Business Succession Planning Prepared By : CA Gaurisa Sonkia Presented By : CA Ravi Mamodiya
Before We Start Let’s bring some clarity about the importance of today’s session in terms of : ➔ WHY should we talk about Succession? ➔ WHAT is the importance of Succession Planning in our practice/ profession? ➔ HOW will it help us to move towards Growth? ➔ What shall be the COVERAGE under this topic? @CARAVIMAMODIYA
In this session you will learn: ➔ What is Business Succession Planning? ➔ Why does Business require Succession Planning? ➔ How to Start the Process? ➔ When is the actual Need? And ➔ Basic Understanding of the Laws and Regulations around it. (Succession Laws) Agenda For Today’s Webinar @CARAVIMAMODIYA
The Thadi wala outside every Corporate building Succession for CXO working in Corporates: CXO level positions cannot be passed on to the next generations Succession for Thadi wala: Can be planned and passed on to the next generations Succession of Corporates : Live Examples of Planned succession. @CARAVIMAMODIYA
Here is a story of my favorite Chaiwala in Jaipur! @CARAVIMAMODIYA
In Hindu mythology, Vishnu is frequently represented by two animals: Despite of being successful, do you really know the art of passing on the business? The ‘Sarp’ View The ‘Garud’ View Replace my Thaggu ke Laddu @CARAVIMAMODIYA
If your thought is different than Thaggu then @CARAVIMAMODIYA
What is Succession? @CARAVIMAMODIYA
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Meaning of Succession Succession planning is nothing but the smooth transition of business from one leader to another, that can be within family or outside family so that the business continuity can be planned in a proper systematic way. In our life, Death is the only certain reality but nobody is comfortable talking about it. Although we cannot change this reality but all we can do is plan for the same and take the calculative risk.
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1. Family Succession Planning
Business Succession planning is a strategy for passing on leadership roles—often the ownership of a company—to an ideal successor. It is a series of logistical and financial decisions about who will take over your business upon retirement, death, or disability. Also known as "replacement planning," it ensures that businesses continue to run smoothly after a company's most important people move on to new opportunities, retire, or pass away.
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2. Business Succession Planning
Types of Succession Planning
Succession Planning in an ongoing process, which needs careful planning and preparation for smooth transition of ownership, leadership and management of the family business and family assets to the future successive generations.
Why Succession Planning? @CARAVIMAMODIYA
Why we should talk on this ? Saving and growth of the estate - Wealth Creation In our life, Death is the only certain reality but nobody is comfortable talking about it Keeping the Family Values intactLegacyIdentifyingBoundEmployeesKey Finding the right successor Providing better and fair Career Opportunities Tax PlanningAligning Individual aspirations with Business Long term strategic thinking @CARAVIMAMODIYA
Planned V/s Unplanned Transition ➔ Planned Transition reduces revenue spent on Capital employed by 14% ➔ Planned Transition leads to 28% increase in Market Capitalization ➔ Planned Transition increases company’s EBITDA by 5% @CARAVIMAMODIYA
When should Succession Planning be done? @CARAVIMAMODIYA
There's a popular Chinese proverb that says: Succession planning should begin anywhere from 10 to 15 years before you plan your retirement. “The best time to plant a tree was 20 years ago. The second best time is now.” @CARAVIMAMODIYA
Business Life Cycle Just as there is a human life cycle, most business owners fail to understand that there is also a business life cycle 1. It begins with the Conceptual/Idea stage, 2. then the actual Startup period. 3. Next comes the Growth phase 4. followed by the Well-established Maturing years 5. and finally the Exit or Retirement phase. The most common mistake most business owners make is that they don’t plan far enough in advance for the exit phase. @CARAVIMAMODIYA
How to Start the Process of Succession Planning? @CARAVIMAMODIYA
5 Step Approach @CARAVIMAMODIYA
Crystal Clear Clarity Focus Energy Results
Purpose - Purpose is the reason, or the why behind what you do, primarily for others, i.e, “do what contributes"
Goal - Goals are the broad primary outcomes towards which effort and actions are directed in an organisation.
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Vision A vision statement focuses on tomorrow and what an organization wants to ultimately become.
Owner’s Vision
Mission A mission statement focuses on today and what an organization does to achieve it
Passion - Passion is about emotions, motivation and what makes you feel good, i.e. “do what you love”
➔ Need a proper Business plan with yearly goals and quarterly targets ➔ Organization Chart and Responsibility Matrix ➔ Team aligned with the Vision of the organization ➔ System oriented company Owner’s Vision @CARAVIMAMODIYA
Family Constitution ➔ Family Council - Formed by Core Representatives ➔ Family Assembly - Hold regular meetings ➔ Family Association Exclusive meetings ➔ Family Fund - Mini Bank ➔ Family Office - Employs CXO level employees THE CONTENT OF FAMILY CONSTITUTION SUCCESSION IN BUSINESS & OWNERSHIPCHARITABLE CONTRIBUTION OF FAMILYTHE FAMILY MEMBERS EMPLOYMENT EDUCATION OF MEMBERSFAMILY FAMILY INSTITUTIONS VALUESFAMILY @CARAVIMAMODIYA
Alignment of Family and Business : Three Circle Model
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The Management circle: It represents the interaction/impact that the management has on the family and on the ownership of the business.
● The ownership circle: This is similar to the management circle and is common to all businesses. It represents the interaction/impact that the owners have on the family and on the management of the business.
● The family circle: This circle determines the interaction/impact that the family has on the management and ownership of the business. It is unique to the family business and differentiates from its non family business counterparts.
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Alignment of family and business : Parallel Planning Process @CARAVIMAMODIYA
Successor Identification & Grooming ➔ Leadership (The Four Profiles) 1. The “Boss” 2. The person others want to work with 3. The highly productive team Lead 4. The Empowering Lead ➔ Three step Model 1. Assessment 2. Management 3. Grooming ➔ Continuing the Succession Process (Basic to Comprehensive) @CARAVIMAMODIYA
Grooming Education Coaching Mentoring Experiential Learning @CARAVIMAMODIYA
Some more Interesting Points… @CARAVIMAMODIYA
Documentation Documentation at every level plays an important role in this complete scenario and steps of this succession planning ➔ Family Values/ Core Values ➔ Family Structure/ Organisation Structure ➔ Legacy Statement ➔ Vision Statement ➔ Family Constitution ➔ Contingency Plan ➔ Estate Planning ➔ Will @CARAVIMAMODIYA
Open Mindedness To align on the same page while planning for Succession, it is very crucial to keep an Open Mind ➔ Be radically open minded to understand others opinion ➔ Be open to be able to view Your truth and Real truth ➔ Be open to accept others truth as well. @CARAVIMAMODIYA
Retirement & Exit Strategy A business owner should be thinking about a succession plan 10 15 years before their exit. In general, a succession plan should be in place to protect a company against the unexpected death of the owner, no matter how old they are. There are some business exit methods: ➔ Selling the business ➔ Passing the business to another family member ➔ Management buyouts and Employee buyouts ➔ Takeover and phased exit @CARAVIMAMODIYA
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Basic Understanding of Laws and Regulations of Succession And now comes to the interesting part (only for CA’s and Lawyer’s here) @CARAVIMAMODIYA
Succession Law Person Dies No Will - Intestate Hindu,Jain,Sikh Parsi,Christian,Jewetc Muslim With a will - Testamentary Parsi,Christian,Hindu,Sikh, Jew, Jain Muslim SuccessionHinduAct SuccessionIndianAct Shariat Law SuccessionIndian Act Shariat Law @CARAVIMAMODIYA
Domicile is relevant to determine which country’s law should apply? ➔ Succession to Immovable Property in India ~ governed by Indian Law irrespective of domicile. ➔ Succession to Movable Property in India ~ based on domicile of deceased at the time of death
Intestate Law & Domicile @CARAVIMAMODIYA
A person domiciled in France dies leaving behind land in India and movables in UK. The law of India would apply to the succession of the land and the rest would be as per British Law.
For Example :
Intestate Hindu Male Male Hindu Demise Without a Will Class I Heirs ClassHeirsII Agnates Cognates Order of SuccessionOrder of Succession @CARAVIMAMODIYA
Intestate Male ➔ Class 1 Legal Heirs : Son, Daughter, Mother, Widow, Child of predeceased Child, Widowed Daughter In Law, Child of predeceased son of predeceased son. ➔ If No class I, then up Class II Legal Heirs Father, Siblings, Grandparents, Parents siblings, etc ➔ If no Class II, then Agnates Related Wholly through Males ➔ Lastly upon Cognates Related Not Wholly through Males @CARAVIMAMODIYA
Intestate Hindu Female Female Hindu Without a Will Daughter,Son,Husband Heirs Husbandof Parents Heirs Fatherof Heirs Motherof Order of SuccessionOrder of Succession @CARAVIMAMODIYA
Make a will - Testamentary If a person dies after making a Will, then in that case the assets are distributed to the persons as mentioned in a will. But do you know what exactly is a Will? Testamentary Succession @CARAVIMAMODIYA
What is a Will? A Will is a legal declaration of the intention, wish or desire of a person as regards to the disposition of his property post his death. ➔ A will details out the manner in which a person’s estate should be distributed ➔ A Will taken into effect only after the death of the Testator ➔ A will can be revoked at any time and any number of times by the testator in his lifetime ➔ Speaks from the Grave @CARAVIMAMODIYA
Why make a Will? ➔ Provides complete discretion on distribution of property after death to the people of your choice ➔ Reduces succession disputes ➔ Good way to reward someone by willing a part of your wealth to him post your death ➔ Better to make a will at an early age due to uncertainty of life as there is ➔ No limit on number of revisions to a will @CARAVIMAMODIYA
Who can Make a Will? ➔ Any Major Person of a Sound Mind ●Male ●Female ➔ Illiterate ➔ Terminally ill ➔ Very old person ➔ Married Woman ➔ An intoxicated person / one who does not understand what he is doing :- Cannot make a will @CARAVIMAMODIYA
How to Make a Will? A Will may be handwritten or typed and must be ➔ Signed/ thumb marked by the Testator ➔ Signed by 2 Witnesses ➔ Properly Dated ➔ Exception - Oral will - Only for Muslims/Soldiers ➔ Designate Legatees/ Beneficiaries A Will is not required to be ➔ Stamped ➔ Registered ➔ No legal format is prescribed A will may have ➔ Executors appointed ➔ As Detailed as possible @CARAVIMAMODIYA
Who can be a Beneficiary / Legatee? ➔ Any one? YES ➔ Relative/ Friend/ Employee/ Servant? YES ➔ CA / Lawyer? YES ➔ Can it be a Stranger to the Testator? EvenYESME ➔ Can Pets be made a Legatee under a Will? YES Let’s consider Pets’ Trust ●Karl Lager field’s cat would inherit US$380 million or Rs. 2,700 cr.! @CARAVIMAMODIYA
Who can be an Executor? ➔ Executor to the will is the one who puts the Will into action ➔ Selection Criteria for an Executor: ●Someone close to testator ●Should be willing to be an executor ●Better to check with him beforehand ●Advisable that he is younger ➔ Duties of an Executor ●Provides for all funeral expenses of the testator ●Pays off all debts ➔ If not appointed Who would administer the Will? @CARAVIMAMODIYA
Who should be Witnesses to the Will? ➔ Will should be attested by 2 or more witnesses ➔ Witness should have seen the testator sign/affix mark ➔ Must receive a personal acknowledgement of the testator’s signature ➔ Need not know contents of will ➔ Can Witness also be a Beneficiary? ◆ Yes,Can be as per Hindu Succession Law but advisable not to have. But applicable to those only in which HSA applies. ➔ Can Witness also be an Executor? ◆ Yes Witness can be Executor @CARAVIMAMODIYA
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The Property shall be disposed off to the legal heir mentioned in the Will and not to the Nominee in case there is no will then Hindu Succession Act will prevail Nominee is just the stop GAP arrangement. Nomination or Joint Holding Prevails over Will?
A Nominee is not the owner of the property but rather just a Custodian of the property
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A Nominee is someone who will receive the assets upon the death of the owner/holder
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Hindu Undivided Family (HUF) ➔ A HUF Consists of lineal male descendants from a common ancestor and their wives. ➔ Any person born in the family male or female will become the member of the HUF. ➔ Post Death of any member he ceases to be the member of HUF. ➔ A Son is not a must for an HUF ➔ Can daughter become the member of the HUF ❏ Gowli Buddana v CIT (SC)
A male, his wife and daughter can also create HUF We need two Coparcener that why a Husband and wife can not create an HUF
Daughter’s Right ➔ Amendment in 2005 – 9th Sept 2005; introduced in Central Act ➔ Daughter of a coparcener shall: ◆ by birth become a coparcener in her own right as a son; ◆ have same rights in HUF as a son; ◆ be subject to same liabilities in respect of HUF property ◆ have a share equal to a Son ➔ Ram Belas Singh vs Uttamraj Singh (Pat) Definition of Coparcener now includes a Daughter also ➔ Ganduri Koteshwaramma vs Chakiri Yanadi (SC) Daughters share in ancestral property as if she was a coparcener / son @CARAVIMAMODIYA
Does 2005 amended section apply to: ➔ Daughters born after 9.9.2005? ➔ Daughters married after this date? ➔ All daughters, married or unmarried, but living as on this date? ➔ Is Act Prospective or Retrospective? ➔ Daughters born before HSA 1956 Act? ➔ Prakash v Phulvanti (SC) Combination of the Daughter and Father should alive as on 9.9.2005 and the partition of HUF has not happened. ➔ Dhanama V Amar (SC) (3 Judge) - Said that a daughter must be alive and the partition of HUF has not happened before 9.9.2005. Hindu Succession Amendment Act, 2005 @CARAVIMAMODIYA
Females as Karta? ➔ Can Daughters now become Coparcener / Karta in her father’s HUF? ◆ Sujata Sharma v Manu Gupta Yes, Post this amendment in the daughter’s right she is a coparcener in the father’s HUF ➔ Can Wife Now be a Karta in Husband’s HUF? No, as wife is not the Coparcener so, she can not become the Karta in Husband's HUF ➔ Can wife ask for the partition of the HUF? No, as only coparcener can ask for the partition of the HUF @CARAVIMAMODIYA
Females as Karta? ➔ Can Widow claim partition of her deceased husband’s HUF Yes, In this special case she can ask for the partition for claiming his rightful share in that HUF ➔ What if there is a family of 3, Father, mother and son. Father dies and son is minor, then who would be the Karta - Shreya Vidyarthi (SC)◆ Difference between Karta and Manager @CARAVIMAMODIYA
What is Ancestral property? ➔ Any property inherited from 3 generations above of male lineage ~ father, grandfather, great grandfather. ➔ Son, grandson and great grandson of a Hindu all have an automatic right in ancestral property ~ deemed to be joint property – Babu Kishva Nandan (PC) ➔ COMMON View ~ Ancestral Property CANNOT be alienated ◆ Person cannot transfer ancestral property otherwise than to his children. He cannot Will it away to any one @CARAVIMAMODIYA
Ancestral property ➔ CORRECT View ~ Ancestral Property CAN be alienated ◆ Section 8 of Hindu Succession Act has modified Old Customs and Traditions ➔ Yudhishter v Ashok Kumar (SC) – property devolving on a person on demise of his father would become his self owned ➔ Uttam v Saubhag Singh (SC) ~ Once joint property has been distributed it ceases to be joint and becomes solely held ➔ Surender Kumar (Del) ~ After HSA, for person inheriting property from paternal ancestors, property is not ancestral in his hands but is to be taken as his self-acquired property @CARAVIMAMODIYA
Ancestral property ❏ 2 Recent SC Views: ➢ Can be alienated Arshnoor Singh (SC) –Old law applies only if succession prior to 1956 date of HSA else self acquired property ➢ Cannot be alienated Doddamuniyappa v Muniswamy (SC) – ignored all earlier SC decisions and upheld that ancestral property cannot be alienated @CARAVIMAMODIYA
➔ Succession or Estate planning is meant only for the Rich or Old people ◆ Even a Thadi Wala can plan for Succession ➔ Succession Planning is about retirement, and I’m not ready to retire ◆ Retirement is the last stage of Succession Planning ➔ I have registered my nominee(s); they will be beneficiaries of my assets ◆ Nominee is just a Custodian of the Assets ➔ Giving up ownership means giving up control and income ◆ Through Proper Succession planning, the retirement era can be planned properly Myths on Succession @CARAVIMAMODIYA
➔ There is no effect on my business profit even if I am not prepared for transferring the business to next generation ◆ The study of BCG clearly specifies that a Planned Transition effects or gives a very positive response by the stakeholders of the company ➔ There is no Connection between my Family Values and Business Culture ◆ Parallel Planning Process has clarified this myth ➔ Only way of grooming successor is Education and Experiential Learning ◆ We have seen above various ways of Grooming of successor including Coaching and Mentoring ➔ Verbal communication and Discussion is enough and there is no need of creating any written document ◆ The importance of Family Constitution and other Documents says it otherwise Myths on Succession @CARAVIMAMODIYA
One More Myth We believe we don’t need any Professional Advice for planning Succession After seeing the 5 step Approach for succession planning and integrity of Law makes it clear that we do need a Professional Advice @CARAVIMAMODIYA
One More Myth My elder son is the only option to become my successor The Capable one shall be the Successor @CARAVIMAMODIYA
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