How to tackle a split in the family business

If a split in a family business has to happen, then it must be for the larger good of creating wealth for all stakeholders

By Hiten Muchhala

Published: Sep 24, 2020 10:19:19 AM IST

Updated: Sep 24, 2020 10:53:35 AM IST

Infographic: Sameer Pawar

A business—whether family managed or professional—is a result of collective behaviour and wisdom. While the first generation is typically an entrepreneur who has an idea and starts a business, the second generation, in contrast, grows under the shadow of the patriarch/matriarch, learning tricks of the trade, understanding wisdom, and values. Gradually, business growth creates enough space for the second generation which identifies and occupies its position. As the family tree expands faster with the addition of the third generation, aspirations, ideas and thoughts on managing business starts to differ. The values and virtues of the founder are diluted over time and business growth fails to match with the growth of the family tree. Third generation family members occupy positions and areas they are not much excited about. Frustration starts to build.

It is often said that everything starts from the top and so are the problems. The generation in charge has a choice to either be reactive or pro-active to this changed reality. Strangely, the path adapted most often is of being non-active—in better words, ignoring. The idea to remain united in business is assumed to be of greater significance than the changed behavioural demands. The differing ambitions and aspirations of the incoming generation on taking the business forward are brushed under the carpet.

Problems start to boil at faster pace with the entry of the fourth generation by which time the family tree has grown far beyond the business. The old ways of thinking, inability to adapt technological changes and the rising pressures of globalisation start to prevent business growth. The demand for splitting the venture takes roots within the family. Frustration reaches to a boiling point and family members become warriors.

Are business splits avoidable? They are if handled properly. Let’s take four scenarios and then examine what can avoid or precipitate a split.

1. Business growth: A rising tide lifts all boats. It’s ideal to have a business growth that matches or exceeds the growth of the family tree where every member finds his/her desired space and position. However, it is a wishful thinking as the external environment may not support such endeavours for all family businesses.

2. Remuneration structures: Family member remunerations are often fixed arbitrarily based on seniority ignoring the vital aspects of performance such as capabilities, achievements, talent. A remuneration structure commensurate with performance brings a sense of recognition and motivation.

3. Withdrawals and personal spends: All family members should well understand whether business serves family or family serves business? Most family businesses lack this clarity and assume that it’s their business that serves them. This leads to unrealistic withdrawal of money for personal spends. A family should serve business and not to treat the business as a financier to satisfy personal aspirations. These are strong seeds of inequality, anger and frustrations. A clear financial structure on what one can and cannot do can avoid splits.

4. Differing views on growing business: This is by far the most delicate and tough to handle. Most family business lack rational structures on reviewing and deliberating on new ideas and plans. Decisions are arbitrarily taken by seniors and imposed upon the incoming generation.

However, despite all efforts, business split becomes imminent over time and generations and brings along animosity between family members. The most important questions are: If business split is an inevitable bitter truth, can such acrimony be avoided? Can family bonding exist even when the business splits? Definitely. There are ample examples. Let’s take the case of Bajaj Group.

Bajaj Auto, managed by the patriarch Rahul Bajaj, housed the famous automobile manufacturing along with the relatively smaller but high potential vehicle financing business. One son Rajiv was in charge of the vehicle manufacturing, engineering & sales and the other son Sanjiv was looking after finance and vehicle exports with differing personalities and ideas of growing their family business. Before trouble could brew, Rahul took a bold move to demerge the business of fast growing vehicle finance from Bajaj Auto. The operational controls of the fledgling auto business went to Rajiv and that of the finance business to Sanjiv. Both businesses have flourished ever since and created immense wealth for the family and shareholders at the same time mitigating any scope of acrimony or animosity between the two brothers.

There is another example in Dabur. Vertical split of business like the Bajaj Group may not be possible with all businesses where the family tree is much bigger than what the business demands or the integrated nature of business. The Burman family realised this and decided to separate ownership from management. The Burmans decided to retain ownership and bring in professionals to run and manage the business which freed family members to move on to other areas of interests and pursuits. Today none of the new generation of Burmans get management entry into Dabur which is professionally run, and are encouraged to start their own entrepreneurial ventures. We find legacy family businesses like Marico and Pidilite following the path adapted by Dabur.

One more example is with the Shroffs of the Excel group. Starting with a single company, Excel Industries, as and when the family tree grew, the Shroffs created new business ventures under separate entities, thereby accommodating the family members with adequate growth opportunities. Most companies are listed. Today, combined together, the Shroffs have created immense wealth for themselves and all stakeholders with strong family bonds.

When family serves business and the business runs in the family, the interests of both need to be taken care of, and delicately balanced. It can’t be one at the cost of other. Split or united, family that means business stays in business.

The author is a professor of strategy at SP Jain School of Global Management, Mumbai, and teaches Global Family Managed Business-GFMB programme

(This story appears in the 25 September, 2020 issue of Forbes India. To visit our Archives, click here.)