ADMINISTRATION OF FAMILY OWNED ENTERPRISES

Family owned enterprises (FEPS) can learn a lesson or two about succession from the manner in which prominent families globally prepare for succession. FEPS are businesses whose ownership is largely or totally controlled by members of the same families. Infact in Kenya, this is the most common form of business, from the small kiosk to the large manufacturing enterprises. A number of listed companies and large multinational companies started out as FEPS and the ownership was passed on to the new generation. There are several FEPS which have lived for over 50 years even as Kenya turned fifty in December 2013. The secret behind establishing a successful FEP lies in planning for succession. This article will show FEPS how to plan for succession in order to build a lasting legacy that will span for generations.

 

One of the challenges FEPS face, is the fact that they are owned by family and they are therefore bound to be affected by familial relationships. When the familial relationships are sour, business becomes hard to do. In one of Kenya’s leading divorce cases, business went sour after the couple who owned a hotel divorced. The court ordered that the business be divided into two by ordering that the shareholding in the company be split 50-50. It is truly a difficult situation for the business which is further compounded by each party competing with the other over petty issues. King Solomon in his wisdom made a similar order in 1st Kings 3:16. Two women were fighting over a baby each one claiming the baby was theirs. King Solomon ordered for the baby to be cut into two, so that each woman would go away with her half. The real mother of the child was heartbroken by the order because she knew the baby would die. She said to herself she had rather let her competitor go with the live baby rather than each going with half of a dead child. This is the unique situation some FEPs face. When the familial relationships are strained and each party is clamouring for a share of the business, the business is bound to die. There are several cases especially of large retail outlets where strained family relationships strain the business. Therefore for your FEP to live for generations what do you do?

 

I would first advice the owners to do a shareholders’ agreement. This is an agreement that is legally binding between the parties and can be as detailed as possible. One of the important clauses of this shareholders ‘agreement would be the dispute resolution clause. Dispute resolution for FEPS is very sensitive given that the relationship goes beyond the boardroom. Your lawyer will be able to make a dispute resolution clause that is customised to include your unique needs. I remember the soap opera called the Bold and the Beautiful vaguely. In one of the scenes, one of the sons of the rich family wanted to marry a woman whom the mother viewed as a gold digger and who was out to gain from the business. The scenes were quite dramatic and all kinds of conspiracies were hatched by the rich mother and the so called gold digger as well. This would all have been cured by a shareholders ‘agreement. Perhaps the founders would have more say on who can join the company as a shareholder.

 

I would also advice the FEP to begin preparing for succession early. We all plan for our retirement and have pension plans and other retirement packages in place. We should also begin planning our FEPs for succession. There is that age when one is not as active as they used to be and want to hand over the company to their children. It would not be prudent to do this abruptly. One can begin grooming a successor even from an early age. How do you do this? You should first identify the successor and let all others know the chosen successor. Many disputes that arise from FEPs is when the family begins fighting over who the successor would be. It would be prudent to appoint a successor. A number of legal instruments would help you achieve this goal. One is to expressly cede your shareholding in the business to the chosen successor by means of a will. Once the successor is chosen, then you begin mentoring the successor and even training them. I have seen an interesting trend in Kenyan professionals. If your father is say a doctor, they will prefer you to do the same course. Why is this? I believe at the back of their minds they are looking for a successor. It is therefore important to groom the successor by training them professionally and even mentoring them. The founder of Apple Inc, Steve Jobs did exactly this when he started grooming his successor early enough. He let his successor make key decisions, with his overall guidance. In FEPs it would be prudent for the founders to let the successor begin running the business and maintain an oversight role.

 

One of the main challenges of FEPs occurs when the founders want to stay in power for too long. There comes a time when power should be shared and you can include your successors in decision making. The timing has to be just right. If it is done prematurely, the inexperience of the successor will be a stumbling block. If done too late, the successors may lose interest altogether and go on to something else.

 

It is therefore my advice for FEPS to begin planning for succession early enough and also engage a lawyer to help them with the planning. Use legal instruments such as shareholders agreements to ensure the FEP is well managed.

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