16th   MARCH 2017

How entrepreneurs can avoid pitfalls of owning, running the family business

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The Kenyan economy depends a great deal on the input of small and medium-sized enterprises. The Majority of SMEs are family-owned presenting a unique set of challenges for the entrepreneurs.

Vimal Shah, the chief executive of Bidco Oil Refineries — itself a family-owned enterprise that has grown to become a multi-billion shilling multi-national business — talked to the Business Daily about running and up-scaling and transforming family business. Here are the excerpts.

Let’s start with the basics. What is the most befitting definition of family business?

Family enterprises exist in three main forms. There are enterprises that are owned and run by members of one family, then there are those that are family-owned but professionally run and lastly there are enterprises that are run by members of one family full-time. The gist of the definition, however, lies in the ownership — all being related by blood.
Studies have shown over time that family businesses face numerous pitfalls in their journey of growth into maturity.

What would you say are the unique challenges that family businesses face?

Let’s talk about the benefits of owning and running a family business first. Reports globally indicate that renewed robustness in family-run enterprises and longevity of business are key advantages for these firms. The pitfalls begin when the family business nurtures aspirations for growth but lacks the required management expertise to take the business to the next level. This often demands that a manager is sought externally. Unfortunately, that arrangement has often brewed conflict between some members of the family and the professional who may have different views on the path to the future. Besides, emotional decision making is a major pitfall for family businesses, where for instance siblings fight over leadership of the business and in this instance, professional qualification counts for little. Overall, the major obstacle is poor conflict management strategies, which often arises from absence of defined roles and structures.

How then does one ensure the business interests are aligned with those of family members?

Family members should decide amongst themselves and agree to segregate the functions from shareholders, directors, management to operations. Initially, the founders of the business are involved in all four stages but as the business grows, the operations role is first to be delegated. With more growth it is prudent that the management function is also delegated, moving the family founders into shareholding and directorship. Traditionally, things have not been very smooth at the shareholding level. Most family business owners have maintained ambiguous shareholding structures because they did not feel the need to be specific but as we adopt more individualistic, western-inspired approaches, it is important to discuss in-depth and record the ownership structure. Overall, to avoid conflict, families should clearly define each member’s role and hold them accountable for it. Equally critical to long-term survival of the business is succession planning where founders make an early determination on who to pass on the business to. This should be discussed and put in writing for authenticity purposes and for the sake of continuity of the business.

Within the context of wealth management, how does an entrepreneur arrive at the decision to diversify her business interests?

When the business is small and experiencing growth, and if there exists avenues for growth in current markets and products, or in new markets with existing products, keep at it and scale up to the maximum. Diversification is initiated when growth in existing lines of business have stagnated. The critical thing is that entertaining alternatives before growing a single line of business, often leads to spreading the business too thin and too early. An entrepreneur can, however, have varied business interests with limited direct involvement where they have delegated the execution to professionals and are resigned to shareholding and directorship. Spreading yourself too thin leads to loss of focus, which then comes at the expense of the operational and successful venture.

What advice would you give the young entrepreneur who aspires to start and grow a business?

We have abundant talent with the right spirit and industry, so of utmost importance is that everyone has to carve their own niche, have clarity of objective, set targets with defined timelines. It is equally important to visualise the business long-term then begin laying the foundation with that goal in mind. Start small, progress a step at a time but always think big and also align the work and passion into the goal. Do not overstretch yourself, be realistic every step of the way, it is better it takes time and build sustainably. Besides, it is important to find a mentor who will guide you through your passion and have a business plan on the specifics of the business, whereby you determine the feasibility of the venture. Many young people are bubbling with ideas but are unable to thoroughly think through the nitty-gritty. Lack of capital should not be an excuse for not starting a business because today there are many platforms — from forming partnerships to seeking venture capital that can be used to make the idea a reality. The problem is that most people do not want to share the business and fail to realise they cannot harvest full returns from a business that has not been built yet. Never take money from the business unless it has grown and is self-sustaining.

Are you saying lack of capital should not be an excuse for not starting a business?

There are numerous forms of capital from intellectual to technological capital, which when put together should count for a certain percentage of the business and only seek the financing externally. From venture capital, private equity, and angel investors — the options are plenty. I personally know many potential capital providers waiting to connect to the right idea. In the developed markets, many of these ventures are helped off the ground by corporate capital but only for the bankable ideas. Many youngsters are afraid of having their ideas robbed, but I advise it is better to take the risk, seek the capital and execute the idea than to have it tight-sealed and eventually not benefit. Anyone can duplicate an idea but the difference lay in the quality of execution.
Source- BD, Page 3 Date:15/3/17

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