Why succession planning is key for family-owned enterprises

Family owned enterprises ( FEPs)an learn a lesson or two 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. A number of listed companies and large multinational companies started out as FEPs and the ownership was passed on to the new generation.

The secret behind establishing a successful FEP lies in planning for succession. 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 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 as the shareholding was split 50-50.

When 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 stress the business.

So, what should FEPs do to live for generations? First the owners should have a shareholders’ agreement that is as detailed as possible. One of the important clauses of this agreement is the one on dispute resolution.

Dispute resolution for FEPs is sensitive given that the relationship goes beyond the boardroom.

The lawyer should be able to make a dispute resolution clause that is customised to include these unique needs. The agreement, for example, can lay out who can join the company as a shareholder.

We all plan for our retirement and have pension plans and other retirement packages in place. FEPs should also begin preparing for succession early.

There is that age when one is not as active as heshe used to be and wants to hand over the company to the children. It would not be prudent to do this abruptly.

One can begin grooming a successor from an early age. First identify the successor and let all others know the chosen leader. Many disputes arise when the family begins fighting over who the successor should be. Appoint a successor early.

A number of legal instruments can 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, begin mentoring himher.

I have seen an interesting trend with Kenyan professionals. If a man is a doctor, he will prefer his children to study the same course. Why? I believe at the back of their minds they are looking for a successor.

Groom the successor by training them professionally and mentoring. Let the successor begin running the business while the founder maintains 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 has to be shared.

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.

Mputhia is a partner with Muthoga Gaturu. cmputhia@mgmail.co.ke