder is still able to make it.

And succession planning is not only about death. It can also prepare the family and the business for retirement, incapacity or the founder’s decision to step away.

Because the real question is not simply who will inherit the business. It is whether the family has planned who will own it, who will control it and who will carry it forward.

Pic courtesy: google/ images are subject to copyright