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A family manufacturing textiles. A jewellery maker’s descendant. A film distributor’s grandchild. Or just a wealthy classmate with brothers, sisters and cousins living together. Regardless of where you grew up in India, there was always a friend who came from a business family. This was a phenomenon we encountered, and we still do. Family business is a tradition that goes back several hundred years in India.
With time, these families evolved to accommodate more members, while some people left the family enterprise to chart their own path. In the process, new and stronger businesses emerged, while the less fortunate ones fell on hard times. The new India—which took off in 1991 with economic liberalisation—has seen many a business take off exponentially. Competing with global counterparts, these ventures have upped the game on quality standards, hiring professionals and creating businesses driven by merit, competence and agility. India Inc., now a name to reckon with, has the big-ticket family businesses as a key component driving its future. That is not to take away the disruptive nature of today’s world and the ease with which family businesses adapt to that scenario. This is critical since that will determine a good part of the future of family businesses in India.
The past and the present
Family businesses have, perhaps, existed in India as long as families have. While this may be tough to believe and there may be no easy way to prove it, a reading of history suggests so. One has read about how moneylenders came from one particular group much as pearl merchants did, as did jewellers. With time, they too evolved, and trade, in every possible form, made way for something more organised.
According to Sonu Bhasin, a family business historian, author and an independent director, as long as India was a closed economy, professionals were not comfortable working for a family-owned organisation, preferring government jobs instead. “There was a certain stigma about being in a family business as profit was a bad word. Then 1991 became the inflexion point with the ushering in of new manufacturing, a new thought process and the next-gen coming into their own.” To outline, what changed so dramatically, Bhasin says, “The stigma was now out of the way and it was kosher to make money.”
What makes the family business model different here is the practice of an Indian joint family. A large number of members—not unimaginable to have more than 50—live in a large house with a common kitchen and run one large business. Job responsibilities were often made with the patriarch either taking the major decisions or facilitating them. Anand Desai, Managing Partner at DSK Legal, says it is important in that set-up to let each person do what they are good at. “That should be done at an early stage to get the best results. A common reason for cracks in a family business lie in the inability to do that well.”
There was a certain stigma about being in a family business as profit was a bad word. Then 1991 became the inflexion point with the ushering in of new manufacturing, a new thought process and the next-gen coming into their own.
Family Business Historian
In a decade of India opening its doors to foreign investment, the transformation was unmissable. Bhasin says the next-gen who returned home after being educated overseas brought about a fresh approach to the traditional businesses. “Manufacturing and services became attractive with joint ventures taking off. More importantly, the realisation that external talent was required became very clear,” she explains. That phase, she says, saw the emergence of entrepreneurs like Anand Mahindra, and a sharp rise in salaries and job opportunities. The other big change was how market forces took over. “Pre-1991 was about who you knew and post 1991 was all about what you do.”
As a concept, family businesses exist in every part of the world and like India, they too have gone through many iterations. To this day, they dominate the landscape of business in many large economies. Emanuele Sacerdote, Founder of Soulside, an Italy-based boutique consultancy focussed on family businesses, says 65 per cent of companies in his country with a turnover of more than €20 million are owned by families. “If you expand that base to less than €20 million, the proportion shoots up to 85 per cent. Two-thirds of the top management are family members,” he says. Sacerdote himself is a fifth-generation member of his family’s company, Strega Alberti Benevento (a herbal liqueur manufacturer founded in 1860). “In Italy, there are ultra-centenary family businesses,” he points out, picking out names such as Antinori (wine maker), Beretta (arms manufacturer), Amarelli (liquorice maker) and Piacenza (fabric maker)—all formed between 1385 and 1733, not counting the well-known multinationals, among which are Ferrari, Barilla and Ferrero. “The key family business drivers are legacy, continuity and heritage, with the most important thing being identity,” says Sacerdote. That is not very different from what one sees in India.
Making the tough decisions
The cases of family businesses splitting are innumerable and the reasons vary. At the core of it remains disagreement or dissent on key issues, making a split inevitable.
That should be done at an early stage to get the best results. A common reason for cracks in a family business lie in the inability to do that well.
DSK Legal’s Desai says that the parting, if done early and amicably, is best for the business. “It can get very challenging when positions are driven by ego. But a lot of foresight is required for an early division. Friction within a family is often determined by a certain pattern,” he explains. “The founder is the one with most passion since he got the business started. The next-gen may have had it easier, while the one that follows is often not passionate about the business.”
Experts say the need to display maturity can never be exaggerated. Kavil Ramachandran, Senior Advisor at the Thomas Schmidheiny Centre for Family Enterprise in the Indian School of Business (ISB), and a long-time family business tracker, says in the past there was never a need to go for any kind of settlement, since it was believed that “a relationship is forever”.
The key family business drivers are legacy, continuity and heritage, with the most important thing being identity.
He explains that the patriarch being all powerful has made way for a social change, where joint families exist only on paper. “Individualism is in. Besides, a family business earlier was largely one company or one business. With shorter product lifecycles, new ventures have emerged and the approach to reinvest in a business does not necessarily hold good today.”
Consider the past two decades, where one saw settlements in business families such as Bajaj and RPG, when the patriarchs were alive. Not only were they amicable, but the resulting businesses (old and new) have grown in terms of revenue, profits and market capitalisation. On the other hand, the separation of Reliance was painful and done after founder Dhirubhai Ambani’s passing. In the recent past, the South-based TVS has quietly completed its family arrangement. ISB’s Ramachandran says it took a long time to work things out but a decision was necessary and to the extent possible, kept everyone satisfied. Other instances include the feud between Hero MotoCorp and Hero Electric over the use of the “Hero” brand name, or what has transpired in the Hinduja Group with the next-gen battling it out with the elders. “Clarity is always required because of changing business dynamics. If a patriarch is strong, it is a challenge,” he says. To ensure a smooth succession, Desai says it is critical to gauge the strengths of the children early in the day. “Ideally, they should complement each other.”
India is unique in the family business map and not just for the joint family. Nitin Potdar, M&A Partner at J. Sagar Associates, highlights a key difference. “Here, even [some] large public companies are de facto operated as family businesses,” he says, adding that things are slowly changing. “Over the last few years, we are seeing more instances of the second or third generation breaking away to do something different. The owners, too, are allowing them to discover new opportunities, and that is obvious in the prominent emergence of technology-based service industries.” According to him, many family businesses lack good futuristic legal structures within families or other stakeholders, and that is why long-term success is largely restricted to the top business groups. Some of the rest, he says, “take decisions determined by the interest of the family and not necessarily that of the business”.
Over the last few years, we are seeing more instances of the second or third generation breaking away to do something different. The owners, too, are allowing them to discover new opportunities, and that is obvious in the prominent emergence of technology-based service industries.
J. Sagar Associates
As India marches on, the story of its family businesses will be closely monitored. In a world where disruption is the only certainty, they need to be innovative, nimble and minimise the chances of a mistake. For all that to take place, cohesion is absolutely critical with each component knowing its responsibility. Bhasin says that family businesses have come a long way in a short time, by referring to 1991. “They have had to relearn to be relevant,” she sums up. That journey continues.
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