In Africa, family–owned companies account for about 70% of small and medium sized enterprises. There has been a huge rise in family businesses in Africa and they are gaining increasing market potential. In addition, we are seeing an increase in the number of ultra-high net worth individuals in Africa and this number expected to grow by 17% over the five year period between 2023 and 2028[1]. Such an increase in wealth will inevitably result in the ongoing creation of and investment into family businesses in Africa, boosting the economic prosperity of the region as a whole.
However, key to the ongoing success, growth and survival of African family businesses are two essential elements: good governance and succession planning.
The role of governance
A lack of governance can be detrimental to the effectiveness of a family business. In this regard there are two broad categories of governance: corporate governance and family governance. Corporate governance refers to the management of the company. Family governance addresses the family ownership of and involvement in the company. With family-owned businesses, the family both owns and runs the company, which can give rise to disputes. It is a well-known fact that many family businesses do not survive past the third generation. However, having good family governance in place can help to address the possible risks that can arise with family businesses. Only 77% of African family businesses have some form of governance structure in place[2], with this figure being 76% in Kenya and 58% in Nigeria and rising to 94% in South Africa. Such governance structures can include shareholder agreements dealing with the transfer of shares as well as family constitutions that set out the foundation of the family’s visions and policies regarding the business. The family constitution can include clear and defined roles and responsibilities, provide processes for decision-making, dispute resolution mechanisms and a settled procedure for succession within the business.
When considering the future of the business, family owners need to consider, for example, the manner in which younger generations should be involved in the business as they grow up, the qualifications they will require to get involved in the management of the business, what the process should be if one family member wishes to exit the business. There need to be conversations around the future transfer of the business and how to future-proof it.
Mechanisms should also be put in place to deal with dispute resolution. What is alarming though is that only 21% of African family businesses have dispute resolution procedures in place. This figure reduces to only 6% in Nigeria and increases to 27% in South Africa. Such figures speak volumes as to how African family businesses potentially face significant threats to their existence from within, with business owners being reluctant to plan for the worst-case scenario. Having dispute resolution procedures in place is an integral aspect of good governance as disputes amongst family members can result in family businesses failing. More than a third of businesses have boards consisting solely of family members[3]. Family disputes can typically occur following the death of the head of the business, resulting in multiple heirs then inheriting. It is this fragmented ownership that can result in disputes arising. A family conflict can result in the collapse of the business if there are no measures in place to deal with disputes effectively. Shareholder agreements and family constitutions can be drafted carefully to address how such disputes should be resolved.
Planning for the future of the business
With most family businesses typically not surviving beyond the third generation, putting in place adequate succession planning is vital to ensuring the future of the business. This is especially relevant as family dynamics can change over time as can the demands on the family business. As mentioned above, establishing a family constitution will be important in creating a clear framework for the ownership and operation of the business, including what principles and values should be adhered to. However, a vital step also involves the owners of the business putting Wills in place to govern the succession to their business and how their shareholdings should pass. Trust structures can also be considered for holding operating businesses.
In addition, thought needs to be given as to who should run the business if the current family member in charge loses capacity. Without appropriate plans in place, the business may languish in the absence of suitable people to step into their place. Depending on the jurisdiction, this typically involves having some form of power of attorney whereby decisions are delegated to trusted individuals chosen in advance by the current owner of the business.
A failure to plan is a plan to fail
Given the huge potential for growth in the African economy and the enormous role that family businesses will play in this, it is vital that current owners of family businesses consider what arrangements they can put in place now to secure the future of their businesses. This will involve looking at current family dynamics, which family members are involved in the business now and how this is likely to change in the future as shares pass down to future generations. There are a range of documents that, with careful planning and professional help, can be put in place to govern potential disputes, future transfers of shares and how the business should be run by family members in the future.
By Julie Howard, Private Client and Tax Partner, and Aakash Mohindra, Trainee, at Boodle Hatfield
