Succession pain in Partnership Firms – A challenge among SMEs in India
By Uncategorized

Succession planning is a very complex challenge for partnership firms. It requires all partners should work together like the way they established the firm to make the transition a successful one.

I would like to narrate disastrous failure of a corporate entity, having significant influence of two founding partners, due to their inability to agree on a mutually acceptable succession plan. The company was set up as partnership firm about 35 years before its disintegration. One partner was high on intellectual capability and carry strong business acumen. He was the majority stakeholder and head of operations & technology development. Another partner technically qualified, was a major financial investor and taking care of finance & corporate affairs. There was an amazing understanding and they were passionately involved in the development of their business. The entry to that business was so well timed that industry was opening up to the products they were producing. Govt was keenly promoting adoption of new practice such that this company was a major beneficiary. The business expanded consistently so is the reputation and country wide presence. They established a major centre with the large track of land in the heart of the city. The R&D set was so well developed that it could make the competitors feel envy as R&D was considered key strength to stay competitive in the industry. Their management standing is so well established that they could attract fantastic professionals to work for the company.

Everything was going on well for 35 years, unusual long time for partners from different cultural group to remain committed like hard rock. However disturbing signals started appearing when their sons attained the majority, secured strong academic credentials from abroad and seek the refuge under the business established by the respective father. Partners had a dilemma and they could not decide on the role and importance their children should enjoy the company. There was an air of suspicion about each other (between the partners).  There was perception gap about their respective wards’ competencies. Discomfort started growing. It started spreading within the company. Employees were divided into the two camps. New growth plans deferred. Many professionals started leaving the firm sensing lack of clarity about the future course. Banks loan started turning red. Market standing started declining. The signs of distress started appearing. Buying out one by other was not an option for both of them because their individual standing in the society was so moored to their identity within the company that either was ready to move out. Procrastination and unwilling to accommodate each other finally ended in the painful separation of assets and business. The sad part is though they moved on separately in the same line of activity, they failed to attain the previous standing in the industry individually or collectively if one sum up their sales.

What went wrong?- Conflict between emotional commitment and business

Starting a business is no small endeavour, especially if you are doing it alone. That is why many entrepreneurs choose to partner up. Having a partner helps make starting a business seems less risky because it gives you two or more brains instead of one as you go along your journey. Partners with skill and/ or appetite in different activities within the organsiation  can complement and set the tone for speedier growth.

As the business become successful, the partners will acquire new identity especially in their social circle. Everybody wants to get close to or do business with them. Many will seek favour like seeking jobs for their loved ones. Family will see pride in the new identity and try to become protective of this. As the age catches, one has to think of succession for his estate. Naturally it is the son who comes first in the mind to succeed.

However, hiring a family member in partnership firm is a frequent source of problems, creating conflict among partners regarding their commitment to the business and to family members.

If family members are in the roll, business decisions are often unduly influenced by emotional connections to family members. This can be reinforced by pressure from other family members. For instance, mother who is not a formal participant in the business, likely to continually pressure her husband to treat their son in a manner not consistent with his performance. The mother’s involvement will create a situation that is not good for the son, the husband or the company.

Please read: Transition Management

What are the possible solutions?

We have been seeing literature on succession planning which primarily are aiming at single entrepreneurs or corporates. However partnership firms are very complex and present a very difficult challenge to transition planning.

Hiring and dealing with family members is a very tall order and is likely to test the best resolve of all partners. There are no set of solutions that can bring peace and prosperity. Few suggestions are as below that may help the firms to address the challenge.

  • A clearly defined policy on nepotism can reduce the problem but it is not likely to completely eliminate it because emotional commitments do not easily yield to logic.
  • Problem relating to hiring family member for example, can be minimized by having the hiree report to someone other than a family member. Another consideration is that the partners whose family member involved will not veto any decision involving that person.
  • If you cannot reconcile to bring family members into firm, you may encourage them to pursue their interest elsewhere and assume the role of conscience keepers assisting transition to hands of professionals. Respective shareholding may be transferred to family trust.
  • Hire a Counselor or Anchor to facilitate dialogue among you all to plan for future.
  • Sale of firm or becoming joint venture with potential investors can also be an option to protect the value of enterprise.

Please read : Sustaining business beyond owner- A challenge to SMEs in India

Successful Transition at Infosys-A living example:One should not think there is no way than splitting the company.  There have been some fantastic business partner success stories over the years of partners from different background coming together and founding a great company. Living example is Infosys, Bangalore based software giant transformed in a span of 30 years into a professionals driven company. Partners happily paved the way and guided the transition.  As a result Infosys is remained a highly admired company and creating value for all stakeholders. Founders have encouraged and supported their family members to pursue their interest outside.

Conclusion:

Succession is a complex challenge for partnership firms as role of partners’ family cannot be discounted. Succession is important exercise and partners should not shun the discussion on this important aspect fearing discomfort. They should not dilute their respect and admiration to each other which could keep them together for years and helps to reach the level now they are in. It is better for them and the institution they have created if they collectively decide to shape the future of their firm.