“There is a difference between a family owned and a family run business,” points out Florence Wanja, Head of Business and Commercial Banking at Stanbic Bank, as she responds to my question on the common challenges faced by family enterprises.
“Most of the large multinational corporations that we see and brands that we know, your Colgate and the like, started as family businesses, initially starting off as family run. With time, as a business grows, it becomes family owned, where the owners are family members, but the business is probably run by professionals while certain decision making lies with the family members,” she explained.
The transition from being family run to bringing professionals on board to manage the business while the founder takes a back seat but retains ownership has proven to be a hard nut to crack, resulting in succession challenges.
A survey by PwC found that 45 percent of Kenyan family businesses have no succession plan. Data from the Family Firm Institute shows that less than a third of family businesses, or 30 percent, survive into the second generation. Only 12 percent remain viable in the third generation, while just three percent continue operating into the fourth generation or beyond.
Recently, Isuzu East Africa terminated its 62-year-old dealership agreement with Associated Motors Limited after the dealer failed to establish a succession plan, leaving the business struggling.
Associated Motors Limited (AML) was appointed as a dealer of the Japanese car manufacturer in 1964, with the business later passed down through generations of the family.
However, siblings of the current management have relocated outside the country and have no interest in the business, forcing the current patriarch to wind it down after efforts to sell it proved futile.
Jane Gichuki, Group Head of Finance and Administration at Symbion Consulting Group, says there are critical transitional steps every family business must take to position itself for longevity.
The first is to assess the current governance structure and ensure there is a clear boundary between family roles and business responsibilities. This calls for regular scheduled management meetings where decisions are documented and action points followed up, allowing family members to develop other aspects of their relationships. She warns that a business can easily consume family life, making it the only topic discussed at home.
“Scheduled meetings also help deal with the founder’s dependency syndrome where everything runs through one person. When they are away, decisions stall,” said Ms Gichuki.
Creating clear boundaries also helps to identify gaps within the business where professional expertise may be required.
A well-defined business structure also ensures family members are placed in roles that match their abilities and can be held accountable for their performance.
For the heirs, she advocates gaining experience outside the family business before joining the enterprise.
Ms Gichuki also stresses the need to involve the next generation in developing the business’s medium-term strategic plans, giving them insight into where the company is headed.
She recommends establishing a board that can provide independent advice and help resolve issues objectively, unlike family members who may be emotionally invested.
“It is also important to clarify what the retiring generation will do next, otherwise they will hang around the business,” said Ms Gichuki.
Ibrahim Nthitu, a second generation hotel owner in Makueni, believes it is necessary to introduce the next generation to the business at an early stage.
Mr Nthitu is the General Manager of Kambua Resort Kibwezi, an establishment founded by his father in Makueni County.
For him, the transition was not smooth. He had to leave his pursuits outside the country and honour his father’s call to return and run the family business. Although he had no prior experience in the hospitality industry, he accepted the challenge. He says he does not regret the decision, having immersed himself in the sector, where he now serves as Secretary General of the Makueni Hospitality Association.
He notes that succession challenges are evident across the hospitality industry, with many owners tied to their premises to ensure smooth operations. As a result, training seminars organised by the association, including a recent one on business continuity planning, often record low attendance because most owners are involved in the day-to-day running of their establishments and need to be physically present.
“Businesses should be managed by competent individuals. If family members are to be involved in the family business(es), then they must acquire the necessary skills. If not, they should remain as shareholders or board members and wait to receive dividends,” said Mr Nthitu.
“In my opinion beneficiaries who are directly involved in the running of a going concern should be allocated shares when the principal is still alive. These shares are then not part of the estate and any funds invested by a beneficiary in a going concern should be clearly indicated,” he added.
Under this approach, those who contribute more to the business receive greater rewards because they have sacrificed their careers and other sources of income to grow the family enterprise.
Rank and authority within the business should also be clearly defined while the founders are still alive, as leadership does not have to follow birth order or gender.
The older generation should also be willing to embrace ideas brought forward by the next generation, who may have a better understanding of changing market trends and new funding opportunities.
Such ideas include the adoption of technology and responding to evolving customer preferences. There is, however, a tendency among founders to cling to practices that worked in the past while patronising the very beneficiaries they have invited to join the business.
Ms Wanja notes that banks have a vested interest in ensuring the continuity of family owned businesses because many of the credit facilities extended to these enterprises are long-term and their performance is closely tied to how successfully the firms navigate different business cycles.
Stanbic Bank recently established a family business division to help family owned enterprises address the unique challenges they face in an ever evolving business environment. The division offers financial solutions as well as advisory services aimed at helping family businesses survive beyond the fourth generation.