Family business: How to split without losing wealth

Synopsis If the next generation wants to preserve the family business bot not necessarily together, here’s how they can execute the split without impacting the wealth. Listen to this article in summarized format Listen Succession planning often assumes that the next generation will continue to run a family business together. But what happens when siblings have different ambitions, disagree over control or want independent financial lives? How can families plan for separation, divide wealth fairly and protect businesses from disputes? A Grant Thornton Bharat Entrust Family Office report titled ‘Custodians of Change’, released in October this year, drew on conversations with business families representing wealth ranging from Rs.100 crore to Rs.10,000 crore. It found that nearly 80% of custodians rated protecting family wealth and continuity as their top priority. It also found that 24% of the next-generation members feel less obliged to join or run the legacy business than their parents did. These two observations reflect a growing problem: while families are planning to preserve, an increasing share of the next generation may not want to preserve it together. A different question Succession planning, as conventionally understood, asks who will take over. “On the other hand, separation planning answers what happens when family members no longer want to run it together,” says Xerxes Antia, Partner at law firm BTG Advaya. Traditionally, the most common trigger for a family dispute was the death of the patriarch, with no clear plan in place. Increasingly, disputes are erupting during the lifetime of the family head—be it over the proposed distribution that some beneficiaries view as unequal, control of individual businesses within a group, or differences in business vision. “It’s worth noting that there is a growing trend of aggrieved family members actually taking steps to resolve their grievances, whether through litigation or mediation. In the past, an aggrieved family member may have chosen to remain silent, but members are no longer wary of seeking to assert their rights,” notes Antia. Aspirations within families are changing faster than succession plans can accommodate. Zeel Jambuwala, Co-founder and Partner at Aurtus, says parents often assume their children share similar ambitions for the family business. She suggests families ask direct questions before designing any structure: “Do you genuinely want to work in the family business? Do you want to manage a business, own it, or simply participate financially? Would you be comfortable owning businesses jointly with your siblings for the next 20 or 30 years? Would you prefer a smaller business that you control independently or a minority interest in a much larger family enterprise?” Where families stand on leadership transition What triggers setting up a family office Equal is not equitable The most persistent confusion in family business succession is between ‘equal’ and ‘equitable’. Families assume that fairness means an equal division of shares. Advisers say this is often where the problem begins. “Equality and fairness are not necessarily the same thing,” says Jambuwala, add ing, “An equal division of shares may appear fair, but it can create difficulties where one child is actively building the business, while another has chosen a different path. Equal voting rights can also create deadlocks and blur accountability.” The cleaner framework separates three questions that families routinely conflate: who owns the business, who manages and controls it, and who receives its economic benefits. These need not be the same person, or be divided in the same proportion. Kanchi Gandhi, Managing Director at Kotak Mahindra Trusteeship Services, explains that a family member can own shares without being involved in day-to day management, while a successor who controls the business may be given adequate decision-making authority without necessarily receiving a disproportionately large share of total family wealth. “The objective should not always be mathematically equal at the cost of commercial viability,” she says. “A business that is fragmented among multiple owners with competing interests may become difficult to manage and ultimately lose value for everyone.” A family trust, governed by a properly drafted deed, can separate these functions, preserving ownership continuity while distributing financial benefits differently, and giving management authority to the family member best equipped to exercise it. The family’s wider asset pool, real estate, investment portfolios, other businesses and legacy assets can also be used to achieve balance without fragmenting any single operating enterprise. One question deserves early attention: if one sibling grows a business substantially over a decade, while another manages a slower growing asset, how should a family treat the incremental value? Jambuwala says this conversation is far easier before the gap opens. “It is much easier to agree on what is fair before one business is worth several times the other,” she says. The price of parting The financial mechanics of separation are often harder than the family conversation that precedes them. Most family wealth in India is locked in operating businesses, property and other illiquid assets. When a split becomes necessary, neither branch typically has the cash to buy out the other. Valuation, the necessary first step, is itself contested territory. Gandhi cautions that a single valuation date may not capture fairness when one party is receiving a fast-growing business while the other receives stable assets of the same present value. The person inheriting the business also inherits its execution risk, its obligations to employees and customers, and its dependence on capital. Mechanisms that go beyond a one-time division can help: deferred payments, peri odic valuation resets, contingent payments tied to a future liquidity event, or internal buyouts structured over time. Manjit Bhimajiani, Associate Partner at Dhruva Advisors, notes that the real challenge is slicing the pie carefully. “The obvious solutions can be expensive. Selling a business or non-core assets may trigger capital gains tax. Taking money out of a company may affect its growth and working capital, while raising additional debt could put pressure on the business.” One option is to raise funds at the promoter or holding company level rather than burdening the operating businesses. Families can also explore demergers, share swaps between branches or the allocation of different businesses to separate family branches. “The real challenge isn’t dividing the pie but slicing it carefully without losing a portion of it to tax,” says Bhimajiani. Antia adds a point of caution: layered ownership structures can make valuation more difficult. “The more complex the structures, or the greater the number of business entities that have to be divided, the greater the probability of a family dispute, as valuation is more an art than an absolute science.” When interests don’t align, keep in mind... *Ownership mapping Identify who owns what. *Independent valuation Value businesses and assets fairly. *Legal documentation Align wills, trusts and agreements. *Tax assessment Evaluate tax and stamp duty. *Business continuity Protect employees and operations. *Stakeholder protection Consider lenders and investors. *Exit arrangements De ne buyouts and exit rights. *Dispute resolution Agree on mediation and arbitration. Build the legal structure early Once families agree on what and how they want to divide, the arrangement must be reduced to enforceable documents. This is where many settlements unravel—not because the family lacked goodwill, but because the documents are inconsistent, incomplete or untested. Anoj Menon, Senior Partner at Desai & Diwanji, says the best time to build these structures is while the founder is still ac tive.