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Family businesses must integrate NextGen planning to ensure longevity and growth

Friday September 17 2021
Business

Covid has accelerated integration and involvement of multiple generations of the family into the business. PHOTO | FILE

By FAIZAL BHANA

Family-owned businesses in East Africa have been instrumental to the socio-economic development of the region and a catalyst for the growth of the private sector. With a long multi-generational history, their focus has been on manufacturing industries, consumer goods, construction, and agriculture. Hence the need to ensure a more integrated and structured wealth transfer method, particularly with the next family generation (‘the NextGen’) for longevity purposes.

According to research by Asoko, there are 645 family-owned businesses earning between $10 million and $100 million in East Africa. Nearly three-quarters of these companies are Kenyan with Uganda, Rwanda, and Tanzania accumulating two percent of the total figure each. In Kenya, there are around 490 family-owned businesses earning revenues of more than $10 million across a wide range of industries. Of the 490, 14.3 percent (70 companies) earn more than $50 million per year, with 22 earning more than $100 million.

Despite being a key enabler of several economies, many family-owned businesses in East Africa face structural challenges, including a lack of robust succession planning and good governance strategies, poor management, as well as challenges with the integration of the NextGen — all of which, if not correctly addressed at an early stage, could potentially limit their growth, and reduce their lifespan.

To add to this, the Covid-19 pandemic has stress tested the foundation, legacy, and heritage of family-owned businesses, as well as their ability and dependability, while placing added pressures on them. Overall, however, family businesses have come out of the crisis still standing, but importantly, with a better understanding of the operational intricacies of their businesses, ready to face the future and the opportunities that lay ahead in this post-Covid era.

Many have inevitably been forced to rethink their business models to ensure sustainable operations. By embracing new ideas and forward-looking innovations, they have developed resilient business models with purpose and values at the core of their operations to preserve their legacy. This being the case, most family-owned businesses have thus exercised their corporate social responsibility in line with their ESG and business strategies. Perhaps now, more than ever, most are focused on their businesses having a positive impact beyond shareholder return, but particularly on the wider community of stakeholders relevant to their operations.

Another key trend that has emerged during this period is the accelerated integration and involvement of multiple generations of the family into the business. This has not only been a challenge that is apparent in Kenya, but also across the globe. Insights from Deloitte’s family-owned business survey highlights that 70 percent of family businesses will have lost their wealth by the second generation, while 90 percent will have lost it by the third generation.

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The pandemic highlighted the importance of integrating the next generation into the family business, which is critical to succession planning and ensuring business continuity. The NextGen now have the necessary skills, character, capacity and capability to run many of these family businesses, and they are now ready to make their mark and present the new order of business.

As a leading international finance centre, Jersey provides a forward-thinking approach, a comprehensive legal and regulatory framework, and offers certainty, stability, and substance.

With the current increase in pan-African and cross-border activity, family-owned businesses will need forward-thinking approach, and a comprehensive legal and regulatory framework to scale and protect their wealth. Essentially what this does, is it enables family-owned businesses to raise capital that will give them the financial support they need to expand. Taking into consideration different regional blocs and treaties, such as the EAC trading bloc and the African Continental Free Trade Area, will allow family-owned businesses to enter new markets, expand their customer base and develop new products and services.

A good example of this is the significant private equity investment made by French investment firm Amethis Finance in the Ramco Group, an East Africa head-quartered family business conglomerate, in 2014. This private equity investment was primarily used to allow an accelerated, but structured, expansion of the group into the East African print sector. As a result of this growth, the group has now grown to more than 50 companies operating within East Africa.

Despite its humble beginnings in Nairobi in 1948, with foresight, careful planning and a mixture of family and professional management, the group has since expanded into key economies in East Africa, employing more than 4,000 people with ambitious targets to grow even further and expand across Africa. What success stories tell us, time and time again, is that careful planning and engaging experienced experts early provides the foundations for the preservation and protection of the family business, thus ensuring its continued survival and operation.

Faizal Bhana, is the director Middle East, Africa, and India, for Jersey Finance

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