Does your family own a business? Are you a student or young graduate eager to contribute to your family business in a big way? We can tell you some amazing things about how 2nd or 3rd generation entrepreneurs can make large-scale difference to a family business. The new generation can make or break it, and here are some things you can bring on the table that the older generation will absolutely love you for doing.
It is indeed a privilege if you are born in a business family. However, people who do not understand, think that you are lucky because you don’t have to worry about your future job. In reality, it is a huge pressure because you have to live up to the amazing success of your previous generation. However, you have a better idea than your friends about what your future may look like. You have time on your side. While everyone is busy running around trying to score jobs and holding them down, your privilege is that you can relentlessly train yourself so that when you join your family business, you can really take it forward to the next level.
So here is the big question. What should I learn so that I can make a noticeable and appreciable difference to my family business? At iPleaders, we have been lucky to observe many young people who had a family business background pursue our courses, especially Entrepreneurship Administration and Business Laws course and make remarkable contributions to their family businesses that completely changed the destiny of those businesses. Therefore, we had the fortune of seeing the development of some young scions of family businesses.
In this article, we will not only share some case studies regarding this but also tell you where you should aim to achieve this goal.
Before we go further, let me tell you a story of a student from the very first batch of the course. We cannot use her name as she has requested anonymity for the purpose of this article, as she does not want to come across as immodest to her family. She belongs to a family that has been exporting Lucknow Chikan works for more than 4 generations. Coming from a conservative background, getting herself a law degree was in itself a challenge. However, she managed to get one and to get a deeper perspective took up the Diploma course in Entrepreneurship Administration and Business Laws while she was in 3rd year of the law college. It was after taking up this course she realized that her family has been exporting the cloth through an exporter (middleman), who takes a significant cut just because he has an export license. She was able to get an export license directly in the name of her family business, cutting out the middleman. This meant a significant increase in the margins of profit. Although in her family women were previously not involved in the business much, now she is always consulted before important decisions. That is the power of knowing the law and regulations! What you can do with it when you have it I really cannot predict, but I cannot wait to see what happens.
A family business, however big or small can always be made better. Do you think Ambanis would have been successful enough had they just stuck to what Dhirubhai started? It’s all about value addition and adding a fresh perspective to what already exists. You can do it too. Here is a list of ideas you can help your family business with.
1# Help them with getting more capital
Can you imagine the kind of acceleration you can bring to the family business if you are able to raise a lot of capital? Every business needs more capital, but very few can actually access it. Capital can come in form or debt or investment. How will it be if you can help your family business to raise investments to expand further and faster? How about getting working capital loans at a very low-interest-rate? Can you ensure that the control of your family is not diluted, by an investment, by being vigilant about the paperwork?
The likeliness of business to grow significantly increases with more capital. However, raising capital for a family business is always a dilemma for most of the businessmen as they do not want any intervention in their business by a third party. Most of the family business does not accept private equity as private equity firms demand a certain stake in an exchange of the investment. In such a situation, is debt a better option? Or is equity an option at all?
As per a survey by PWC global, 76% of the family business owners said, “to grow significantly they would rely on their own capital, rather than relying on banks, external investors who might want a measure of control.” If your family business is running on the same orthodox mindset, how can you convince them to get external funding?
Shobana Kamineni, Vice Chairperson, Apollo Hospitals says, “We were one of the first Indian firms to get PE funding in the late ‘90s when India first opened up to foreign direct investment. But we thought about it carefully before we did it: we sat down as a family to discuss it because we knew things were going to change radically, and we’d have to be even more accountable, and willing to adapt. We also knew that PE works to a very different timescale to families: PE houses are looking for a quick return on their money.”
The above statement by Shobana has a great deal of insight to offer. First of all, you need to figure out the basic reason for which the funding is needed. Once you have figured that out, you need to figure out is it going to be patient funding or short term. You need to figure out whether you have a capital structure that can be accessed for future opportunities. Once you have figured that out, you need to figure out whether you want to go to the capital market or other private investment. As a legal advisor, you need to ensure that the terms of funding ensure that the source remains secure even if there is a change in the circumstances, both within the firm and outside market. You can also suggest PE funding from an investor who is backed up by family offices. These days a lot of family offices are interested to fund family businesses as these setups often meet PE investment criteria.
In fact, you might be in a position to negotiate the deal on behalf of your company, if you knew how to negotiate investment agreements or term loan agreements. Make sure that you know so much about these processes, terminology, and regulations, that you become the default person in the family who is approached for clarifications and help.
Just an idea for you here. You can actually include a buy/sell agreement where the PE firm can plan to exit using a predetermined timeline or an exit formula. This would ensure 100% control back to your family at a later point in time. In the end, you could actually find your family business and not compromise on the stake of your family in the business. All it would require is a partner which shares the same values as your family business.
Here are some courses that may be useful for you:
Investment law and institutional finance course – investment as well as loan from financial institutions
Due diligence process – due diligence will be conducted before every big investment or loan disbursal.
Corporate finance – knowledge of how the finance world works can be advantageous to a family business.
How to negotiate a term sheet for entrepreneurs – before any PE investment they first give you a term sheet. Negotiating it well is a critical task.
Foreign direct investment course – a specialized course on how FDI works and regulations.
How to list your company is foreign stock exchanges – This is for companies looking to go public.
2# Could you make more money from import/export?
If your family business is already into importing/exporting, great. If they are not, you may want to explore if there are export-import opportunities. Import and export can lead to new revenue generation and reduction in costs. Imports are important to procure goods that are either not available in India or are comparatively cheaper in other countries. Importing goods could add quality and variety to your family business and can be an effective cost-cutting/investment technique. Exports, on the other hand, is tapping into an altogether new geographical area which can add significantly to the scale of business and eventually profits. However, do you know all the compliances or requirements that you need to have in place for starting to import or export? Can you guide your family on it?
The very first thing you need for getting into import/export business is an Import Export Code (IEC) issued. IEC is required in all the cases of import/export except if your business falls under the list of prohibited goods/services. It is actually pretty easy to get an IEC registered. All you need to do is go and register on DGFT website and apply for IEC with the following documents :
- Company’s/Personal PAN Card
- Photograph of the applicant
- Copy of canceled cheque from the current account.
After obtaining the import/export certificate you need to apply for Registration Cum Membership Certificate (RCMC) from the concerned Export Promotion Council for getting authorization to import/export or any other benefits. The best part about the process is, it is hassle-free and takes maximum a week to get this authorization. Once this is done, you can freely import/export your good unless it falls under restricted, prohibited or state trading enterprises. However, you need to also ensure that you are well acquainted with various kinds of duty that are levied on such import/export and the process of valuation for the same. There are also a lot of regulations and procedures, knowing which will provide you with a serious advantage in exim business. You can rapidly gain practical knowledge about exim laws and regulations by taking up courses like these which can enable you to know much more about making your family business truly global.
3# Can you recommend franchising as an option?
In 1940, Richard and Maurice opened a small drive-in cafe in San Bernardino, California. This family business offered a 25-item menu. While they were doing sufficient for themselves, they decided to close down and opened 8 years later, with a changed and cheaper menu and faster delivery. Neil Phoenix, walked into the store and liked the concept and decided to become its first franchise owner at $1,000 dollars. In 1954 another milkshake machine salesman appeared on board, and said to himself, “this idea can be sold anywhere, anywhere.” This led to him taking the business franchising rights and the current restaurant has more than 31,000 franchises in 119 countries. The family business, now a fast food franchising giant is none other than McDonalds.
You don’t have to be a fast food supplier or a garment or cosmetic supplier to be able to franchise. You can practically franchise almost any business that has a good reputation or remarkable core product. Major brands like Kidzee, Delhi Public School, Dr. Lal’s Path Lab, Subway, Nike, Adidas are examples of franchise businesses. It is actually a simple yet very effective process to expand your organization and profits.
The very first requirement for expanding yourself is a registered trademark, under which your business would run. Once the trademark is registered, you need to simply execute written franchise agreements covering all important aspects of the business.
Imagine you enter into a franchise agreement and the franchisee after learning your practices, your trade secrets and organizational structure decide to exit the franchise and start something of his own. Will that not be a total betrayal and a loss of revenues? What if the franchisee starts to underreport revenues so that you get less money? What if they start providing services of pathetic quality and damage your brand as a result? A well drafted and properly negotiated franchise agreement can save you from all those hurdles. A classic franchise agreement should necessarily include the following clauses :
- Proprietary marks or trademarks the franchisee can use
- Licenses or permissions the franchisee must obtain or can use from the franchisor
- Operation standards
- Quality standards
- Training and assistance from the franchisor and its use.
- Consideration for granting franchisee
- Franchise license fee
- Marketing assistance from Franchisor and its use.
- Products or Services that can be offered by the Franchisee
- Franchisee obligations
- Franchisor obligations
- Terms of the franchise agreement
- Tenure of the franchise agreement
- Non-compete clause
- Non-disclosure clause
The Entrepreneurship Administration and Business Laws course in the best place to learn the skills you will need to successfully run and grow a franchise model business.
4# Most businesses can gain massive competitive advantage by entering into better contracts
Contracts have a very important role to play in any organization. Small family businesses generally run on goodwill and rapport with its vendors or clients. In many situations, these businesses suffer massively, in case one of the parties denies his duty. A friend who runs a printing business in Bhopal entered into a business deal to print material worth 10 lakhs. He started the printing work on the assurance that payment shall be done once the assignment is complete. However, mid-way he was told to discontinue the assignment. He could not claim any compensation in absence of a contract.
Imagine, what power you can hold by executing a contract which will bind the other party and they can’t escape by twisting the terms. The best part about implementing a contract is that you have all the terms in black and white and once the agreement is signed and entered into, no one can deny those terms, make false claims, allege wrong facts or put new obligations on you, provided that the contract is well drafted.
In India, many people don’t think contracts are useful because it can take a lot of time and money to enforce a contract which often does not make sense practically. However, with the advent of technology and business now you have really amazing solutions like justiceinsitute.in and xjudges.com where you can start an arbitration online at a minimum cost and very little time. The threat of enforcement itself often helps to prevent a breach of contract. You can practically protect yourself from a plethora of issues like labor and employee, IP protection, competition, and non-disclosure etc. by entering into well-drafted contracts that can be enforced with low-cost thanks to online arbitration.
Remember, a contract is the biggest tool in the hands of the business. Can you be the master of perfecting the art to use it? Even Steve Jobs said that every modern man must learn how to read a contract. This is definitely true about every modern business person or even a professional.
You can also opt for this course of Arbitration.
5# Improve compliances and licenses
Did you know that companies with better corporate governance and compliance regime receive a premium on the stock exchange because investors prefer such stocks? Such companies are less risky, whether private or public. You can help your family business to develop a strong culture of corporate governance and compliance. Your business should have access to a comprehensive list of laws and regulations that apply to you so that you can identify ahead of time all the troubles that your business might get into. Also, a good idea will be to create a compliance handbook. Isn’t prevention better than cure? Here are some of the facts that can blow your mind :
- Every 2nd business receives an Income Tax Notice for non-compliance.
- 3 out of 7 companies find a place in the defaulters’ list of ROC for non-compliances.
- India is the 7th most non-compliant country in the world.
A case study by Taxmantra recounts how a company which was incorporated in 2007, incurred a huge liability of 80,000-90,000 by simply forgetting to file financial statements with the ROC, which could have been easily done in Rs. 900 per year on timely submissions. Can you help your family business with compliance? Here is a list of some of the laws you need to ensure your company is compliant with :
- Companies Act and Rules
- Tax and GST compliances
- Labour and Employee Compliances
- Intellectual Property Laws
- SEBI and RBI compliances
Apart from all these compliances, there will also be a list of licenses that you would need to effectively run your business. It is your duty to ensure that all these licenses are up to date, and timely renewed.
Apart from these, there are a couple of other ways you can ensure that your family business is progressing and well protected. You can ensure that your business’s IP is well protected, the tax benefits are availed well in time, and government’s programmes and initiatives are benefitted from.
However, all of this cannot be achieved in a day. You need to be patient, and open to learning. Remember, joining a family business is a greater responsibility than a job because here your actions will directly affect the business and your family too. You need to be constantly updated and be well aware of all relevant issues. Being a business owner is a tough job.