Setting the Foundation for Multi-Generational Family Businesses

Globally, family businesses account for more than two-thirds of all companies and provide between 50 percent and 80 percent of all employment. In Kenya, family businesses contribute up to 75 percent of the country’s Gross Domestic Product (GDP).

Family business founders put in years of hard work and investments to build legacies that will outlive them. However, nearly 90 percent of family businesses do not make it to the third generation. Over the years, only a handful of family businesses have managed to survive and thrive through several generations. These businesses have one thing in common; a solid grip on governance, strategy, management, succession planning, social responsibility, and environmental responsibility.

Family businesses usually start as simple organizations. But as they grow and expand beyond their entrepreneurial beginnings, they face challenges that often lead to tension among family members.

According to a McKinsey & Company article there are four key dimensions of successful enduring family businesses:

• The strong network of family relationships, the clear and shared objectives among family members are key benefits, as they enable the family business to forge a strong identity and common purpose. On the other hand, the closeness of family relationships can also lead to disaster, stemming from conflicts between family members, and the difficulty in managing the relationship between the family, the business, and the ownership. Family businesses can go under for many reasons, including family conflicts over money, nepotism, poor management, and infighting among others. The various roles of the family members must be stipulated; who is a shareholder, manager, board member, etc. this regulation can help avoid these pitfalls.
• To survive through generations, a family business needs to maintain a controlling stake or influence of their business, more so when it comes to raising capital. Ownership may be a potential source of conflict especially when there is a power transition from one generation to another. It is therefore key to ensure there is proper regulation of ownership of the business in terms of how shares can (and cannot) be traded inside and outside the family. This can be done by having carefully thought through shareholders’ agreements that can last for 15 to 20 years. This is not cast in stone and can be reviewed after every few years.
• Business Governance Structures. The one thing that brings down most family businesses in Kenya and Africa as a whole is the last of proper governance structures. It is of utmost importance to have clear governance structures and provide clear rules and regulations which then serve as a business anchor. Some of the key governance structures that every family business needs to have in place are; a family business constitution, a succession plan and a board of directors.

A family business constitution is a document that stipulates the core values, vision, and mission of a family business. It defines the governance structure of the family business with its roles, composition, powers, values, principles, and procedures that the family agrees to follow. Constitutions help manage expectations, avoid misunderstandings, specify roles and responsibilities, foster greater harmony, and ultimately improve decision-making. The family business constitution is a living document and as such, it must evolve as the business and the business operating environment evolves.

Most family-owned business owners put off their succession planning because they don’t want to think about their retirement, disability, or death, however, business succession planning should be a priority in every family-owned business. Business succession is the process of transitioning the management and the ownership of the family business to the next generation of family members. Succession planning plays a very critical role in building enduring family businesses. A family business requires different generations working together, as well as open conversations among the owners. Succession planning can help strengthen family ties and business engagement.

Developing a strong board of directors is a cornerstone for effective governance of family businesses. Naturally, the first phase in family business governance is creating a family-only board. These initial boards are usually composed of family-member owners working in the business. As the business develops further into the second and third generation, increasingly outside influence has greater impact. When transitions occur, governance often evolves from a family-only board, to an advisory board, to a fiduciary board with family members as the majority, and then to a fiduciary board with non-family members as the majority. A board of directors enables family business owners to access more knowledge, use resources wisely, and leverage as much experience as possible. A board of directors is a strategic weapon when wielded by wise management.

• Wealth Management. As the family business grows, it accumulates wealth which needs to be effectively managed. Wealth management goes beyond proper management of the business core assets to liquid assets, investments in hedge funds or private equity funds, and stakes in other companies. Members of the family must develop strong wealth management capabilities.

Almost all companies start as family businesses, but only those that master the challenges intrinsic to this form of ownership endure growth, maintain collegiality and harmony as a family and achieve success in the business. The Family Business Executive Programme aims to equip participants with practical skills and best practice insights needed to sustain family businesses through generations. This Programme draws from a cross-cultural team of lecturers and practitioners and will focus on the African context of family businesses with best practice insights from world-renowned family business societies and countries. Learn more about the Family Business Executive Programme

References:

1. Caspar Christian, Dias Ana Karina and Elstrodt Heinz-Peter. The Five Attributes of Enduring Family Businesses. mckinsey.com. 1st January 2010. Retrieved from: https://www.mckinsey.com/business-functions/organization/our-insights/the-five-attributes-of-enduring-family-businesses

Article by Juliet Hinga

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