How to make family business work

By John Kariuki

A common saying states that wealth will always follow its owner to the grave.

And to validate this, one only needs to look at the many court cases surrounding some locally owned businesses after the demise of their founders.

Add one’s extended kin and a surplus of hitherto unheard of "fathers", "wives" and "children" to the succession battle, and the business’s death is guaranteed.

To catalyse the fall of such an empire, seasoned employees often read the script correctly, pay themselves their terminal dues and make a fast exit.

The ending is predictable and repetitive. Often, children are recalled from colleges, locally and abroad, to manage fleets of matatus, restaurants, commercial buildings, private schools, rental houses and shambas and so on, but instead, put everything in free fall.

But on the other hand, some family enterprises founded centuries ago by Kenyans of Asian and European origins are still afloat, now in the third and fourth generation of managers.

Their founders designated their heirs, who went through rigorous apprenticeships and the handover was smooth. But most of us fail to carry out the crucial transition and all tricks and secrets of the trade go to the grave with their originators.

Investment experts say that a family business can thrive and pay handsomely over many generations if managed well.

Such an enterprise brings the family together and provides a long-term financial security for all involved.

Management lines

With sound ground rules, things can work out well and everybody can earn a return as the money grows over the years. It is from small family enterprises that multinational corporations like Toyota, Warner Brothers and BMW, Nakumatt, and so on, were born.

David Mwangi, an investment expert with a financial institution, says that the first thing in founding a family business is to put everyone’s roles and expectations in writing. "Draw clear management lines. Ensure that all family members understand their responsibilities," says Mwangi.

He singles out this duplicity as the most persistent cause of failure of many family businesses. "There are many cases where partners in some family outfits stray into each others’ dockets producing multiple accountants, CEOs and nearly all other designations", he says.

According to Mwangi, another family business killer is lack of fairness in its dealings. The owner-managers are often not fair in the pay scales, promotions and work schedules among the family and non-family employees.

"If in your business module you pay your kin astronomical salaries and non-members peanuts for doing the same job, this is unfair. It may breed resentment, a key element in the chain of events that often lead to failure," he says.

The key to a successful family business is often in appointing competent managers.

Competent managers

Investment experts advise that people with the thickest skin and who can live with family bickering are the best bet. Historically, family businesses have grown in leaps and bounds after outsourcing their management.

Long standing feuds or tensions often influence peoples’ attitudes about others’ abilities within a family. And no business can prosper when the owners are divided into warring camps.

If this happens, non-family employees often shift their allegiance to a particular member of the family eroding their professionalism and productivity.

But such scenarios can be minimised by relegating troublesome members to the periphery and paying them dividends annually commensurate to their percentage ownership.

But the most crucial decision in any family business is to have a succession plan in place.

When a family member retires or passes away, feuds may arise over who will take over as head of the business and who knows the right contacts and has the institutional knowledge to hold the business together.

With some foresight, these questions can be addressed before the current generation of leadership is ready to step down or risk bequeathing younger family members the self-fulfilling "modern proverb" of wealth following its owner to the grave.