Having an Exit Policy in place even where there is no talk of exit is crucial. Also, where exit must be done, a common set of accounting, tax and legal advisors and a common facilitator is essential.

Family businesses, especially organised one (say with assets over Rs. 50 crores) of today’s world are like zamindars, landlords and kings of the days gone by. They signify wealth and power, the two most important pursuits of the majority of the people, more so in today’s world.

On the positive side, wealth and power make our lives comfortable and give us opportunities to make a difference. The flip side is, many times, they become the cause of differences, strife and destruction. History is full of examples, where wealth and power have caused many struggles, enormous amounts of pain and destruction – both material and emotional.

In Ramayan, it was Kakeyi under the influence of Manthara on the question of who would ascend to the throne of Ayodhaya. This triggered events leading to the death of Dashrath & Lord Rama being exiled for 14 years.  World history and literature is replete with instances of wars around the question – who gets the throne? In pursuit of the throne (signifying money and power), many siblings and relatives have been imprisoned and killed, in almost all cultures of the world.

In the modern world, family businesses have witnessed similar struggles. It is true that instances of killings are rare  in modern times. One such example that comes to mind is of Ponty Chadha and his brother. However, business history is full of cases where family wars have led to stress and severance of relationships and erosion of business value.

Is there a way to minimize or even better, avoid destruction of wealth and relationships? There are many family businesses in Europe, US and India that have not only avoided destruction of wealth and relationships but preserved and grown them over multiple generations. This has been achieved first by emphasizing the value of and constant nurturing of relationships. Secondly these family businesses create appropriate policies and practices of governance. One such important  policy is around separation or division of business and wealth.

One of the biggest lessons of long lasting business families is what Prof John Ward refers to as “graceful pruning.” Graceful pruning means having a clearly laid down policy and process for separation and/or division of business and family assets.

Wise and progressive families recognize the fact that relationships and togetherness cannot be forced. So in their governance policies and structures (Commonly referred to as Family Business Constitution), they recognize the right of the family business owners to ask for division or separation from business. They acknowledge that togetherness/joint ownership of business has both costs and benefits. Each individual has the right to ask for separation when he/she finds that the costs of togetherness are more than benefits. This is a delicate, complex and difficult exercise. At best, it takes months to complete division of a business and at worst it can continue for years, decades and even a lifetime. What makes this process so difficult and challenging ?

The first question to address is business control. If a family has one business, more often than not, dividing it into equal parts is difficult. For example, if two brothers own a steel mill, it will be difficult to divide into parts, leave aside equal.

If there are more than one business then grouping them into equitable parts is difficult. For example, in the case of Reliance, both Mukesh Ambani and Anil Ambani wanted ownership of the Petrochemicals business.

Valuation is the next difficult question to address. This happens because there are multiple methods of valuation. Even if the family agrees on the method of valuation and hires common  professional valuers, there could be wide variation between different valuers. For the division to happen, it is essential that  all family members agree to a common value of business and other assets. Now, valuation is a subjective call and many times family members are not able to agree to a common value.

Division and separation of a business has significant tax and regulatory issues. Since this involves transfer of assets it attracts stamp duty, capital gains and transfer of business liabilities. It could require approval from banks if the business has outstanding loans. It also requires various regulatory compliances with the registrar of companies, income tax and GST departments and SEBI. For most of the families, this would be a unique experience and they require help of  tax, structuring and legal experts.

The person buying business shares of selling family members needs to have liquid or other assets to compensate the selling member. Many families do not have enough liquid or other assets to fund buying and selling of business assets.

Lastly, the most crucial factor that impacts the division/separation process is the quality of relationships within the family. If the relationships are good, there is high trust and willingness to share amongst family members, the separation process becomes smooth. On the flip-side, if the relationships are strained, people and family members have animosity and feelings of win-lose or revenge, the whole process becomes arduous, long and painful.

What are the key elements of an effective and fast division process? 

When any family member makes the decision to separate, generally others make efforts to address the discomfort of separating member to avoid separation. If the reconciliation efforts fail, then everyone needs to recognise that it is in my interest to conclude the separation process fairly and quickly. It is important to understand here, meaning of the word ‘fair’. Being fair means doing unto others what we expect from them.

Family members need to recognize that separation process would require three key category of skills.

First is Facilitation Skills. Facilitation means the ability to understand feelings and needs of all concerned and helping them understand each other’s feelings and needs  and ability to find a solution that meets feelings and needs of all concerned to a reasonable extent.

The second category comprises accounting, tax, regulatory and structuring skills. These skills are necessary from the point of view of taxation and avoiding stress related to regulatory compliances.

The third skill is the ability to draw a legally binding agreement such that post settlement, no party is in a position to wriggle out of the agreement.

The next step would be to find a set of persons with required skill sets to facilitate this process. These persons could be relatives and existing or new advisors. Most of the families err in this step. The common mistakes made by them include having one or two advisors only. In the process they miss on one or more of the three key category of skills required.

Another common mistake made in this step is having a separate set of advisors. These separate advisors start working in protecting the interests of their client only and thereby, complicate and delay the process.

After this, the advisors should co-create with family members the detailed elements of the separation process and do a mock run of the same. For example, in a family that separated, the family members co-created and agreed to a process which including following three steps :

1. They listed down their businesses and companies (they had 5 businesses and 4 companies) and classified them under three groups. They assigned key personnel to specific businesses/companies, who would go with the business to the family member. They also listed down their non business assets.
2. They agreed on the details of the bidding process which included number of bidding rounds for each asset, interval between two rounds, defined a valid bid and discussed various bidding scenarios. Incidentally, by choosing the bidding process, they found a way out from the difficult question of valuation.
3. They agreed on the process of transfer of assets and payments. This included the date and modalities of transition, defining transition period, payment terms, non compete and cooling period.

After they had agreed on the process, they also went through a mock bidding exercise which brought in further clarity and refinement.

It is said – prevention is better than cure. One of the critical levers of avoiding destruction of value and relationships in family businesses is to have a clear separation/division policy. This ensures that family members are together by choice and not any compulsion. Also, it provides a fair and expeditious process of separation as and when required.

Having an Exit Policy in place even where there is no talk of exit is crucial. Also, where exit must be done, a common set of accounting, tax and legal advisors and a common facilitator is essential.

(The author is Managing Partner and BAF Consultants )