Remember Tuskys Supermarket? It wws one of the finest and largest retailers in Kenya. When the retailer collapsed, it joined other fallen family giants such as Nakumatt Supermarkets, Akamba Bus Services, and Book Point Bookshops that collapsed under the weight of mismanagement and debts. But Tuskys is not the only troubled family business on the verge of collapse.
Family businesses associated with political figures Njenga Karume and Gerishon Kirima are facing the same fate that has left many people wondering what goes wrong with once promising family enterprises.
Family businesses look very ideal on paper. They are full of prospects. They give families the opportunity to make money and strengthen kinship. Money stays in the family.
But the growing list of failed family businesses means that the possibility of things falling apart is very high. If you are involved in a family business, how can you insulate it from suffering the same fate as Tuskys and Nakumatt?
Sibling rivalry and wrangles
Most family businesses that experience rapid growth and market success do not have strategies for long term success. They find the allure of temporary success gratifying enough.
“Although the increased market share and growth will be endearing to the family, long-term growth could lead to unreasonable demands and wrangles among the sibling shareholders,” says Stella Mutua, a business consultant based in Nairobi.
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Almost always, differences among sibling shareholders play out publicly, sometimes in law courts. In 2012, the five Tuskys brothers took their wrangles to court in a bitter process that revealed a secretive dynasty and battle for control.
They returned to court a few months ago over the potential stake sale to a private investor that could have saved the retailer.
In 2012, they were followed by the Naivas siblings who sued each other over the then proposed 51 per cent sale of the supermarket to South Africa’s Mass Mart.
A year later, in 2013, Mohamed Abdul Basiet and Gamal Abdul, whose families owned the Kampala Bus Company and Bungoma Mall battled in court over the valuation, control and assets of the bus company.
Family salaries
The success or failure of a family business depends on its structures and management. Robert Sher, the author of Mighty Midsized Companies says that one of the most common traps that snare family businesses is the over remuneration of the sibling shareholders.
“When running a family business, you must avoid allocating salaries to family members without merit. This means that any coin that is paid out must be backed by performance. Low performance should not be rewarded with higher pay,” he says.
How is the family business run?
The running of a family business must not be conducted like a casual family gathering.
“You must prioritize professionalism over your blood bonds by instituting measures such as shareholders’ agreements, family councils, and incapacity arrangements,” a report on family businesses by PwC says.
This means that you cannot just meet up on the sidelines of a nyama choma fest and decide to kick out the business manager.
The long term game
According to the 2019 Global Family Business Survey report, one of the biggest catalysts to family business failure is the lack of a strategic long term plan.
Family businesses do not plan for succession or transition. Invest and innovate for the long term. This means that business objectives and goals must include leadership succession plans.
“To avoid putting the wealth of the family and the control of the business at risk, family businesses must constantly pursue long term growth and performance,” says consulting firm, McKinsey & Company in a note on family businesses.
Long term planning and more moderate risk-taking will caution the business and assure the interests of any debt holders.
The McKinsey note adds that this will ensure that the family business does not only have lower levels of financial leverage but also lower costs of debts.
Outside investors
Selling equity to private equity funds could work to strengthen the business and boost future growth.
This is what saved Naivas from the unfortunate fate that has befallen Tuskys. Naivas sold a 30 per cent stake to private equity fund Amethis last year.
The entry of an equity fund or investor into the business will enhance accountability and governance, inject professionalism, and proper business systems and structures.
In addition, the long term strategy must include grooming of future business leaders for business continuity.
“Many family businesses either die or go financially lukewarm once the founder dies because of lack of a viable, legally instituted successor,” says Ms. Mutua. “Let there be clear consensus that is based on merit on who the overseer successors will be, or how shareholding will be allocated.”
Takeaway stats:
- 24 per cent of all family businesses in the world have no long term succession plans.
- Family businesses make strategies that cater for two to five years only.
- Only seventeen per cent of Kenya’s family businesses survive beyond the third generation.
- Family businesses contribute nearly 40 per cent of Kenya’s total market value of goods and services.
Examples of family businesses that are doing well today
- Ndegwa family investments
- Muguku Poultry and Investments
- Naivas Supermarket
- NIBS Technical College
- Bidco Africa
- Chandarana