Why family business needs succession planning and shareholder agreement

A home office. Many family business disputes arise over succession. PHOTO | FILE 

By CATHY MPUTHIA

A family owned enterprise is one which is largely owned and run by people with close familial ties.

A lot of Kenyan businesses are family owned and they have their unique characteristics and challenges.

One of the benefits of such an enterprise is that it enables a family to maintain a legacy and also enables it to plan its estate effectively. It also enables a family to pass over skills and knowledge through generations.

One of the challenges facing such businesses is that they are bound to be affected by familial relationships.

When such relationships get sour, business suffers. A case in point is a hotel which was run by a couple.

When they divorced a court ordered that the business be divided into two and the shareholding be split 50-50.

When familial relationships are strained and each party is clamouring for a share of the business, it is bound to die.

I advice owners of a family business to draft a shareholders’ agreement. The agreement is legally binding and can be as detailed as possible.

One of the most important clauses of the pact should be a dispute resolution clause. Dispute resolution for family businesses is quite sensitive given that the relationship goes beyond the boardroom.

Your lawyer will be able to make a dispute resolution clause which is customised to include your unique needs.

The founders could have more say on who can join the company as a shareholder. Also begin preparing for succession early.

We all plan for retirement and have pension plans and other packages in place. We should also begin planning our family businesses for succession.

One reaches an age when one is not as active as they used to be and want to hand over the company to their children.

It would not be prudent to do this abruptly. One can begin grooming a successor from an early age.

How do you do this? You should first identify the successor and let others know your choice. Many family business disputes arise over succession

Cede your shareholding
A number of legal instruments can help you achieve this goal. One is to cede your shareholding in the business to the chosen successor by means of a will.

Once the successor is chosen, begin mentoring and training them. Steve Jobs, the founder of Apple Inc, did exactly this when he started grooming his successor early enough.

He let the successor make key decisions, with his overall guidance. It would be prudent for the founder of a family business to let the successor begin running the business and maintain an oversight role.

One of the main challenges of the business is that the founder may want to stay in power for too long. There comes a time when power should be shared or relinquished. The timing has to be just right.

If it is done prematurely, the inexperience of the successor will be a stumbling block. If done too late, the successor may lose interest altogether and go on to something else.

It is therefore my advice that family businesses begin planning for succession early and also engage lawyers to help them with planning.

Use legal instruments such as shareholders agreements to ensure that the business is well managed.

Mputhia is the founder of C Mputhia Advocates. cmputhia@cmputhiadvocates.co.ke www.cmputhiadvocates.com