Five characteristics of a good family business

Chances are high that seven out of 10 of the businesses you know are family owned.

As defined by audit firm PricewaterhouseCoopers (PwC), a family-owned business is one where the majority of votes are held by the person who established the firm, or their direct descendants, with at least one family member involved in the company’s management.

And if the company is listed, the persons who set up or bought the firm, or their family, hold at least 25 per cent of the right to vote through their share capital, with at least one family member on the board.

Patient capital

An estimated 70 to 80 per cent of businesses in Kenya, and around the world, are family owned.

These businesses contribute more than 60 per cent of the jobs in Kenya, according to Peter Muga, a family business expert at the Institute for Family Business (IFFB).

However, despite their potential, if not well-structured, family-owned businesses are more likely to fold than non-family-owned ones.

Yet, family businesses are important, not just for individuals who want to start a company and have to rely on their relatives to raise capital or manage the firm, but also for the economy.

“Unshackled from the quarter-to- quarter pressures of their listed peers, family firms can invest for the long term, and allow good ideas the time they need to prove themselves,” PwC says in its latest family business survey, The ‘Missing Middle’: Bridging the Strategy Gap in Family Firms.

“It’s a classic example of ‘patient capital’ and an invaluable counterbalance to the short-termism of many public companies.”

However, despite some family businesses showing extraordinary longevity, the average life-span in the sector is three generations, PwC’s report, which interviewed senior executives in 50 countries, notes.

“Typically, only 12 per cent make it that far, and the number getting past four generations falls to as low as 3 per cent.”

Shreya Shah, a manager at PwC Kenya, defines a family business as a commercial organisation in which decision making is influenced by multiple generations of a family that’s related by blood or marriage. She notes that in such set-ups, balancing between roles within the family, ownership and business is complex and may involve conflicting values, goals and actions.

As a result, to be successful, family businesses must find a way to balance between the personal and the professional. This makes succession planning one of the most critical factors in attaining the company’s long-term vision.

As PwC’s report notes: “The transition from one generation to the next is the fault-line in this business model. There’s no point in having detailed plans for business continuity, if the single most significant risk to this is not addressed.”

With the proposed deal between two family firms, Nakumatt and Tuskys, occupying debate, Hustle looks at some of the characteristics that would help these sorts of businesses thrive for generations to come.

1. A clear goal and vision

The bedrock of any family business is the goal or value that is put in place by its founder. That goal has to be passed down from generation to generation, and adhered to by everyone.

For example, Joram Kamau, the founder of Tuskys Supermarket, wanted his retail store to be guided by strong Christian values. Such values included not selling any alcohol or tobacco products. This value has continued to guide the retail chain years after Mr Kamau’s demise.

Paul Ouma, the course director of the family business programme at Strathmore Business School, says that as much as a founder might have had a vision, it must be understood and shared by everyone if it’s to outlive him or her. Everyone has to toe the line.

2. A succession plan

We’ve already mentioned how important succession planning is for a family business’ continuity, yet in the PwC survey, it was found that 45 per cent of family businesses interviewed had no succession plan in place for most senior roles.

Failure to groom successors has resulted in the death of many family businesses once the founder dies.

Micheal Mugasa, the leader of private company services at PwC Kenya, sees a problem in reconciling the worldviews of the founder generation and the next generation as far as succession planning goes.

He notes that a survey his firm had conducted earlier, it was found that this next generation (NextGen) is “ambitious and talented and can help to drive the business forward. However, their ambitions do not always jive with the owner or founder generation, which can lead to conflict.”

The NextGen tends to do well in areas like digital strategy, or leveraging technology to inspire innovation. On the other hand, explains Michael, the owner generation tends to rely on experience and a more cautious approach.

“Having an effective succession plan in place is one way of creating an environment in which the NextGen can thrive and effectively contribute to the business,” he says.

3. Professional management

A good family business should not only have a clear succession plan, it should also be professionally run. There is the tendency to make operations of a family business a family affair. And while there is nothing wrong with having relatives in the company, sometimes those selected are simply unprofessional or unable to do the work required.

A good family business puts in place proper operational structures, processes and systems that are efficient and well documented, and regularly reviewed for improvement, says Shreya.

Fortunately, according to PwC’s survey, 43 per cent of respondents are prioritising professionalism in their family businesses over the next five years.

This is taking different forms in different firms, “including mechanisms such as shareholders’ agreements, family councils and incapacity arrangements”.

4. Proper governance structures

Good governance is important for every business, whether its family owned or otherwise.

“Good governance includes transparency and a consistent framework to ensure business continuity. For family businesses in particular, governance often includes a focus on appropriate conflict resolution, policies (including recruitment and career progression) and succession planning,” says Shreya.

Subjecting a business to professional non-family governance does not require that one relinquishes the business. Unfortunately, most family businesses fear that this is the case, and refuse to seek professional help. Instead, they surround themselves with ‘yes-men’ – people who tell them the comfortable lie rather than the uncomfortable truth.

IFFB’s Peter acknowledges that it’s not always easy to tell a family member a difficult truth, especially if that person is the business’ founder.

“It is very human to develop a certain level of emotional attachment to something you have started,” he says, adding that this is one of the biggest strengths of family businesses, as founders end up working for the company with unrivalled passion.

Unfortunately, most family businesses shun outside help, fearing that outsiders may not be able to truly understand and honour the family’s vision for the business.

But failure to allow for professional management and governance can lead to the premature death of a business. This death is even faster for family businesses that operate in industries that are not subject to strict regulation, such as transport, retail or hospitality, says Strathmore’s Paul.

Here, unlike in sectors like banking or in listed companies, no one can tell a business owner that they cannot be the owner and CEO at the same time because it amounts to a conflict of interest.

There are several businesses that have been hurt by a failure to put in place strong governance structures. The result has been the shutting down of such famous family businesses as Akamba Bus and Bookpoint bookshops.

“Nakumatt, for example, became so big that for all practical reasons it needed other stakeholders. Once you become a multinational, you can’t sit around a table over lunch and prudently make a decision for the business,” Paul adds.

5. Diversification plan

Paul says one of the best ways for a family business to grow is through diversification, which is also a good way to manage family squabbles – an Achilles’ heel for many businesses.

However, few family-owned businesses are thinking about their growth in these terms. According to the PwC survey, while more than half of the respondents plan to launch new entrepreneurial ventures, “one in three family firms is still operating in only one sector and in only their home market. This can expose the family firm to risk, as the whole enterprise stands or falls on one dimension”.

Paul says one of the family businesses that has managed the process of growth through diversification well is Simba Corp, which is now better capitalised having gone into different industries. The family sold its stake at East Africa Building Societies to Nigerian investors and got more capital, which it used get into motor vehicles. It has also moved into hospitality, with a majority stake in Kempinski Hotel, and gone into mining through Acacia Mining.