Which way family business? It’s time to go professional

When consultancy firm PricewaterhouseCoopers (PwC) conducted a global survey of family-owned businesses in 2014, only one Kenya enterprise was featured in its final report — Nakumatt.

PwC’s focus was on businesses with a sales turnover of at least $5 million (Sh516 million) and Nakumatt Holdings Limited was mentioned in the same light as Al Majdouie Group in Saudi Arabia, the Nuqul Group in Jordan, the International Group in the UK among eight others featured in the report. Some 2,378 family businesses had been interviewed in 60 countries but only eight were highlighted.

Speaking with the PwC interviewers, Nakumatt’s managing director Atul Shah said the company had a strategy to realise $1 billion (Sh 103 billion) in earnings by this year.

“We’re more professional now to support our third phase of growth, which should see us achieve a billion dollars in turnover by 2018,” he said.

But the recent state of affairs at Nakumatt’s supermarket outlets casts doubt as to whether Atul’s dream can be realised.

HUMILIATING EJECTIONS

The retailer’s story is now a tale of forcible and humiliating ejections from spaces where its branches stood, unpaid staff, yawning shelves in the few outlets that are still running, and its rivals unapologetically taking over some spaces it formerly held.

For a business that was once held as a beacon light of hope for family-based investments, the supermarket chain’s woes have shaken traders using the same model.

“The plight of Nakumatt is very unfortunate,” Mr Joseph Okelo, the chairman of the Association of Family Business Enterprises (AFBE), told Nation on Thursday.

“Any time a family business is in trouble, and especially when it is a big player like Nakumatt, one of the largest family businesses, we also get concerned,” added Mr Okelo, who is now in a management role in the Makini Schools conglomerate that was founded by his mother Mary Okelo and his late father Pius Okelo who died in 2004.

VULNERABLE

Observers see the plight of Nakumatt as a manifestation of how vulnerable family-owned businesses can be.

Is Nakumatt’s slip a result of failing to modernise fast enough, the bane of many family-run families managed by ageing entrepreneurs?

A Reuters journalist posed that question to Nakumatt managing director Atul Shah in November. Atul, through a publicist, replied in the negative.

What pulled down the chain, he noted, was pumping money into an extension plan mooted in 2010.

The plan assumed Kenya’s economy would grow at a sustained 10 per cent rate per year and it saw Nakumatt’s outlets rise from 36 in 2011 to 62 in 2016.

Mr Okelo, who founded the association for family business owners in 2015, said people should not focus too much on the downfall of Nakumatt and forget the role family-run businesses play in the economy.

“In a country like Kenya, it’s estimated that between 70 to 80 percent of all businesses are family-owned. And it is said that they contribute to about 60 per cent of the labour force,” he said.

PITFALLS

He, however, admitted there are pitfalls facing local family businesses that will need to be ironed out.

“Family businesses in general, and specifically in Kenya, have a problem with succession and handing over to the next generation. If you look at the Western countries and some of the Asian countries, you can find businesses that have been there for 10 generations,” he noted.

Nakumatt, for instance, was started in 1987 in Nakuru by Atul’s father. Atul had been working with his father from the age of 10.

He told PwC in 2014 that his sons and one of his nephews were part of the management team.

“We are allowing the next generation to bring in their own ideas. They want to do things a little differently — some of it may succeed, some may fail. But that is the beauty of it,” he said.

MADE ALL DECISIONS

He however admitted that “for many years I made all the decisions”, noting that starting 2009, the chain had started changing its way of doing things to become more systems-based.

While the jury is out as to whether it is the challenges of running a family business that brought down Nakumatt or a well-orchestrated plot by rivals to pull them down — as Atul had said in a May 2017 letter to Trade Principal Secretary Chris Kiptoo — the time is nigh for family-owned firms to introspect on the manner in which they do things.

Mr Okelo said: “Family businesses have their own in-built vulnerabilities, which they must try to protect themselves against.  If you look at the nature of a lot of family businesses in Kenya, sometimes it is driven by one person. Even if it is a big company, you find that the decision maker or a lot of the power lies in what we call the vision-bearer.”

“We see a curve, where this person takes the business up to somewhere and the same person brings down the business. Because what happens is, as we grow older, we start to make mistakes,” he added.

SUCCESSION STRATEGIES

What is needed, experts advise, are proper succession strategies, employing professionals and tighter systems for such businesses to thrive.

In its 2016 survey of Kenyan family businesses, conducted between May and August that year, PwC spoke with representatives from 62 businesses in Kenya.

The finding was that 45 percent of family firms did not have a succession plan for senior roles.

Seventy-one per cent of the businesses said they were planning to bring in non-family professionals to help run their businesses while 66 per cent said they believed the strategy of their business and their company were aligned.

Most family businesses develop cold feet when it comes to hiring non-family professionals. Experts say that is the source of trouble.

“We bring relatives into the business. Sometimes these relatives are not qualified; sometimes they have varying interest,” Mr Okelo said.

“You can find that in many family businesses, people are hired with no job description. The conflict that creates is on what role the person is playing.”

NEUTRALITY

Emphasising the need to have a family constitution to sort out such issues, Mr Okelo said hiring outsiders brings neutrality.

“Outsiders have no emotion. They don’t have the legacy issues. They can be more rational and they have a fresh pair of eyes. With families, you may have good ideas but if your mother says she’s the boss, she’s your mother first. In Kenya, we’d like to see outsiders coming in and taking senior positions. They can steer the business to greater heights,” he said.

In case a family member works at a firm, he advised, they should earn a salary rather than have access to the business account.

EARN SALARY

“Let the family member earn a salary so that they don’t take money from the main account to buy their items,” he said.

One disadvantage that makes family-owned firms unattractive, he said, is career progression.

“Sometimes when you bring skilled people from outside into a family business, there will be a perception that they may never rise to the top. So, attracting talent is an issue,” he said.

The Association of Family Business Enterprises, with more than 80 members and chaired by Mr Okelo, has held two conferences so far — on the third Thursday of May in 2016 and 2017.

Mr Okelo said any enterprise can be called a family business if the controlling shares and interests of the business are owned by family.

“If a family owns 51 percent of the business, technically it is a family business because they’re the ones who control it. The second characteristic is if they have an intention to hand it over to another family member. Sometimes that plan is not written down,” he said.

GO PROFESSIONAL

Through discussions in the conferences, one clear theme is that family businesses want to go professional.

“We are seeing family businesses now wanting to introduce outsiders to separate ownership and management, which I think is key,” he said.

PwC, after conducting surveys on family businesses in 2014 and 2016, observed that family businesses were making “real progress” towards professionalization.

“But there is clearly more that still needs to be done,” it noted.

“Every firm will eventually reach the point when it has to professionalise the way that it operates, by instituting more rigorous processes, establishing clear governance and recruiting skills from outside,” added PwC.

In its conclusion of the 2016 Kenyan survey, PwC gave five actions that family firms should take.

Among them were that family firms must redouble their efforts to deal effectively with succession and “institute robust plans to address it”.

Succession wars are a dark chapter in Kenyan family-owned businesses.

Top supermarkets Naivas and Tuskys have been subjects of court cases as second generation owners wrangle.

The firm added that such businesses should dedicate time and resources for professionalising the management.

If this happens, it may prevent a situation that happened to a prominent trader’s fortune in Nairobi whose son blew up a large chunk of his fortune in sport after he died.