PASSING THE BATON: WHY SUCCESSION PLANNING IS KEY TO FAMILY BUSINESS

Family businesses are the backbone of many economies, providing employment to millions of people worldwide. But what happens when the founder of the business retires or passes away? Without a proper succession plan in place, the future of the business can be uncertain, leading to potential financial and emotional turmoil for family members and employees. That’s why building a legacy through adopting the best practices in succession planning is crucial to the long-term success of your family business.

Scotland has a saying that goes, “the father buys, the son builds, the grandchild sells, and his son begs.” This shows the importance of having a succession plan in place for family-owned business. According to research done, 70% of family businesses lose their wealth by the second generation, while 90% lose it by the third generation. It is also interesting to note that 45 percent of family businesses in Kenya have no succession plan in place.

In the recent past, Kenyans have witnessed some family-owned companies collapse in the hands of the NexGen management the likes of Nakumatt, Tuskys and Akamba Bus. Nonetheless, it is important to note that some companies have really grown by how well the 3rd generation has handled the succession plan. Here is a case study from Kenyan companies of how effective a succession plan is:

Chandaria Family Business- Comcraft Group

Comcraft group has succeeded because of keeping the business within the family. Manu Chandaria’s father started Kaluworks in 1915 which had 40 employees among them (5 relatives). It was then that Manu Chandaria joined the company upon returning to Kenya. Manu credits the expansion of the business to Sir Ernest Vasey (an English chairman to Comcraft at the time) for advising them to venture out into more East African countries Post Independence period. By 1965, they had set up in six countries (including Burundi) with the family members heading the companies. Vasey also noted that African countries were unstable due to the coup thus the family sent out more people in other countries to set up shop. By 1985 they were already in 30 countries and currently, the Chandaria family of about 65 people operates businesses in 50 countries.

Ramco Group

It was founded from a humble beginning in 1948 as a hardware. It now boasts of being a conglomerate of over 50 companies operating within East Africa with a focus on 6 sectors: printing and packaging, hardware and building materials manufacturing, office supplies, services and real estate. In a classic case where the NexGen management is right on Restructuring, Amethis Finance (a French Investment Firm) made a private equity investment in the Ramco Group in 2014. Which resulted to a structured and accelerated expansion into the East African Print Sector.

Bidco Group

Diversification is what has led to Bidco’s success. It was founded in 1970 as a Garment manufacturing company. In 1985, the former chairman, Mr Bhimji Depar Shah and his two sons Vimal Shah and Tarun Shah saw a growing need in the African market for soap products and started a soap manufacturing plant. Bidco has expanded its business to Edible Oil manufacturing plant, production of fats, margarine, laundry soap, personal care and skin products, animal feeds, beverages, and food products.

With the above examples, the one thing that is clear is that Succession planning is a critical process for any family-owned business. A well-thought-out succession plan can ensure a smooth transition of leadership, preserve the values and culture of the business, and provide financial security for future generations.

Best Practices for Succession Planning

Here are some best practices for succession planning in a family-based business:

#1 Start early

The family members should be introduced to the business from an early age to enhance their knowledge of the operations as the business grows. This gives the next generation ample time to learn the ropes, gain experience, and develop the skills needed to lead the business. One thing I admire about the Indian Community family business and highly recommend is that they introduce their kids from a very early stage.

#2 Ramp up Communications with stakeholders

One of the important things a family business should focus on is establishing transparency and ensuring knowledge of the business succession plan and its pain points are made aware to the stakeholders. Communicate the succession plan with all stakeholders, including family members, employees, and any outside advisors. This helps ensure that everyone is on the same page and that the transition is as smooth as possible.

#3 Develop a clear plan and structure

Family businesses are unique because they are centered on involvement by family members hence emotions are intertwined in management. Hence it is important to lay out a clear plan and structure for transferring ownership and leadership, as well as any other key details such as the role of family members who are not involved in the business. This will help in the avoidance of conflict and misunderstandings.

#4 Focus on talent development

Succession planning should not just focus on the transfer of ownership, but also on developing the talent needed to lead. Prepare potential successors for their new roles by teaching them the historical, cultural and strategic foundations of the business, including them in decision-making and implementation of new and innovative ideas that they recommend. This will enable the new generation to gain ownership of the business and give them a sense of responsibility.

The Family Charter and what it entails

Another document necessary for family-owned business that is often ignored but is a necessity to a succession is the family charter. A family charter, also known as a family constitution, is a crucial governance document that outlines the values, vision, and rules that guide a family-owned business. Typically, the Family Charter will contain several key elements, including:

1. Definition of Family- The family charter clearly defines who is a family, their descendants and who doesn’t qualify.
2. Statement of Family Value, Vision, and Objective- It states out the principles and code of conduct in which the business is to be run.
3. Governance- It states out the leadership and management structure of the business during the succession and after the passing of the founder.
4. Business Ownership- It defines the succession plan and who exactly owns the business for generations to come.
5. Roles and Responsibilities- It defines the different roles family members play within a family business.

Conclusion

The success of a family-owned business is solely dependent on how well the next generation is groomed and prepared for succession. It also is dependent on the unity of the stakeholders and family members to have the business interest at heart. At Ronalds LLP we offer advisory services to family-owned businesses by providing support in business continuity planning, family governance, succession planning and transition. To discuss making or updating a family charter for your business you can contact us.