Why are family businesses finding it difficult to pass on the baton to the next generation?

Succession is inevitable — so plan for it

“Family businesses in general, and specifically in Kenya, have a problem with succession and handing over to the next generation. If you look at the Western countries and some from Asia, you will find businesses that have been there for 10 generations and more,” said Mr. Joseph Okelo, chairman of the Association of Family Business Enterprises (AFBE).

The sentiments of Mr. Joseph Okelo are mirrored by previous occurrences in the country when it comes to succession and succession planning. Recently, South African retail chain Massmart had offered to buy 51% stake in Naivas Supermarket — Kenya’s fourth-largest retail chain. This deal was however delayed as one of the family members owning shares in the company went to court to stop the process.

Tuskys supermarket has experienced a similar fate. After the death of its founder in 2002, five brothers; sons to Joram Kamau, have been entangled in court battles. The fourth-born is accusing his elder brother, the Managing Director of Tuskys of mismanaging the giant retailer that employs over 6,000 people in Kenya and Uganda.

Another incident can be cited from when directors from two families owning Kampala Coach moved to a Nairobi court to resolve a feud threatening to disrupt operations of the bus firm. Kampala Coach is one of the leading players on the Nairobi-Kampala route. In the court case, one shareholder is asking the court to order for valuation of the company and wants her shares bought by her co-director. Riyaz Kurji’s death in 2009 at a motor rallying event left his business on the edge of collapse. The management team that took over simply ran-down operations of the giant bus company; tax officials said Kampala coach owes $1Million in tax arrears.

So, why are family disagreements destroy operations of otherwise successful companies? Why do large corporations struggle to survive beyond the founder stage?

Businesses are now coming of age

The region is witnessing an increase in these cases due to businesses getting into second-generation, post-founder phase. Upon the exit of the founder, businesses are immediately faced with succession wrangles because of the owner holding all cards, networks and processes to his chest.

In a survey done by PwC in 2016, in Kenya, between 70 to 80% of all businesses are family owned. Out of which, 45% of family firms do not have a succession plan for senior roles. 71% of the businesses said they were planning to bring non-family professionals to help run the business. Most family businesses however tend to get cold feet when it comes to recruiting outside the family, which is one of the biggest sources of trouble. “For many years I made all decisions” Atul Nakumatt CEO. “We are allowing the next generation to bring their own ideas. They want to do things a little differently — some of it may succeed, some may fail.”

It is important to inculcate a culture of delegation. Succession planning involves identification of qualified individuals who can take up the founder’s role as time goes by in the organization. They may or may not be part of the family. Fortune is inheritable, job is not. Family businesses should not shy away from looking outside the family.

Professionalizing management

Many professionals avoid working in family businesses, because career progression in a family run business is deemed an impossible task. The assumption is that only family members get promoted to top management. As a result, it is difficult to attract top talent and skilled people from outside the family and those recruited have a perception that they may never rise to the top.

“We bring relatives into the business; people are hired with no job description” Mr. Okelo said. Most family businesses follow similar trends. Hiring of staff is centered around family members and specifically close relatives. This results in conflicting interests and subpar performances in specific areas. In case a family member works at a firm, they should earn a salary rather than have access to the business account.

A proper benchmark on professionalizing management would be Bidco Oil Refineries Limited. Currently, Bidco oil refinery is run by the second generation of the Vimal Shah family. In addition to the members of the founder’s family, there are other relatives working in the business.

The Vimal Shah family however decided amongst themselves and agreed to segregate the functions from shareholders, directors and management of operations. The successor gets responsibilities that ensure real family business sustainability. They must have training on managerial skills required to run the business after the departure of the previous manager. A transfer of entrepreneurial secrets to the successor must be done during development. It all boils down to the family’s commitment to the business, successor training, well-timed parenting and early mentoring.

It can be concluded that founders of family owned businesses perceive that succession planning is important for business continuity.

Regulating inheritance

Including mechanisms such as family constitutions and councils, shareholders’ agreements and incapacity arrangements is important. Proper, clearly defined structures ensure limited grey areas when it comes to inheritance. Each family member clearly understands what is expected from them and how big their piece of pie is.

Family-owned firms might consider putting the property into a trust which will manage assets on their behalf. A trust is managed by a trustee who ensures that the value of assets is maintained for beneficiaries. The trust can therefore ensure that all family members earn their fair share from the company especially in terms of dividends without disruption of company operations.

A family constitution can also help when it comes to sorting out inheritance issues. The founder can allocate the estate equally to all beneficiaries as the heritage structure. This may however not be an ideal approach. Some beneficiaries may prefer immediate liquidity as compared to ownership which poses a problem for the company. The owner can therefore incorporate clauses binding the beneficiaries from selling off the company shares until majority of other shareholders approve of it. Restrictions on transfer of shares can also be included as part of the inheritance clause.

This ensures that shares cannot be sold to an undesirable third party without first allowing the family members to purchase them at the existing price. Shareholding of the company therefore remains in the business.

Conclusion

Succession planning is a key element in ensuring sustainability of any business. The company must run, with or without the founder. This is the only way the 45% of family businesses without a succession plan for senior roles in Kenya can move from success to significance. The ISBI Institute & I&M Burbidge Capital have organized a Capital Raising Seminar on 31st October and 1st November with a key focus on Succession Planning & Governance.

“As a result of the ISBI Institute programs, I have instituted a board of directors for my company which will ensure proper succession plans are in place.” Jason Muraya, Pong Agencies CEO & KNCCI board member.

Register here today for our Capital Raising Seminar to gain more insights on how to ensure your business outlives tomorrow.

ISBI @ Strathmore Business School

Mastering private enterprise.

ISBI @ Strathmore Business School

Written by

Mastering private enterprise. www.isbi-kenya.org.

ISBI @ Strathmore Business School

Mastering private enterprise.

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