Family businesses are often perceived as small mom-and-pop shops with just enough cash flows to sustain the nuclear household. This is not the reality, today. Family businesses are a key economic driving force across the globe, accounting for more than 70 percent of global GDP and 70 to 80 percent of all businesses in Kenya, according to the Association of Family Business Enterprises (AFBE). The association further estimates that family businesses contribute over 60 percent of the labour force in the country.
The success and influence of family businesses to economy is derived from their deliberate action to institutionalise operations, creating more corporate structures which define the nature of engagement between the owners, management, staff and the greater market.
As family businesses expand, there is often need to raise the right capital to innovate, manage growth, attract the right talent and maintain their competitive edge. Traditionally, they tend to either look inwards or seek bank financing. While both remain viable options for financing, they may fall short in injecting the fresh vibrancy needed to catapult the enterprise to the next level. It is for this reason that more family businesses are considering opening up to Private Equity (PE) funding as an alternative source of financing.
The PwC Global Family Business Survey 2018 shows there is an increase in the willingness of family businesses to go the PE funding way with 83 percent of the close to 3,000 global firms surveyed indicating they would consider the option. In Kenya, over 50 percent of the 60-family business who participated in the survey indicated their willingness, with at least 26 percent saying access to finances is a key challenge over the next two years.
Family businesses are agile and outperform large corporation as they are able to make quick decisions, owing to their often-flat structures of decision making. Despite this agility it takes more to grow any business to the next level. The PwC survey highlights corruption, access to skilled manpower, operational costs such as energy and raw materials, increased international competition and the need to innovate and stay ahead as the leading challenges facing family business in the country.
PE firms are ideally placed to help family businesses grow amid this challenging environment, changing technologies and growing globalisation. As partners in the business, PE funds work with families to enhance business performance and allow owners to leverage on the funds’ sector experience to identify risks and opportunities in advance, making smart goal-oriented decisions.
As external parties to the business, PE firms bring new corporate governance and decision-making systems that help in smoothening the transition to structured corporation. PE firms offer the businesses the capability to look beyond their internal governance structure for new ideas while at the same time cushioning leaders from being pressurised into taking decisions based on family or other non-commercial reasons. This in turn means greater organisation efficiency, auditing and monitoring, better access to financing and new markets, as well as retaining the right talent to support the business growth.
PwC’s survey indicates that family owned businesses are set to undergo generational change in coming decades marking one of the largest transfers of wealth in history. From an analytical perspective, this transfer often leaves businesses with three main options: direct sale, maximising growth potential for sale or investing in growth for future generations. In all three cases, PE is an ideal option which enables the businesses to gauge the real value of their ventures enabling them to extract maximum value regardless of the option they pick.
Strategic investments such as PE in family businesses increase the brand value of enterprise, making them more marketable and attractive to other investors, which may result in new opportunities for market listings and strategic partnerships.
As family businesses move towards becoming economic champions, third party engagement such as partnerships with PE firms will help them to safeguard generational wealth and promote business continuity without necessarily relying on family members to conduct the day to day running of the business.
The writer is Executive Director at East Africa Private Equity and Venture Capital Association.