Establishing the worth and strength of a family business

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It is important for leader of family business to have a clear idea of the venture’s worth. Photo/FILE  NATION MEDIA GROUP

By PETER MUTUA

Posted  Monday, November 4  2013 at  18:00

In Summary

• When family feuds rocked Tuskys and Naivas supermarkets in 2012 and 2013 respectively, attention was glued on the combatants embroiled in what promised to be a long drawn-out battle
• Many family businesses dream that they will, one day, become regular suppliers to large corporate customers
• Family businesses are prone to deception by temporary success, especially when this arises from a partnership with dominant market players whose expansion automatically leads to enterprise growth

When family feuds rocked Tuskys and Naivas supermarkets in 2012 and 2013 respectively, attention was glued on the combatants embroiled in what promised to be a long drawn-out battle.

What was hidden from public view was the fate of hundreds of suppliers to these giant retailers whose livelihoods were at stake; individuals and organisations that were completely dependent on the supermarkets for their survival. For these, it was a huge relief when the families decided to take their disagreements off air.

Many family businesses dream that they will, one day, become regular suppliers to large corporate customers.

They blissfully imagine that being accredited to supply goods to these giants will unlock opportunities to expand their market share within Kenya and beyond, allowing them to concentrate on producing goods for guaranteed markets. Once a chosen few get their feet in the door, they bend over backwards to fulfil all the principals desires. This can have disastrous results.

When Wal-Mart made the commitment to deliver “Always low prices. Always.” no one imagined the length to which they would go to ensure that they always has the lowest prices in the market. By consistently building efficiencies into their systems and demanding that their suppliers do the same, Wal-Mart eventually arrived at the point where they began rolling back prices of popular goods.

As customers celebrated increasingly affordable consumer goods, suppliers were left to bear the costs. While some flourished, others for whom Wal-Mart was the biggest customer ultimately got to the place where they could not lower prices any more and were forced out of business.

Others like Jack Wier of lawn mower manufacturer Snapper viewed the low price trend as a business threat. Looking into the future, Mr Wier realised that a low price-high-volume approach was not compatible to Snappers strategy of building high end, high spec machines.

During a visit to Wal-Mart’s headquarters in Bentonville Arkansas, Mr Wier did what very few vendors would dare; he politely turned down a contract to supply Wal-Mart, instantly cutting off 20 per cent of his business.

While the Snapper brand suffered a temporary setback, their strategy of remaining at the high end eventually paid off. Mr Wier gained the confidence and respect of his staff and distributors who also saw Wal-Mart as a threat; his stance got them even more committed to Snapper.

Mr Wier recognised that the high end product, distribution chain and pride associated with being an American manufacturer had an intrinsic though unquantified value worth far more than toiling every year to supply orders that promised only diminishing profits and possible subsequent collapse of the venture. This knowledge gave him the confidence to stand up to the biggest corporation in the world.

It is important for the leader of family business to have a clear idea of the venture’s is worth, what they could realise from its sale in various circumstances and what internal or external factors could enhance or diminish the business’ value.

Having this information allows that the leader to make prudent decisions, carry themselves with the bearing appropriate for the business’ stature and properly motivate their team members.

Family businesses are prone to deception by temporary success, especially when this arises from a partnership with dominant market players whose expansion automatically leads to enterprise growth. While fruits of increased market share and growth can initially be sweet, they could turn poisonous if the partner organisation succeeds spectacularly— leading to unreasonable demands or fails on account of internal wrangles.

Mutua is a Humphrey Fellow and a family business consultant