When you goof by selling a stake in your firm

When should you sell a stake in your company? What stake is good enough without losing control? What price should you settle for?

Or better still, should you sell the stake at all? Having the right answers to these questions is no walk in the park.

Enterprise looks at case studies of Kenyan firms that have resisted to sell a stake and the fortunes of those that have sold. What were the driving forces?

Type of investors

Davis & Shirtliff in May 2021 marked 75 years since being founded by ex-soldiers Eddie Davis and Dick Shirtliff.

Started in 1946, the business has stood the test of time in the water and energy equipment supplies market, growing its annual turnover to above Sh10 billion.

Executive chairman Alec Davis, who has been in the business for nearly five decades since taking over from his father, Eddie, in 1976 says it has taken focused and consistent management to keep growing.

Yet for Mr Davis, one thing he has resisted for all this while has been selling out a stake to, say, a private equity firm in the name of growing.

“Many times, rushing to private investors can be the beginning of problems especially when such investors come in for, say, five to 10 years,” said Davis when the firm was marking 75 years.

“Such investors fix their energy and focus on maximising returns. They hardly care about what happens after their exit.”

For him, it has been about organic growth achieved through diversifying products, but all tied to Davis & Shirtliff’s key core competency area —water.

Founders vision 

It is a view that Naftal Nyabuto, the chief executive at Mzawadi, shares. The firm is a loyalty programmes provider and has been winning new clients across sectors including manufacturing and insurance.

Mr Nyabuto says his team has brought the firm where it is now without external financing. It is a strategy he is not about to change.

“When external financiers come in at the very early stage of a start-up, there is a lot of excitement. Most of the companies that receive financing early tend to attract a lot of attention at this early stage,” he says.

“But at some point you (the founder) are no longer in control of your own vision. From our experience, organic growth creates a better foundation.”

Companies willing to buy stakes in others typically take a long time scouting for the best firm to buy into, especially if they are the one initiating the deal.

This means firms being approached to sell a stake should think through the process and consider things such as the valuation of the shareholding and the powers they are going to cede once the process is completed.

Building value

Centum CEO James Mworia recently said the company, which has grown by buying into firms, building value and exiting profitably, is not in a hurry to seal the next deal.

“It takes time and we are not in a rush to announce. The objective is not to announce a deal. The objective is to do a transaction that can be viable to create additional value to shareholders,” he said.

Unfortunately, some of the firms seeking faster growth do not take time to understand the implications of accepting to sell a stake. Some do not know how much stake to give out.

For instance, Nyabuto’s caution is exactly what once confronted James Mugambi, now the CEO of Premier Credit, back in 2013.  It was the harsh reality that he faced alongside his business partner.

Mugambi’s Premier Credit was recently awarded by President Kenyatta as the top medium taxpayer in the financial year ended June 2021.

But Mugambi’s entrepreneurial journey is older than Premier Credit. Mugambi and his business partner, Tim Carson, had built another entity way before Premier Credit was born.

The two co-founded Micro Africa Ltd —a business Mugambi once described as the “only other thing that was closest to my heart after God and family.”

The firm had started in Kenya before rebranding and entering Uganda in 2004. Mugambi and Carson wanted to expand. And so in under a year, they turned to Orion—then called Acacia fund— a private equity fund.

Untimely exit of investors

With the help of more investors, the business expanded to Rwanda and South Sudan while sticking to the same proposition—offering small loans with short repayment periods.

The company attracted more private equity firms who collectively controlled 67 per cent of the company while Carson and Mugambi held 33 per cent.

But at the peak of success, the private equity funds decided to exit. In 2013, they teamed up and looked for a single entity to buy them out. Letshego Holdings Ltd came in.

The following year, Letshego reached out to Mugambi and Carson to contribute huge sums of money to recapitalise the business by $10 million (Sh1.1 billion).

It was a tall order. Mugambi and his partner had to bow to pressure by relinquishing the stake in a company they had taken close to a decade to build.

“It was a very painful and difficult decision to take. By the time we were selling, I didn’t feel I had the energy to start again in a green field,” Mugambi said in a past interview.

Such was the low moment that he could not figure out letting go of the close-knit institution through which he had built personal relationships with customers and employees.

However, the duo dusted off and decided to start all over again. On January 1, 2014, they launched Premier Credit with Mugambi as the managing director and his partner as the CEO.

Premier Credit has expanded and now has branches in Kenya, Tanzania and Uganda.

While many businesses have achieved growth by ceding stakes, many others have also run into struggles once they invite investors.

The sad case of ARM Cement 

For others like ARM Cement, selling a stake has done little to keep them in business. This points to the fact that selling a stake is not akin to waving a magic wand.

In May 2016, Pradeep Paunrana, the man who had driven ARM to be the second biggest cement maker in the region, invited the Press to make an announcement that was fashioned as a strategic deal.

ARM announced the sale of 40 per cent of its shares to CDC Group, a UK-owned development corporation, for $139 million (Sh15.6 billion at current exchange rate).

But as visitors tossed to the deal, Paunrama—the man who had become the face of the family-owned cement firm— was overcome with emotions.

“Do you think I have done the right thing?” an emotional Paunrama asked journalists—the very people who ought to have asked him this question.

The answer did not come from journalists. But when the market responded months later, it was ARM being placed under administration after it defaulted on bankers and bondholders.

The mission to rescue the cement maker had hit a snag. Paunrama had been kicking the can down the road and the timing of his stake sale failed to kick-start the firm.

While Paunrama’s case was more about mismanagement, sometimes selling out a stake to achieve growth can also be problematic when the new investors start pushing for a different business strategy.