Personal Finance

Good relations key to family business success

fam

According to a Credit Suisse report, family-owned enterprises (FEPS) have outperformed non-family-owned businesses since 2006.

This was attributed to a number of factors. It was found that FEPS had a longer-term vision which was very crucial in enduring the tough seasons. It was also found that FEPS do not focus much on short-term performance but make decisions based on their long-term goals. Both of these are crucial to survival and performance.

A FEP is a business which is largely or wholly owned by members of a family. They could be spouses, parents and children, siblings and even cousins. What is unique about them is that members of a particular family control a large percentage of their ownership and management.

This makes them unique businesses as the family relationship may affect the business performance.

A well-managed family relationship can have very positive effects on the business while a poor relationship can lead to closure of the business.

A few years ago, Kenyans were served with soap opera-like drama when a couple who owned a restaurant/club along Langata Road, Nairobi, got embroiled in a very bitter divorce. The divorce led to the eventual closure of the popular club as both parties claimed ownership of the club to the exclusion of the other.

The club was eventually demolished. This is just one of the many examples of how a mismanaged family relationship can affect the performance of a FEP.

That notwithstanding, there are many successful FEPS that have been able to live for hundreds of years. Some global examples include the Walmart group owned by the Waltons and the Ford Motor Group owned by the Ford family.

Research has shown that the most common cause of FEP failure is a mismanaged family relationship. The causes of failure include rivalry and competition in the family, disputes, favourism, marital and sibling strife, lack of skill and capacity and power struggles.

The pillar of a successful FEP is a well-managed family relationship. There are many successful case studies that Kenyan FEPS can borrow from.

The secret according to experts, lies in having a family governance structure. A family governance structure is a structure that provides a forum for decisions about the business and the family. It is distinct from the business governance structure but interlinked to the business governance. It serves as an intermediary between the business and the family.

There are also several family governance tools that can enhance family governance. These include the family constitution which sets out the visions, values, objectives and decision-making structures of the family in so far as the business is concerned.

The family constitution will contain detailed provisions on grievance and dispute resolution. In many of them, family members covenant not to take each other to court on matters relating to the business.

Family policies are important to provide clear guidelines and to prevent disputes. A family employment policy will provide guidance as to how family members shall be employed and remunerated.

A family dividend policy provides guidance on how family members shall earn dividends while the redemption policy provides guidance as to how members are to exit from the business.

The most crucial document however is the shareholders’ agreement. This is an agreement between the different family members on their rights and responsibilities in the business. It also sets out the proper governance and dispute resolution provisions of the FEP.

It governs how exits will be done to avoid a negative impact on the business.