A worker walks by wheels of cheese stored in the ripening department of the Casearia Castelli, member of Lactalis Group, a family business founded in 1933 in Laval, France. FILE PHOTO | AFP
Family-owned businesses are the foundation of Kenya's economic landscape. Contributing a staggering 80 percent to the GDP, they represent the entrepreneurial spirit and drive that fuels the nation's growth. Ensuring their long-term success transcends passion and hard work. It necessitates a strategic approach, with ownership through effective holding structures forming the foundation upon which these businesses can thrive for generations.
An optimised and fit-for-purpose holding structure provides a future-proof robust framework and legal structure for a thriving family-owned business. By setting up clear financial and tax planning practices, using a growth-focused capital structure, and implementing forward-looking strategic tax planning, family businesses in Kenya can navigate growth complexities and ensure the protection of their family business heritage and legacy.
A study conducted by KPMG in 2022 found that just 30 percent of family-owned businesses globally manage to survive into the second generation. This highlights the importance of laying a solid foundation with well-thought-out holding structures while considering the legal and tax implications, all of which are crucial for the long-term success of a family business.
Ownership, specifically structuring holdings, is a decision that differs from one family business to another. It's influenced by a variety of factors, including the types of assets and business operations involved, where the business is located, how complex the family's situation is, and other important factors that come into play such as the family’s future ambitions and plans.
Let’s explore the journey of a family-owned hospitality sector business in Kenya, focusing on the transition from founder leadership to the next generation. The family business established by the patriarch thrived for decades but faced potential challenges often associated with family business succession.
The founder's eldest son James, an engineering graduate, initially pursued a different career path. However, upon his father's retirement, James stepped in to manage the business. This shift required him to adapt his skillset and use his technical expertise to effectively manage and lead a hospitality business.
Recognising the importance of his father's legacy, James preserved the core values and ethos of the founder. However, he also implemented changes to stay relevant. James, along with his siblings, established an advisory board that included their mother and independent members. This structure aimed to promote good corporate governance, effective holding structures and prevent decision-making based solely on family ties. The board fostered open communication and ensured professional management practices were prioritised.
Under James' leadership, the business continued to flourish. The family's commitment to ethical business practices, combined with strategic innovation, has positioned the business for future success. James' story is an example of the successful transfer of leadership within a family-owned business, highlighting the importance of adaptation, collaboration and a commitment to long-term vision.
Structuring plays a vital role in a family business. With the help of qualified and experienced local and international advisers, the family and its business can protect itself, preserve operations, and foster harmony, ultimately surviving the inter-generational transfer of wealth.
This also applies to the next generation who perhaps don’t want to be involved in the business directly. Adequate structuring and professionalisation, particularly in the context of governance and transparency, may also help attract third-party investment and financing as well as high-caliber c-suite employees to help grow the business.
Family businesses often rely on personal savings or reinvested profits initially. But for long-term success, exploring diverse sources of capital is key. Findings from a study by Strathmore University Business School (The Effect of corporate governance structures on firm performance among family-owned businesses in Nairobi County Kenya, 2023) show that family-owned businesses with a diversified capital structure achieve faster growth and experience greater resilience during economic downturns.
A well-structured family business can use tax planning strategies to its advantage. Consulting a qualified tax adviser is crucial to ensure compliance and explore all the incentives available for family-owned businesses in Kenya. Qualified advisers can help the family navigate the myriad of legal solutions available to them including trusts, corporate entities such as limited liability companies or various forms of partnerships.
Now, navigating Kenya's legal landscape can be a bit of a maze. While the country offers a robust legal framework, the legal obligations brought about by structuring family business assets (if considering onshore and offshore solutions) can be complex, especially compared to other jurisdictions.
Understanding the available options – sole proprietorships, trusts, partnerships and various company structures – is essential for securing business continuity, asset protection and achieving long-term success. This is where a regional on-the-ground specialist becomes critical.
Family businesses often operate with a close-knit structure, where family members handle ownership and management. However as the business grows and seeks international expansion, the complexities of Kenya's legal framework can become a significant challenge.
Finding the right specialist – someone who understands the regional nuances, the challenges and the specifics of Kenya's structures – can be the key differentiator between success and failure.
In the private wealth space, where family businesses are concerned, experts in Jersey have supported global clients with wealth preservation, asset protection and succession planning of their international assets and investments for more than six decades – ensuring a smooth transition of leadership to future generations.
Jersey as an international finance centre (IFC), offers a wealth of expertise for family businesses. With an increase in the number of Kenyan family businesses looking to consolidate their assets, Jersey’s stability, certainty, governance, robust structures and superior service, position it strongly as a partner jurisdiction for family businesses in the years to come.
Experts in Jersey already manage US$1.7 trillion in assets from clients worldwide through its corporate, funds, banking and private wealth sectors.
Jersey Finance recently hosted roundtable discussions in Nairobi and Mombasa on structuring holdings, which focussed on the legal, financial and practical considerations for family businesses. We collaborated with CMS Daly Inamdar Advocates and Spencer West Kenya to host these events and we were fortunate to have fiduciary, legal and tax experts from Jersey, the UK and Kenya to talk directly to families about the importance of ensuring wealth, including operational businesses, were held through optimised legal structures.
Many options are available for families to use, whether locally or internationally, to hold their assets, investments and operations efficiently.
The journey towards the success of a family business starts with conversations with trusted advisers both locally and internationally. Family business owners must start that conversation by seeking out and speaking to advisers who understand their business and their family to optimise their asset, investment, and operational holding structures.
The writer is the Director of Middle East, Africa and India, Jersey Finance.
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