Sunday, November 27, 2011

Sucession Planning - Challenges for SMEs

SMEs face challenges in Succession and Business Continuity
The recent 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 corporates.  Small and Medium Enterprises (SMEs) also deserve the same degree of importance in succession planning and business continuity, that many entrepreneurs do not take serious note of. 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 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 back, but it may not excite the current generation. Though equally enterprising, the nextgen may want to try its hand at developing mobile application software or a green energy company. Inducting natural heirs into the business early could provide entrepreneurs with necessary lead time to plan succession, either from within family or through outside professional managers.
Attracting 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 position becomes a challenge in such a stifling environment, leaving little choice outside 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 who can be help in business continuity, in the absence or unwillingness of 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 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 next generation early, identify strong professional talent to run or scouting for exit opportunities – that deserves serious attention of any entrepreneur who has aspirations of leaving a legacy of the business that he has built with passion. 
N. Muthuraman is Co-founder of RiverBridge Investment Advisors Pvt. Ltd., a boutique financial advisory firm and can be reached at muthuraman@riverbridge.in
This is the blog of the Print Version published in Business Line dated 28st Nov 2011 

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