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Succession Plan for SMEs

, February 21, 2013, 0 Comments

The appointment of Mr Cyrus Mistry as successor for the Tata Group, after a search that lasted almost two years, highlights the importance placed on succession planning by well-run corporate. Small and Medium Enterprises (SMEs) also deserve the same degree of importance in succession planning and business continuity, but many entrepreneurs don’t take serious note of it. Progressive entrepreneurs who take up succession planning face several challenges in this endeavour, many of which are unique to SMEs in India. The most common ones are highlighted below.

GENERATION GAP

Businesses that are exciting for the first-generation entrepreneur may actually not be attractive enough for the next generation. For instance, an auto ancillary unit supplying to a reputed auto major may be a prestigious SME business 30 years ago, but it may not excite the current generation. Though equally enterprising, the next generation may want to try its hand at developing mobile application software or become a green energy company. Inducting natural heirs into the business early could provide entrepreneurs with necessary lead time to plan succession, either from within the family or through outside professional managers.

PROFESSIONAL TALENT

SME entrepreneurs are almost always involved hands-on in the day-to-day running of their business, resulting in concentration of decision-making powers. Attracting professional talent at senior management positions becomes a challenge in such a stifling environment, leaving little choice outside the family in the matter of succession planning. Concepts such as clear separation of ownership and management, delegation of decision-making powers, etc., that are still alien to many SME entrepreneurs, are important to attract professional talent, which can be helpful in business continuity, in the absence or unwillingness of the natural heir.

BUSINESS EXIT

Selling the business, either as a remunerative exit strategy or in the absence of a clear successor, is an acceptable evolution of a business in many developed markets. However, it is not even considered an acceptable solution among several older generation entrepreneurs in India. Social stigma in the business community, fear of getting branded as a failure, emotional attachment to the business, and genuine concern for the employees are the most common reasons for SME entrepreneurs not pursuing business exit as an acceptable proposition. Absence of an active platform or exchange for such transactions, and hence long time taken to conclude an exit adds to the reluctance.

Succession planning is a long-term exercise — be it inducting the next generation early, identifying strong professional talent to run or scouting for exit opportunities — that deserves the serious attention of any entrepreneur who has aspirations of leaving a legacy of the business that he has built with passion.

The author runs a boutique SME advisory firm, RiverBridge Investment Advisors Pvt. Ltd. focussed on assisting SMEs in fund-raising and strategic investments. The author can be reached at muthuraman@riverbridge.in






About author
N. Muthuraman is Co-founder and Director at RiverBridge Investment Advisors Pvt. Ltd. , a South India based advisory firm that focuses on assisting SMEs in raising private equity and in their strategic M&A transactions. Muthuraman is a former Director - Ratings at CRISIL Ltd . During his 12-year stint in CRISIL, he was responsible for developing criteria for credit rating as well as new products. more ...more