What family businesses must do to stay alive

Tuskys branch along Kenyatta Road, Kericho. [Wilberforce Okwiri, Standard]

Family businesses largely rely on leaving a legacy to thrive for the next generation.

To secure this legacy, family businesses need to adopt new priorities.

This is according to a new survey by PwC that interviewed over 2,000 participants in 82 territories, 95 of whom were from East Africa.

Several factors have contributed to the collapse of family-owned businesses. These include succession planning, family conflicts, lack of trusted advisors, varying visions between generations, lack of financial education and poor strategic planning.

There is also the issue of children neglecting the family capital thus suffering internal conflicts.

Kenya has seen the fall of big family businesses in the recent past. These include old retail giants such as Tuskys and Nakumatt.

Sibling rivalry and poor governance were contributing factors to the fall of Tuskys.

A family-owned bus company, Akamba Bus, which thrived in the East African region with a fleet of 100 buses, closed down due to debt and mismanagement. This led to the auction of buses to pay debts.

A recent study by the Kenya National Bureau of Statistics (KNBS) showed that family business was quoted as a good alternative means of acquiring wealth and putting one’s skills to practice.

This as 75 per cent of East African family businesses project growth, according to the survey by global consulting firm PwC.

Dubbed PwC’s 11th Global Family Business Survey, Transform to Build Trust, it interviewed over 2,000 participants in 82 territories, 95 of whom were from East Africa.

Family businesses rely on the trust of their customers, employees, suppliers, shareholders and other stakeholders that they will be able to meet their needs - be it service delivery, employee engagement, financial performance, ethics and integrity or considerations for the environment and society.

“Trust levels in East Africa are generally slightly higher than globally: 56 per cent of these businesses in East Africa are fully trusted by customers and 51 per cent globally. 47 per cent are fully trusted by employees and 46 per cent globally. 77 per cent are fully trusted by family members and 74 per cent globally,” said PwC.

About 37 per cent of family businesses are second-generation businesses, while the total turnover of all family businesses is Sh1.23 trillion, said the survey.

Family conflict is handled or discussed within the family without using third parties or resolution mechanisms. 77 per cent of East African family businesses, and 82 per cent globally measure or monitor progress against goals.

“The trust of family members is also key to ensuring the peaceful resolution of family conflict and consistently focusing on these key stakeholder groups builds trust and provides new opportunities for growth,” said PwC

While most East African family businesses believe that it is essential to be trusted by customers, employees and family members, the survey, however, showed that being trusted by suppliers is seen as more essential than being trusted by family members.

PwC noted that trust has been – and remains – a vital competitive advantage that sets family businesses apart from other businesses.

“Our survey shows that they are not prioritising what is most important to their stakeholders today. That’s why they need to adopt a new formula for building trust to secure their legacy.”

The research shows a strong correlation between trust and profitability.

“There’s a new formula for building trust and family businesses will need to transform to ensure they remain trusted by customers, employees and family members,” said the survey.

Further, PwC said that 84 per cent of East African family businesses claim to have a clear company purpose. Still, many do not take action to ensure that it is effective by writing it down and communicating it. According to Michael Mugasa, partner, PwC Kenya: “Family businesses will need to do a better job of communicating and increasing the visibility of their efforts around these new measures of trust. Transparency and accountability are key to winning the trust of these key stakeholders.” 

It also projected that the key priorities facing East African family businesses over the next two years are expanding into new markets and increasing customer loyalty.

“The notion of what builds trust is expanding and businesses need to be cognisant of new groups of stakeholders who consume information in different ways and have different expectations of businesses,” said Mugasa. 

In addition, Mugasa said issues like Environmental, Governance and Social (ESG) and Diversity, Equity and Inclusion (DEI) are becoming increasingly common as a barometer for measuring business.

88 per cent, 72 per cent and 63 per cent of family businesses say it is essential to be trusted by customers, employees and family members respectively.

47 per cent of family businesses put more focus, energy, investment and resources into understanding customer needs, 29 per cent put lots of focus, energy, investment and resources into attracting and retaining talent, and 29 per cent actively communicate their company purpose to family members.

In the survey, 31 per cent of family businesses actively communicate their company purpose externally, 56 per cent Actively communicate their company purpose externally and 29 per cent actively communicate their company purpose to family members.

53 per cent say that increasing customer loyalty is a top five of their priority, 26 per cent say that increasing trust among employees are top five of their priorities and 61 per cent feel that all family members involved in or affected by the business have similar views and priorities about the company’s direction.

In addition, the survey showed that 35 per cent of family businesses are very advanced in having a system in place that gathers customer feedback while 27 per cent are very advanced in offering staff incentives at all levels.

71 per cent of the family businesses said that relevant information is shared in a transparent and timely way between family members while 29 per cent say there are high levels of trust between family members outside the business and family members working in the business.

Despite the ambitious growth projection of family businesses, studies have also shown that 70 per cent of big family-owned companies have collapsed in the recent past. Some are sold or passed on to the second or third generations.