One of our clients was in his mid-40s. Suddenly, one day we heard that he was no more. His family was understandably shattered, but not just emotionally, they were also affected at a business level. So what went wrong?
- He was handling all business functions.
- Nobody in his family knew about the business as it was handled by him.
- His investments were not structured and not known to his spouse.
- His competitors were attacking his business as there was no second in command to handle it in his absence.
Another gentleman known to us socially in his late fifties got a paralytic attack. The business had to be handed to one of his employees who started another business. His family was not able to manage the business even at a basic level. Fortunately he had some assets outside of the business which helps them to this day to live their life in an orderly manner.
What are the lessons learnt from this?
1. Know your family business
Every family is unique and has its own challenges. The most fundamental challenge is to reduce the attitude of not paying attention to key details like:
- Key business associates
- Key buyers
- Cash flow cycle of the industry
- Banking relationships
- Key personnel
How does this help?
In a crisis this knowledge helps to connect the dots faster and build a solution with the team. Problem in situation 2 was a lifestyle business where there was overdependence on one particular executive.
One family we know has created an informal family council which meets every week to discuss business opportunities and challenges. This helps them stay updated and decisions are taken in a more informed and cohesive manner. This acts like a Board with adequate skin in the game. One of the other things they do is pay a similar interest to directors as paid to banks who lend to the business if needed. It is more useful if it is difficult to raise external capital.
Also many evolved businesses do not sign personal guarantees at a promoter level to reduce their business risk. If a promoter guarantee is there, all assets in the name of the promoter can be attached in the event of a default. Hence it is advisable to keep this out of collateral related discussions with stakeholders.
2. Learn about business and personal finances
One of our clients is a woman director. She manages the accounting and banking relationships of the business.
One of the primary problems of a family business is that 100 per cent of the money is reinvested in the business may be good for initial years of your business, however, at a later stage you are bound to feel unhappy if you are not living the life you want.
One of our clients invests a certain amount through SIPs to keep some money outside the business. This separates personal finances from business finances.
Knowledge of existing investments made is critical for a happy financial future. Seventy per cent of our worries are financial. This knowledge reduces the worries to a large extent.
One of the more effective ways is to learn about new investment ideas and opportunities. One could start by reading financial journals.
If a business is of volatile nature, we recommend policies only under Married Women’s Property Act (MWPA). Once a policy is taken under MWPA, nobody but the government can touch it, and only for reasons of non-payment of taxes. This ensures stability of capital at a family level. Another good option is adding to PPF which enjoys a similar benefit like policies under MWPA.
3. Build a skill
Sometimes on account of external or internal factors it may not be possible to grow the business or continue the business. In those scenarios one can develop another skill and collaborate with like-minded people within the business/social circles one is active in.
It could be a hobby which has not been pursued, a passion which has not yet been shaped into a profession, the possibilities are endless.
One of our associates started another business when the core family business was slowing down. This has now become the main business. The idea is to convert insecurity into security through proper planning. Planning mechanisms makes transitions easier.
Plan for the future, thrive well!