According to a recent Asoko Insight’s publication on East Africa’s Family-Owned Business Landscape, “family-owned businesses constitute the vast majority of private sector landscape in Kenya and are very instrumental in job creation and economic growth”. Unfortunately, a vast majority of these businesses are never fully ready to transition into the next growth phases through avenues such as mergers, acquisitions (M&As), and investments. This is because they are crippled with multiple challenges such as lack of corporate governance, non-existent succession planning, inadequate long-term strategies and limitation in structures.
For family businesses to scale successfully, these issues must be addressed early, before a potential investor, buyer, or strategic partner begins due diligence. The following are some of the key practical steps to make family businesses deal-ready:
a) Clarity on business governance
Family businesses are mostly run by family members hence are they are confronted by many nuances, conflicts and disagreements over important matters such as the criteria for joining or exiting the businesses. To this extent, it is essential for internal matters of this ilk to be separated from business governance and regulated through innovative structures such as family constitutions. Such structures could cover informal issues such as entry into the business governance hierarchies, decision rights and succession over time. Importantly, it neutralizes the possibility of disgruntled family members becoming key hindrances to significant deals and investments.
b) Preparation of company constitutive documents in timely and orderly fashion
Under Kenyan laws such as the Companies Act (Cap. 486), all companies are required to maintain certain records in updated formats. These include the register of members, statutory registers, memorandum and articles of association (MEMARTS), shareholders agreement, and share certificates among others. The governing documents such as MEMARTS should contain clear shareholder rights and responsibilities, board operations, voting rights and transfer of ownership among others. Importantly, there should also exist clear record of company key decisions made through board minutes and resolutions. Any gaps in such documentation are likely to be flagged by a potential investor and either slow down or lower the value of a deal.
c) Conduct of independent and regular financial audits
Most Kenyan family businesses are run in very informal ways. This implies that it is common, for example, to encounter issues such as the comingling of personal and business expenses, lack of record of transactions, numerous director loans and lack of regular financial audits. A business
that commissions regular and independent financial audits has a better chance of closing deals and receiving high profile investments since they would be negotiating from positions of evidence and strength. Lack of such audits may however result in investors not getting a clear picture of the financial position, debt position, balance sheet and profitability of the business and ultimately lead to the breakdown of deals.
d) Succession planning and alignment for long-term business continuity
Investors are likely to look beyond a family business’ current crop of ownership/management and assess the people who are in line to make key decisions in future. This is an incentive for family businesses to ensure they have proper documented leadership and succession plans with clarity on the family members who will be operationally involved in future while also maintaining a sense of independence to increase investor confidence.
e) Formalization of contracts and intellectual property (IP) rights protection
When most family companies are founded in Kenya, they tend to operate mostly on undocumented relationships and verbal understandings instead of having in place proper contractual frameworks. Additionally, few of the companies take time to evaluate their intellectual property assets and register them accordingly for protection. It is thus imperative for existing family businesses to formalize, in written format, their key contracts with suppliers, employees, customers and landlords among others. If possible, they should also get experts such as legal advisors to assess their various IP assets such as trademarks, patents, industrial designs and domain names and facilitate registration of such in the company names.
Conclusion
If your family business is considering a merger, acquisition, investment round, strategic partnership, or generational transition, early deal readiness planning can improve valuation, reduce transaction delays, and strengthen investor confidence.
Contact Us
At CM Advocates LLP, we provide founders and stakeholders of family businesses with tailored advice and compliance support on how to be ready for mergers, acquisitions and investment. For further guidance or assistance in navigating the steps or insights outlined in this article, please contact our Family Business Services and Corporate Commercial Business Groups at law@cmadvocates.com or the contributor below.
Contributor
Brandon Otieno,
Senior Associate
Email: botieno@cmadvocates.com
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