Family businesses will need to put their families in order, so that they can reap the benefits of an improving business environment and continue to contribute to the Indian economy.
India’s growth story crucially hinges on the performance of its family businesses, which constitute more than 75 per cent of Indian businesses. Indeed, family businesses are the predominant organisational forms of business across the world, and India has the third largest number of family businesses globally. A crucial challenge is the generational shift these businesses are likely to undergo in the next five to seven years, even as the senior generation which entered the business in the late 1980s to early 1990s retires, handing over the reins to the next generation.
We conducted a study called India: State of the Family Business Report, over the period May 2022–October 2022, with a sample comprising 350 family businesses from across India. Most businesses studied were small and medium family firms. More than 80 per cent of the businesses continue to have the founders playing an active role in the family business. We found that about 75 per cent of them have experienced the induction of a next-gen member and are now second-gen businesses. The senior gen, however, continues to exert a crucial, executive role.
In terms of generation dynamics, small does not seem to be beautiful. Micro enterprises continue to be largely founder-driven. It is the larger family businesses which have a greater involvement of the generations beyond Gen 2. Again, small size is also inimical to organised employment. Thus, while medium and large family businesses reported employing between 101–250 regular employees and 51–100 contractual employees, a majority of the micro and small enterprises reported employing less than 50 employees.
We studied the business performance of these 350 enterprises for the fiscal year 2021–22. A majority of the family businesses reported stable or improved performance across various metrics of business performance, including sales, market share, profitability, Return on Assets, Return on Equity, profit margin on sales, besides number of people employed. This would be in line with the provisional estimates released by the National Statistical Office (NSO), which reported that the Indian economy had fully recovered to its pre-pandemic levels of 2019–20, and the real GDP growth rate stood at 8.7 per cent in 2021–2022. Most of the enterprises surveyed reported a better performance on these metrics in relative terms as well, i.e., compared to their competitors in the past three years. This indicates positive business sentiments.
We studied one-year-ahead business expectations of these businesses. While a majority of the family enterprises reported expectations of cost increases in terms of both raw materials and labour, they also reported expectations of higher sales and adoption of technology. It appears thus that family businesses have done well and this has also resulted in optimism regarding the state of the business in the coming year.
It is, however, in terms of the state of the family that family businesses seem to be floundering. The top family challenges faced include: Lack of a clear successor/succession plan; lack of clearly defined and/or written roles and responsibilities for all family managers, including women; lack of a conflict resolution mechanism within the family business; lack of a retirement age for the senior generation and a roadmap for the next generation’s induction into a leadership role; and lack of a family constitution.
While these family businesses are governed by clear values and a code of conduct, there seems to be lesser attention paid to critical aspects such as family governance and succession planning. This is manifested in succession timing being not clearly defined despite there being an intent to hand over the business to the next-gen member, and a reluctance to let go due to the perceived inability of the next generation or their lack of interest in the business.
A majority of family enterprises seem to equate leadership with the possession of business, especially marketing abilities, and state such abilities as critical when considering succession. The ability to lead and manage people, to plan and execute and be technologically savvy—are reported by a small proportion of family enterprises.
Family businesses are well known to operate keeping in mind both business (economic) goals, adding to the family’s financial wealth, and non-economic goals which add to the family’s socio-emotional wealth. The tradeoffs between economic and non-economic goals are likely to be even more stark in the case of small family businesses, which face greater vulnerability to the vicissitudes brought about by natural and other factors.
Our study reveals the contradictions that family businesses are likely to face even as the next generation takes over the reins of business. Family businesses will face greater headwinds from the family side than from the business side, with issues of succession and governance looming large and threatening their business performance. Indian family businesses will need to put their families in order, so that they can reap the benefits of an improving business environment and continue to contribute to the Indian economy.
With the senior gen not wanting to let go, it might drive away the talented and independent among the next gen. Management schools and consultants will need to train the senior family members in the importance of “letting go” to preserve the family business they have invested so much in. Transgenerational entrepreneurship can be fostered only by paying sufficient attention to family dynamics.
(The writer is Executive Director, Centre for Family Business & Entrepreneurship. Professor, Finance & Economics at Bhavan’s SPJIMR)