Personal Finance

Listing on bourse the next rite of passage for family business

IDEA (2)

Summary

  • In 2019, a survey by Asoko Insight found that a significant number of family-owned businesses in Kenya earn revenues in excess of $50 million per annum and are spread across industries.
  • It also found that most of Kenya’s leading family businesses are within the first three generations of ownership.
  • However, while family businesses are many, only a handful enjoys longevity beyond the first three generations.

Family businesses dominate the landscape across the world and are a vibrant contributor to the economy.

In 2019, a survey by Asoko Insight found that a significant number of family-owned businesses in Kenya earn revenues in excess of $50 million per annum and are spread across industries.

It also found that most of Kenya’s leading family businesses are within the first three generations of ownership. However, while family businesses are many, only a handful enjoys longevity beyond the first three generations.

Family businesses have unique attributes that impact the way they approach the management and growth of the business. For instance, business, professional life, work relations and business decisions co-exist with emotional attachment, informal bonds and personal choices.

There exists a strong integration of family and business which, on the one hand, can be a source of strategic advantage and on the other, potentially be a source of inertia and governance-related challenges.

FAMILY INFLUENCE

As a family enterprise grows and expands reach and dominance, the need for new sources of capital becomes critical. The growing family business increasingly devotes capital into human capital, operations and brand equity.

Many look for funding that will not dilute family influence, which is why such entities should consider listing on the bourse.

Far from the perception that listing may lead to the family cutting ties with the business and ultimately losing control, the free float and diversity of capital markets investors keep the family with a seat at the table and a steadying hand in the culture of the business.

Compared to other strategic options like selling the company to a competitor, or welcoming private equity as an interim investor, listing can help manage family assets, uphold family values, while preserving a structured family involvement.

Succession moments in family businesses can sometimes be faced with challenges and have the potential of generating conflicts and tension among family members. The chosen heir(s) might not feel suitable for the role, or might feel compelled to continue their parents’ model of business despite their desire to pursue alternatives.

Family members who are not chosen to take over the business might feel sidelined and other family members may wish to exit the business. Inevitably, the moment of transferring the leadership and preserving the family legacy is crucial to family enterprise.

Listing could provide family businesses with the tools to manage the organisational change that the succession moment causes.

Disinterested family members could take advantage of the increased liquidity that listing provides to easily sell their stake while family members who remain could get funding to advance the business.

Transferring the values and business knowledge of the founders to future generations becomes more difficult as the family grows. It becomes more difficult to maintain aligned interests within a large family, especially given that the demand for creation of wealth increases as time passes.

The corporate governance practices required of listed companies and some level of regulatory monitoring bring greater structure to family businesses. Corporate governance structures enable attracting top talent, thereby making the business more professional and remove the excessive informality that often characterise such businesses.

Documenting internal controls and business processes ensure continuity and preservation of trade secrets beyond the lifetime of the founders. The corporate governance structures would still ensure that the family has greater scrutiny on the management and decision making at the executive level.

ENHANCED VISIBILITY

Though family businesses are many, most are not known. Listing on the stock exchange would lead to enhanced visibility and credibility, which in turn raises its profile and reputation. This visibility would help to unlock brand equity much faster and easier than traditional marketing and advertising.

Consequently, a listed family business would be able to reach new clients and attract the right kind of investors. Also, the increased transparency in the operations of a listed family business creates credibility and trustworthiness in the business.

While many benefits accrue from listing, it is important that the stock exchange and the capital markets authority appreciate that family businesses are a unique category. They are more than just an investment.

Family owners derive significant non-financial benefits from them, such as influence that comes from owning and controlling an entity that bears the family name.

Therefore, there is a need to create awareness among family businesses of the available options on the stock market to disabuse the perception of loss of control to create opportunities for family businesses to engage with other listed family businesses and to assess opportunities.

Such benefits address concerns by family businesses about listing that may enhance the willingness to list on public capital markets.