Family businesses in India are at a crucial crossroads, as reliance on traditional sources of funding may no longer be sufficient to drive the next phase of growth. Many families are also navigating a generational transition where the next generation are either not yet ready or are not interested in the business and are choosing to pursue alternate career paths.
Access to capital often determines whether external funding becomes necessary. This need for capital coupled with uncertain leadership transitions are prompting family businesses to explore new avenues for growth and continuity, such as private equity or public market listings. In cases where the next generation are not inclined to run the enterprise, promoters are increasingly open to monetising their interests, either partially or fully. The proceeds are then deployed in a family office, to diversify investments or support the next generation's interests.
Monetising the business and preserving family control need not be at opposite ends of the spectrum. As per Barclays and Hurun's recent report, approximately 70% of the 300 most valuable family-controlled businesses in India are publicly listed, indicating that families can access external capital while still retaining strategic control. With the right strategy and structure, families can strike a delicate balance of unlocking value while continuing to preserve their legacy and influence.
Getting Investor or IPO ready
Family businesses can take a four-pronged approach to attract private equity investors or when preparing for an IPO.
- Strategic alignment and mindset: Investor or IPO readiness begins with mindset. The family, including the next generation, must be aligned with the shift that external capital brings, from privacy and autonomy to transparency and accountability. Adapting an adage, "we do not inherit the earth from our ancestors; we borrow it from our children" and applying it in context of the family business, the second generation of a family enterprise consciously left the decision of pursuing external funding to the next generation, thereby empowering them to shape its future.
- Family governance: External fundraise encourages family-run businesses to formalise governance by articulating the family's role in the business. This minimises conflicts and deepens investor conviction. In one instance, investors formally mandated a business with multiple stakeholders and cross-holdings to adopt a family constitution and streamline ownership through trust structures to ensure clear governance and succession mechanism.
- Separating ownership and management: External investors encourage family businesses to delineate ownership from management, where leadership roles are based on capability, rather than lineage. While family members can stay involved, competence and alignment with the shared vision should take precedence. Promoters must also respect governance frameworks and empower professionals. Instances where promoters have resumed operational control after the exit of a professional CEO have been viewed negatively by the markets, as it signals weak governance discipline. Strengthening the board with independent directors for strategic guidance is also critical to ensure sustained growth.
- Operational and financial governance: Setting the “house in order” ahead of a fundraise or IPO lays the foundation for long-term success. Transparency, improving financial and operational efficiencies and robust internal controls helps foster discipline across the organisation. Investors, in turn, bring tested governance frameworks and their ability to ask the right questions helps elevate governance standards and contributes to long-term value creation.
For family-owned business groups, the best practices can also be extended to the larger group. When one entity raises capital, the practices and discipline instilled in that business can be translated and adopted across other businesses. This not only improves efficiencies and decision-making but also helps in scaling sustainably, building competitiveness and preserving legacy for generations.
"If you want to go fast, go alone. If you want to go far, go together"
Preparing a family business for external funding is not merely a financial exercise, it represents a change in mindset and organisational transformation. It requires families to evolve their relationship with the business, moving from a closely held enterprise to one built on shared ownership and collaboration. Partnering with investors does not mean loss of family control, rather it is an opportunity to preserve and extend the family's legacy, influence and values. The discipline and strategic perspective that investors bring enhances governance standards, strengthens leadership and ultimately increases shareholder value.
The article has been authored by Ganesh Prasad, partner, and Akshika Harikrishnan, director at Khaitan & Co.
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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