Trust, Transition and Tradition: Inside India’s Family Run SME Ecosystem

Family-owned small and medium enterprises (SMEs) have long been a key component of India’s economic structure. These businesses, often passed down through generations, are embedded in local economies and community life. They range from manufacturing units in industrial clusters to retail and services in Tier 2 and 3 towns. While family-run SMEs are known for their resilience and strong interpersonal foundations, they also face distinct operational and structural challenges.

Last week as the world celebrated the United Nations’ designated International Day of Families (May 15), it was an opportune time for us at SME Communities to reflect on the dynamics of family-led enterprises – their evolution, opportunities and the pressing need for structured approaches to leadership, governance and long-term continuity.

The Context of Family-Run Enterprises

Globally, family-owned SMEs are seen as both resilient and vulnerable — a paradox shaped by tradition and transition.

According to PwC’s 2023 Global Family Business Survey:

• 67% of family businesses globally expect to grow over the next two years, but only 30% have robust succession plans.
• In Europe, Mittelstand companies in Germany – mostly family-owned – are praised for their deep specialization and export prowess.
• In Japan, centuries-old family businesses (Shinise) have endured through structured intergenerational transfers, often beyond bloodlines.
• In Latin America, large family-run businesses are investing in governance structures to professionalize operations without losing their familial soul.

What’s common across these models is the delicate balance between heritage and modernization, a lesson Indian SMEs are increasingly navigating.

In India, over 70% of SMEs are family-run, according to estimates from Confederation of Indian Industry (CII) and Edelweiss. These businesses often draw strength from deeply rooted trust, commitment to continuity and shared values. Decision-making tends to be rapid, based on experiential knowledge and informal systems. Family involvement provides a level of dedication that is often difficult to replicate in other ownership structures.

However, this format also presents unique risks, particularly when informal systems are stretched by growth, generational transitions or external shocks such as policy shifts or technological disruption.

Succession and Continuity Planning

One of the most prominent challenges faced by family-run SMEs is succession planning. In many cases, the process of leadership transition is either delayed or left undefined, leading to confusion, internal conflict or business fragmentation.

Common scenarios include:

• Lack of formal agreements on leadership roles or shareholding during generational change.
• Divergent interests or aspirations between older and younger family members.
• Limited external advisory or legal support to navigate transitions smoothly.

While the intent to keep the business within the family remains strong, the absence of structured succession frameworks can affect both continuity and competitiveness.

Operational Risk and Informality

Family SMEs, particularly those operating in informal or semi-formal structures, often manage risk based on personal experience or intuition rather than formalized processes. This can result in:

• Inadequate documentation of ownership, liability or insurance coverage.
• Under-preparedness for disruptions such as illness, cyber incidents or regulatory shifts.
• Overdependence on personal relationships with vendors or lenders, which may not scale effectively.

Introducing basic elements of risk management, such as financial documentation, legal clarity and business continuity planning, can significantly improve long-term viability.

Unspoken Roles, Unwritten Rules

In family-run enterprises, business and family roles are often interlinked, leading to blurred boundaries in decision-making. While this may work well in early stages, it can become a limitation when the business grows or requires professional inputs.

Key governance challenges include:

• Lack of distinction between ownership and management roles.
• Informal decision-making processes without documented strategies or oversight.
• Difficulty in onboarding non-family professionals or partners due to perceived lack of autonomy.

Adopting elements of modern governance, such as advisory boards, periodic reviews or external audits, can enhance decision quality and attract potential collaborators or investors.

Adoption of Technology and Modern Practices

Digital transformation is an important milestone for any SME and for family business, it often reflects generational priorities. While younger family members may advocate for new systems and tools, older generations may be more cautious due to legacy knowledge or perceived risks.

Still, many family SMEs are beginning to adopt:

• Digital accounting, CRM and inventory tools.
• E-commerce and social media for outreach and customer acquisition.
• Cybersecurity measures and compliance tools for safer digital operations.

Balancing continuity with change remains a key theme in how family-run SMEs modernize while retaining their foundational ethos.

Family businesses carry unique cultural significance. They are often associated with identity, community status and intergenerational values. However, this emotional dimension, while important, can also influence business decisions in ways that may not always align with market dynamics.

Issues such as resistance to external funding, reluctance to delegate or decisions driven by legacy rather than strategy are not uncommon. These factors highlight the importance of creating space for professional dialogue within a value-driven family business framework.

Where Legacy Meets Leadership

For family-run SMEs to thrive in a competitive and fast-evolving economic environment, structured approaches to management, leadership transition, and growth planning are essential. Support mechanisms — such as mentorship, capacity building, and legal-financial advisory — can play a crucial role in helping these enterprises strengthen their foundations.

Industry bodies, banks and financial institutions and knowledge platforms can further contribute by:

• Offering guidance on succession planning and formalization.
• Providing toolkits for governance and digital readiness.
• Highlighting success stories that blend tradition with innovation.

Family-run SMEs form a vital part of India’s economic and social fabric. They not only contribute to employment and regional development but also preserve business traditions and craftsmanship that span generations. As the business landscape evolves, these enterprises are well-positioned to grow — provided they are supported with the right mix of continuity, capability, and modernization.

A good way to mark this year’s International Day of Families will be to recognize the strengths and address the needs of family-led SMEs, as a step toward sustainable enterprise development.