Building resilience in family-owned businesses after founders exit

Some of Kenya’s giant retail chains have been reported to be operating on shaky ground due to family feuds. Is it by default or design?

When family wrangles grip family-owned businesses, a lot is left at stake — especially if any grievances are addressed before the exit of the patriarch or matriarch.

To ensure smooth operations especially for family-owned businesses, it is important for the founders to put the right systems in place for the business to remain viable and sustainable long after their exit.

This is important, more so taking into consideration the economic and social impact family businesses have in the economy in terms of job creation, value addition to consumers and corporate social responsibility activities.

Consequently, it is important that key measures and policies be put in place to ensure that such businesses live long.

Code of conduct

From a legal perspective, it is important that the family has a constitution.

A family constitution though not a legally enforceable document will be clear about the involvement of spouses and the larger family in the business.

Secondly, it is important that the family has a code of conduct that governs the family and the business.

Family businesses that are open about their values and purpose and incorporate the same into their businesses through their vision, mission, goals as well as their strategic plans yield better results and have greater longevity. This will go a long way in building their social capital.

It is very important for the first generation to take time to communicate and educate the next generation early enough about the values that the family embraces. It also helps a business attract the right talent in terms of employees as well as potential investors.

In an era where decision-making is becoming very complex, having a family constitution and a code of conduct that has values and purpose is one of the most effective risk management systems.

The family constitution and code of conduct need to be revisited regularly and refreshed frequently so as to make sure people are clear about what they espouse and their relevance.

Third, having prenuptial agreements also comes in handy when dealing with spouses. This is especially helpful in instances where there is a divorce and parties have to agree on the mode of sharing the assets and liabilities acquired during the existence of the marriage.

Implementing such agreements ensure that whatever stake a partner has in the family business is not affected.

Upholding professionalism

The fourth aspect is the professionalisation of the business. This can be done in two ways.

One, the children need to be exposed to the financial, legal and strategic aspects of the business. This is central to recognising the important role they have in influencing the future of the business.

The founders should be keen not to coerce the next generation to join the family business. They should let the offspring to earn their place in the business based on their skills and interests.

Family-owned businesses should embrace a system of meritocracy s. Talent in the group should also be recognised and hard work appreciated and rewarded.

To achieve professionalism, family business owners should ensure that they have a good governance structure and systems in place.

The family members should strive to bring on board non-executive directors from different sectors who have a wealth of experience to support the management as well as assist in creating efficiencies and streamline businesses across key divisions.

Competent, effective and efficient non-family members can be helpful in transforming a family-owned business into a well-managed and governed entity.

Diversification of senior management and extending business governance beyond family members goes a long way in ensuring the success and continuity of the family business.

Succession planning

Succession planning, including of leadership and ownership, ensures that the entity has a continuity plan. This involves having a board structure comprising audit and advisory teams.

Timing is also critical for a successful transition from one generation to another to take place.

Therefore, there is a need to have more structured and documented conversations — for example, having written wills — to address inheritance issues and transitions.

Leadership succession, which is usually one of the biggest challenges for family-run enterprises, is best handled when there is a long-term plan and not when a successor is needed.

If planned for a span of between 5-20 years, a family can find a variety of candidates from both family and non-family to train and groom.

Where there are many children interested in the family business, a family can embrace rotational leadership.

Having a plan where the leadership of the business is rotated amongst the family members after one completes a term will assist to curb incidences of fraud as each member will be keen to ensure the success of the business in anticipation of their turn to take over the leadership mantle.

If implemented, these policies will go a long way in promoting trust and loyalty among family members and all key stakeholders, making the business resilient during tough times.

Maina is an advocate of the High Court of Kenya and an associate at C. Mputhia Advocates