PERSONAL FINANCE: A to Z of running a family business

On paper, family businesses are ideal. They are full of prospects, and mainly present families the opportunity to make money and strengthen kinship simultaneously.

In essence, the money stays in the family. But in the same measure that the business can enrich a family, there is also the potential that both the family and the business can fall apart. The big question thus begs; how do you navigate the family enterprise?

Ms Stella Mutua, a business consultant based in Nairobi, says family businesses are prone to deception by temporary success. This is particularly common in cases of businesses with market prominence and rapid growth.

“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 Ms Mutua.

Usually, differences among sibling shareholders play out publicly, sometimes spilling over to law courts. For example, in 2012, five brothers fighting over the control of Tuskys Supermarket took their wrangles to court in a bitter process that revealed a secretive dynasty and battle for control.

Hot on their heels was Naivas Supermarket, whose sibling shareholders took each other to court over the then planned 51 per cent sale of the supermarket to South Africa’s Mass Mart. 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 firm.

BOOBY TRAPS

However, there are family businesses that have defied sibling feuds and battles for control of the wealth. An example is Muguku Poultry Empire, which was started by the late prominent farmer Nelson Muguku. The Muguku family has been renowned for their buying and selling of shares at the Nairobi Securities Exchange. For example, in the six months to November 2013, the family took home Sh327.5 million worth of shares. In the two months leading to January 2014, the family took home Sh185.4 million after offloading 5,336,055 Equity Bank shares. After diversifying into real estate, the family opened a Sh3 billion mall in Karen, Nairobi, in December last year.

Whether the family business ends in battles or success depends on how it is run. Robert Sher, the author of Mighty Midsized Companies says one of the most common booby traps you must avoid is over-remuneration of the siblings running the business.

“You must avoid allocating salaries to family members without merit. This means any coin that is paid out must be backed by performance. Low performance should not be rewarded with higher pay,” he says. Similarly, the running of a family business must not be conducted like a casual family gathering.

“You must prioritise 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.

A family business will also do well when it concentrates on investing and innovating for the long term. This means that 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 be constantly in pursuit of long term growth and performance,” says managing consulting firm, McKinsey & Company in a note.

“The longer-term planning horizon and more moderate risk taking also serve the interests of the debt holders.” McKinsey says this will ensure that the business will not only have lower levels of financial leverage but also lower costs of debts.

The long-term plan must include solid strategies aimed at grooming future business leaders in order to foster 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.