Family1 | Family Business Business Survey Survey 2018 2018 The values effect

How to build a lasting competitive advantage through your values and purpose in a digital age. 2 | Kenya Family Business Survey 2018 3 | Family Business Survey 2018

Introduction

In recognition of the exceptional value that family businesses and private individuals who lead them. On the horizon in Kenya, we are seeing inter- companies contribute to the economy in Kenya and the East Africa region, PwC generational transfers of wealth, the prominence and growth of private has published our third biannual Family Business Survey, Kenya edition. This companies cross-border and increased regulatory pressure on companies of all year’s survey focuses on values and how clear, well-integrated values have the kinds. power to transform family businesses. In this publication, our practitioners, senior members of Kenya’s family business As PwC, we also have strong values and they inform our service to clients and community and representatives of related industries share their insights, outreach to business leaders like you. Our global PwC values – Act with integrity, which I hope will resonate with you. The survey itself is the product of many Make a difference, Care, Work together and Reimagine the possible – are how respondents’ time and effort. We are grateful for their contributions. we see ourselves and how we communicate a shared PwC culture. Our team is ready and prepared to help you achieve your business goals. If you We are committed to working with our clients to develop solutions with proven have any questions or if you need help in a particular area of your business, results and a strong track record of success. Our practitioners are trusted please reach out to any of the PwC people profiled in this report. You are also business advisors who bring a wealth of experience to our clients, as well as welcome to contact me or our Private Company Services partner leader, Michael relatable experience and insight. Mugasa, at any time. This publication, based on conversations with family business owners, is an effort to help you understand some of the trends affecting family businesses in Kenya. Private companies represent a very broad market including established family businesses, family managed or controlled businesses and the influential Peter Ngahu Country and Regional Senior Partner, Eastern Africa [email protected] +254 20 285 5000 4 | Kenya Family Business Survey 2018 5 | Family Business Survey 2018

Foreword

In a fast-changing and challenging business environment, family business For this report, we surveyed 2,953 companies in 53 countries globally, and 46 owners are introspecting on their legacy, purpose and what makes “values” respondents in Kenya, covering a wide range of sectors. I would like to thank the count for their businesses. Digital technology is disrupting businesses; respondents in Kenya for taking the time to participate in the survey. sustainability is becoming key to the conduct of business; winning trust is more We were also privileged to conduct in-depth interviews with Mr Adil Popat, important than it’s ever been; and millenials present an enduring demographic Executive Chairman of the Simba Corporation; Dr Raju Mohindra, Founder and change. In this third edition of the results of our biannual family business survey Chairman of the Dawa Group; Mr George Odo, Senior Partner and Managing in Kenya, we focus on the significance of “values and purpose” as a driver of Director, AfricInvest, East Africa; and Mr Mihir Shah, Head of Strategy, Sales and success in family owned businesses. Marketing at Bidco Africa. I sincerely thank them for being so generous with their We believe family businesses - built around strong values and with an time and insights. aspirational purpose - have a competitive advantage in disruptive times. It’s It is indeed an exciting time for family businesses in Kenya and globally. We are long been recognised that a family firm - ranging from a global enterprise always pleased to have a conversation with you on any family business related to a business in a small community - is more likely than other companies to topics, whether covered in this publication or not. Please contact me or any treat each day’s activity as an investment in the long-term, prioritising broad of the PwC practitioners who have shared their views in this report for more stakeholder interests over the short-term earnings cycle. information. Overall, our respondents in Kenya expressed continued optimism about future growth, but also increasing concern about corruption in the countries where they operate, attraction and retention of talent, prices of energy and raw materials, international competition, innovation to keep ahead and regulation. This suggests a need for continuous strategic thinking to stay ahead of the curve! Michael Mugasa Partner & Leader, Private Company Services PwC Kenya [email protected] +254 20 285 5688 6 | Kenya Family Business Survey 2018

Contents

8 15 25 Growth – and how to sustain it Getting value from your values Purpose and professionalisation

30 41 50 Securing your legacy in a digital age Private equity: A final word thinking outside the box 7 | Family Business Survey 2018

Case studies

13 20 22 28 31 Managing growth and Stewardship and the Family values and The new revenue standard Thriving in the face the professionalisation values that inspire tax compliance ‘IFRS 15’ – Is your business of digital disruption journey compliant? Adil Popat, Judy Muigai & Sunny Vikram, Alex Muriuki, Dr Raju Mohindra, Simba Corporation PwC Kenya Akinyemi Awodumila, PwC Kenya Dawa Group PwC Kenya

36 38 43 46 48 How can family owned Challenging the old Perspectives of a private Access to funding – Fraud and corruption in businesses retain talent? ways of doing business equity investor in family a post rate cap conundrum family-run businesses – is the owned businesses bond strong enough? Jane Kithela, Mihir Shah, Isaac Otolo, PwC Kenya Bidco Africa George Odo, PwC Kenya Samuel Marete, AfricInvest PwC Kenya 8 | Family Business Survey 2018

Growth – and how to sustain it The 2018 survey of family businesses reveals great confidence in the future, with over 80% of respondents in Kenya predicting steady or aggressive levels of growth over the next five years. 9 | Family Business Survey 2018

The 2018 survey results shows that family businesses in Kenya Exhibit 1: Growth aims over the next two years are in robust health, with revenues expected to continue growing for the vast majority (82%), compared to 84% globally, with 30% of Kenya 83%84% respondents saying that growth will be ‘quick’ and ‘aggressive’ compared to 16 30 16% globally (see Exhibit 1). Expect growth 74% of our Kenya respondents Grow quickly and aggressively experienced revenue growth in the last 12 months before the survey Grow steadily was conducted, compared to 69% 68 52 Consolidate globally. This is a slight improvement from the 71% in Kenya and 64% Shrink globally who reported revenue growth over the same period when we last conducted the survey in 2016. 17 13 These findings echo what we found in the private company cut of our Kenya Global global 2018 CEO Survey, where a solid majority of private company chief In 2016, 84% of businesses in Kenya and 85% of Global executives said they were somewhat businesses expected to grow over the next five years confident or very confident about their company’s growth prospects in the next 12 months. Of the 722 private company executives polled for that report, 85% said they were somewhat confident or very confident about their company’s growth prospects in the next 12 months. 10 | Kenya Family Business Survey 2018

Yet there is a nagging sense among many family businesses that the Exhibit 2: Key challenges over the next two years trajectory of growth over the next two years and beyond can’t easily be charted, given a set of key challenges Global (see Exhibit 2). Corruption in the countries where you operate 72 23% This is reflected in the steadily declining percentage of Kenya Accessing the right skills & capabilities 52 60% respondents who anticipate growth Prices of energy & raw materials 52 43% over the next five years: 88% in 2014; 84% in 2016 and 82% in 2018. International competition 52 38%

The top five challenges in Kenya were: The need to innovate to keep ahead 50 66% corruption (72%), accessing the right skills and capabilities (52%), prices Economic environment 50 56% of energy and raw materials (52%), Regulation 50 43% increasing international competition (52%) and the need to innovate to stay Domestic competition 46 49% ahead (50%). Cybersecurity 39 39% Both globally and in Kenya our survey respondents shared concerns Professionalisation of the business 37 41% about new market entrants and Succession 33 33% their potential to topple established businesses. Digitalisation 30 44% However, fewer businesses in Data management 30 39% Kenya (35%) feel vulnerable to Access to financing 26 25% digital disruption compared to the 2016 survey (40%) results. This Conflict between family members 13 14% result stands in contrast to our global survey, where 30% of global The growth of artificial intelligence/robotics 11 22% respondents feel vulnerable compared International tax reform 11 16% to 25% in 2016. The UK's decision to leave the EU 7 11% 11 | Family Business Survey 2018 9 | PwC Global Family Business Survey 2018

Our Ourglobal survey survey findings findings show showthat first-that first-generationgeneration family family businesses businesses clearly Exhibit 3:3: Growth Growth rate rate by by generation generation running running the businessthe business clearlyoutperform outperform those those run by run subsequent by subsequentgenerations generations in their ability in their to achieve abilitydouble to achieve digit growth, double highlighting digit growth, the highlightingneed to balance the need business to balance model continuity with an appetite for business model continuity with an 48% disruption (see Exhibit 3). appetite for disruption (see Exhibit 3). Reconciling optimism with concern will 44% Single-digit sales growth Reconcilingnaturally seemoptimism challenging. with concern But one big 42% 41% for thetakeaway future that will emergesnaturally is seem this: those challenging.family businesses But one that clear are message actively thatpursuing emerges their from values the Kenyaand purpose and 35% respondentsnailing down is thata clear a valuesstrategic and plan purposeare showing driven thestrategic way. Specifically, plan is critical 32% 32% for arespondents fast changing who and said challengingthey deliver Double-digit sales growth 10% or more annual growth tend to business environment. 28% 27% have some consistent attributes (see Specifically,Exhibit 4, page87% 10). of Eighty-fourKenya percent say they have a clear sense of agreed respondents said that they have a 22% clearvalues sense and of purpose,agreed valuescompared and to purpose76% ofas those a business, that had compared slower growth. to 79%Almost globally. two-thirds (63%) said they intend to make significant strides in Anddigital 48% capabilitieshad a fully-costed, (compared to 54% formalisedamong businessesand documented that have strategic slower 1st 2nd 3rd 4th 5th + plan,growth). similar And to the 55% 49% had ofa fully global costed, generation generation generation generation generation respondentsformalised who and documentedsaid the same. strategic Theseplan findings (compared tell with us that46% it for pays the to takeslower an active growth approach group). This to values tells us and that Generation running the business purpose,it pays and to take clear an strategicactive approach planning. to values and purpose.

Base: all 1/2/3/4/5+ generation global respondents (2018: all answering n=1,040/1,082/480/187/127) Source: PwC Global Family Business Survey 2018 12 | Kenya Family Business Survey 2018

10 | PwC Global Family Business Survey 2018

One of the main findings from our formalised and documented mid- 2016 survey in Kenya and globally term strategic plan. It also pays to plan ahead. Mid-term key performance indicators (KPIs). Exhibit 4: Behaviours of family businesses with 10%+ growth wasstrategic that mid-term planning strategic – over a planning three - to There is a correlation between Among those Kenya respondents Exhibit 4: Behaviours of family businesses with 10%+ growth (overfive-year a three- time to five-year frame – is time often frame) one withthese any sort high-strategic of strategic planners plan, 78% is oftenof the one biggest of the missing biggest pieces missing of the say andthe planother is high embedded value groups. in their piecespuzzle of thefor familypuzzle businesses. for family This financialHigh- strategicplanning plannersprocess constituteand 56% businesseswas also (https://www.pwc.com/a theme of our 2016 survey say 56%the plan of the has companies defined financialwith a ke/en/publications/family-business-(The ‘missing middle’: Bridging the and highnon-financial level of philanthropy; key performance 53% of survey.html).strategy gap in family businesses). indicatorsthose with(KPIs) a robust,in place documented to measure and communicated succession This year, we found that survey the progress and success of the plan. This year, we found that survey plan; 46% of businesses with respondents fall into three groups: In both cases, the percentages of respondents fall into three groups: annual turnover above US$100m; global respondents who say the same • The first group, making up 21% 42% of companies with double- • The first group, making up is higher (83% and 65% respectively). 11%of the (21% total, global) has no of strategic the total digit growth; and 41% of those respondentsplan at all. These in Kenya, ‘low-strategic has no Furthermore,with a high 73% level of of Kenya focus on 84% 63% planners’ seem to be more focused strategic plan at all. These ‘low respondentsdigital technology. with a strategic plan Have a clear sense of agreed Are aiming to make significant steps on keeping the boat afloat than values and purpose as a company in terms of digital capabilities strategic planners’ seem to be haveHigh-strategic communicated planners the areplan internally thinking about where it’s going. (vs. 76% among those who have (vs. 54% among those who have more focused on keeping the boat (comparedtranslating to their 83% strategic globally) goals and into 63% <10% growth) <10% growth) • afloatThe second than thinking group makes about upwhere externallyeveryday (53%practices globally). and building up it’sanother going. 30% of the total. These Thethe survey habits showsthat, over that time, in Kenya, create a companies have a plan in mind, • The second group,making up theredistinctive is a clear legacy. need to develop but it is not far advanced; it isn’t 41% (30% global) of the total formalised and documented mid- explicit about costs or methods respondents in Kenya have a plan term strategic plans, to embed them for achieving the company’s goals. in mind, but it is not far advanced; in the financial planning process Together, these first two groups it isn’t explicit about costs and to define financial and non- represent a little more than half of orthe methods companies for achieving surveyed, the and, as financial KPIs to measure progress. business’a whole, theygoals. are Together, more likely these to fall Communicating these plans internally firstbehind two over groups time. represent a little is certainly a priority, whereas external 55% 22% more than half of the companies communication may be on a need- Have a fully costed, formalised and Are aiming to earn the majority of • surveyed,The third and,group, as the a whole, remaining they to-know basis (such as with potential documented strategic plan revenue from new products or services are49%, more are likely those to with fall behinda costed, over partners with a financial interest). (vs. 46% among those who have (vs. 16% among those who have formalised and documented mid- <10% growth) <10% growth) time. term plan. Within this, we have Both globally and in Kenya, high- • Thedefined third group,a sub-group the remaining (36%) of strategic planners are translating their 48%‘high-strategic (49% global) planners’ of respondents who also strategic goals into everyday practices Base: all global respondents with 10%+/<10% growth (2018: all answering n=1,000/1,001) inhave Kenya, financial are those and withnon-financial a costed, and building up the habits that, over Source: PwC Global Family Business Survey 2018 time, create a distinctive legacy. 13 | Family Business Survey 2018

Managing growth and the professionalisation journey

Dr Raju Mohindra, Founder and Chairman Dawa Group

Twenty-five years ago, Dr Raju Mohindra, his trained as a radiologist and is the current wife Reema and his friend Dr Ajay Patel founded chairman of the group while Reema, his wife, is Medisel (Kenya) Limited as a wholesale distributor a management consultant and the Chief Finance of generic medicine. Their mission was to create Officer. Dr Patel, a professional pharmacist, is the an enterprise that would avail high quality group’s operations director. medicine to Kenyans. “Dawa Group has been growing steadily since its Medisel started off as a marketing and distribution humble beginnings in 1994,” said Dr Mohindra. company selling drugs sourced from India and China. In 2004, they acquired Dawa Limited, a Expanding the business rundown pharmaceuticals manufacturing plant Dr Mohindra is bullish on the future outlook of the under receivership, which they later upgraded to business and the opportunities in the East African begin manufacturing drugs for local and regional region. With a strong footprint in East Africa and consumption. Francophone West Africa, plans are underway to expand to Ethiopia, Angola and Mozambique. Dawa Limited has over the years become a successful pharmaceutical manufacturing “Pharmacy is an exact science and cannot be company and is the flagship of the Dawa Group. compared to the fast moving consumer goods The Group acquired a chemicals business, sector, and therefore access to markets has to KEL Chemicals Limited, three years ago to be specialised and optimal at all stages of the complement the Group’s established real estate supply chain. The inspections at the borders are and pharmaceuticals divisions. Dawa Group’s punitive,” he adds. Recent investment of over commercial and real estate investments are in US$40 million in professionalising the business Thika and Nairobi. and upgrading the operations across various functions are expected to transform the Group Dr Mohindra, Reema and Dr Patel are close and facilitate their expansion plans. business partners who set the stage for a cohesive and robust business that now employs On the Government’s role to support the over 500 people across Africa. Dr Mohindra pharmaceutical sector, Dr Mohindra notes that 14 | Kenya Family Business Survey 2018

more could be done by the regulatory The Group has had to develop a management team. Competent non- It would address speed and bodies. “There needs to be increased different product mix and over the family members can be helpful on the convenience for our customers,” he restriction on imports for some drugs years introduced an array of more journey of transforming family owned explains. so as to promote local manufacturers. advanced locally manufactured and businesses into well managed and For instance, Ghana and other West imported drugs to meet new and governed corporates. The future African countries have restricted evolving demand. Although the pharmaceuticals As head of strategy, Dr Mohindra imports of some common drugs which business provides a lot of opportunity acknowledges the struggle in has boosted the local pharmaceutical Professionalisation and could be passed on to Dr balancing good people and the cost manufacturing sector,” he explains. The Group has embarked on the Mohindra’s children, they have each of hiring them, although he does not professionalisation of the business, chosen other careers. In hindsight, He lauds the inspections by bodies hesitate to pay a premium for what he driven by the implementation of robust he says he made a wise decision like the United Nations Industrial calls the “skills of the future”. “I am information technology management by involving outside talent in Development Organisation (UNIDO) to always open to growth, which is the systems primarily to streamline management and on the Board. clamp down on substandard drugs, spirit of entrepreneurship,” he says. supply chain processes and steadily emphasising that quality is key to their Looking ahead, Dr Mohindra’s automate manufacturing operations. sector and society in general. Technology and competition vision for the business is to “run it to Dr Mohindra also acknowledges “Dawa is still dealing with competition prosperity”. Private equity firms and Customer preferences and the that the transformation of the group by innovating digitally. The influx of other investors have approached regulatory environment requires the diversification of the imports from markets like China and Dawa Group but Dr Mohindra Market dynamics have changed senior management and extending India require thinking innovatively indicates that they are not ready to over time for the group’s “typical” business governance beyond family about our Business 2 Business relinquish control of the business. He customer. The middle class has grown members. The recent recruitment of (B2B) model and just like online is especially keen to transform the and it is apparent that lifestyle choices a non-family member as a managing retailing, our traditional models in business digitally before considering are very different as compared to 20 director of the group has helped to the pharmaceutical sector will be outside investment. years ago. Drugs that sold readily 20 diversify the senior management disrupted,” says Dr Mohindra. Lastly, Dr Mohindra believes that what years ago included broad spectrum team. The board has also recently Even as a traditional B2B operation, has worked for him over the years was drugs like basic antibiotics. With been restructured to bring onboard Dr Mohindra is open to Dawa Group his emotional detachment from the today’s fast-paced lifestyle, poor non-executive directors from different acquiring an online digital partner to business. He and the other founders food choices, and reduced outdoor sectors to support management in push online sales of a B2C nature. “A have been focused on handing activities for most people, lifestyle creating efficiencies and streamline model similar to MyDawa, launched over a sound business to capable diseases have slowly crept up in the business across the key divisions. recently in Kenya as the first retail professionals. As this handover takes prevalence. Consequently, the Even so, Dr Mohindra believes that licensee for e-retailing medicine, is effect, Dr Mohindra looks forward to demand for the drugs to treat lifestyle the Group still needs to focus more what we want. spending more time with his family. diseases has risen. on increasing local talent within the 15 | Family Business Survey 2018

Getting value from your values As decision making grows more complex during an accelerated pace of change, family businesses need to implement guidelines and tools to codify their values as a way to make better decisions. Based on our survey results and experience in the Kenya market, family businesses that make their values and purpose explicit and measurable, and incorporate them into their strategic plans, see better returns and greater longevity. Adopting an active stance towards values really pays off. 16 | Family Business Survey 2018

The values of a company are the resilience during downturns. This an asset that is relevant to today’s In this year’s Family operating beliefs and principles that is why family businesses are often world can get better returns if they act guide behaviour among not just the viewed as more trustworthy than other smartly and communicate their values Business survey, we set leadership, but also its employees. companies. effectively. out to test some of our These concepts often manifest in the Although many family businesses Businesses that embody their values experiences about the company’s culture. are strongly aligned around a shared in everyday practices and routines importance of values. We They affect not just what a company sense of values, they don’t always use get better results. “The ones that get says but also what it does. For them to their full advantage. it right start with understanding the found that 87% of Kenya example, a family business might value of values. They get that this is respondents felt that What if family businesses codified collectively agree on the need to what distinguishes them in the market. their values right from the start and they had a clear sense of diversify its product offerings or It’s their DNA, their secret sauce,” made them active? Our research expand into new markets, just as says Dr. Justin Craig, a professor values and purpose as shows family businesses that make it also might agree on the need for of family enterprise at Northwestern their values and purpose explicit a company, compared greater trust and cohesion among University’s Kellogg School of and measurable, and incorporate to 79% globally. Of the family members and employees. Management. “This is what has helped them into strategic plans, see better Genuinely held values become them across previous disruptions. The total, 73% felt strongly returns and greater longevity. Indeed, ingrained in everyday practice: the thing that distinguishes successful many of today’s entrepreneurs are that having a clear sense deals made, suppliers worked with, family businesses is that they take the founding companies based on a of agreed-upon values products and services launched and time to communicate and educate clear set of values, and many of them ways of managing employees. and remind themselves, and the next increased revenues and have themselves come from family- generation, early and often about the Companies that are managed with led businesses, where they would profitability (compared to value of values.” strong values, a clear purpose and an have learned, first-hand, the role that 70% globally). Critically, eye for legacy will tend to build trust clearly articulated values can have. a total of 73% felt that and loyalty among staff, suppliers Businesses that talk about their values and consumers, and will have greater as ‘social capital’ and treat this as having a clear sense of values gave them a competitive advantage. 17 | Family Business Survey 2018

Other findings reinforce this point. As decision making grows more In Kenya, a higher percentage of complex, particularly in an accelerated respondents reported growth over stage of change, family businesses the last 12 months (74%) than global need more than ever to implement respondents (69%) and a higher guidelines and tools to codify their percentage (87% in Kenya) have a values as a way to make better clear sense of agreed values and decisions. Indeed, living up to codified purpose (79% globally). Values values and purpose is the most and purpose matter even more in effective risk management system. markets like Kenya, where corruption When it comes to codifying values, is a significant challenge to doing a good starting principle is to keep business. Another challenge faced it simple. With just over half (54%) by 93% of respondents in Kenya, of Kenya respondents reporting that attracting and retaining the right they have documented their values, talent, also speaks to the importance one of the challenges could be the of strong values. Honest, hard working documentation process itself. people want to work for others who share those values. Our survey showed that 68% of Kenya respondents that had a clear sense of values felt that this helped attract potential joiners (compared to 79% globally) and 83% felt that their values and purpose made their company a happier place for employees to work (compared to 85% globally). A total of 80% in Kenya and 82% globally felt that their values and purpose had improved their company’s staff retention. 18 | Kenya Family Business Survey 2018

“The Aspire value is not only a corporate identity but is encouraged as a personal mantra of self- belief translated to day to day work at Simba.”

- Adil Popat, Executive Chairman, Simba Corporation

No matter how solid your values simply be assumed; they need to examine whether values drive the right are, they will change over time. As be brought to life by living up to behaviours to improve performance, the business grows and new people them. So, it is important to talk including those of management, staff join in, leaders need to revisit what about values regularly to make sure and stakeholders. Everyone must be those values are and, in some people agree on what they mean and committed to the actions needed to cases, refresh them. Values cannot their relevance. It is also crucial to support these shared values. 19 | Family Business Survey 2018

“We are celebrating It is also useful to recognise the Africa by the approach taken by ZZ2, our business. Instead of focusing difference between having family the country’s largest independent internally on the family or on the 60 years of business values and having values that work agriculture group, which traces its business all the time, the focus should this year. This year is for the business. Values need to be roots to the owning family’s farming be outside of that, and thinking about dedicated to our elders creatively shared and reinforced in activities in 1698. Chief Executive the interactions and the linkages in the family businesses involving more than Tommie van Zyl says everyone from wider world,” he says. and our founders who one generation. the purchasing office through to the Values should be communicated logistics supply chain understands the had the guts to start the Values are more effective when explicitly and clearly if they are to be business’s value system. “We adopted business. explicitly communicated to customers adopted across the family business an ‘open systems philosophy’ in and suppliers, as exemplified in South and beyond. Family values are based on discipline and ensuring that we portray to the community at large that this is a company that works well, works hard and looks after its employees in total.”

- 3rd generation Family Business owner, Kenya 20 | Family20 | Business Kenya Family Survey Business 2018 Survey 2018

Stewardship and the values that inspire

Adil Popat, Executive Chairman Simba Corporation

“Our engine is our people,” says Adil Popat, Planning and management Executive Chairman, Simba Corporation. “I have Since 2007, Simba Corporation has experienced been blessed to work with good Kenyans and great change and diversification. The group grew build a stable and sustainable business.” its auto dealership portfolio with the introduction The early years of BMW, Mahindra and Renault franchises as well as a separate division, Africa Fleet Management. Simba Corporation was founded in 1948 as The group also ventured into hospitality with the a used car dealership on Koinange Street in building of the Olare Mara Kempinski Camp, the Nairobi’s Central Business District by the late Villa Rosa Kempinski and Simba’s own branded Abdul Karim Popat. “My father was a hardworking hotel, the Acacia Premier in Kisumu. This and disciplined man,” reminisces Adil Popat, propelled Simba wholeheartedly into the Kenyan Abdul Karim’s son and a second generation hospitality sector. business owner. “He worked long hours and regularly took the train 300 kilometers away to Regarding expansion, Adil remains cautious. The Eldoret, a town in the northern part of Kenya, to group is on the look-out for new opportunities buy used vehicles for resale. He would diligently in the region, but the management team keeps travel, write multiple books of accounts for his a clear eye on risks as well as the expected clients, while making time to attend the mosque benefits. “We prefer creating partnerships with every day.” strategic investors when the time comes along and according to Simba’s four pillars: motor From those humble beginnings, Simba vehicles, hospitality, real estate and financial Corporation now has an annual turnover of over services,” he says. US$ 100 million and employs about 1300 people. It operates in the motor vehicle, hospitality, fleet “Change is inevitable,” Adil continues. “Especially management, car rental, real estate, financial for the motor vehicle franchises.” He took over services and power systems sectors. when turnover was modest and operations still 21 | Family Business Survey 2018

small. These have grown steadily over “I would want my family working and Adil says that he is not averse time amidst fierce competition from together and living harmoniously, and to “growing the group slowly and other brands. find prestige in working for the family steadily” for the sake of doing the right business,” he adds. He is realistic, thing. NextGens in the family business however, and mentions that there are Finally, Adil recalls how he and his late Adil has exposed his children to the mechanisms in place for exit if family father related to each other. He says financial, legal and strategic aspects members so wished. that they had candid conversations of the business in recognition of the about whether it was necessary to important role they play in influencing Values and Legacy Alignment of the keep expanding yet they were already the group’s future. Adil is keen to Adil reinforces that the ethos and spirit so successful. company’s values reinforce that talent in the group is of Simba Corporation is underpinned supported and hard work appreciated by its core value: Aspire. The Aspire He remembers responding and with its peoples’ and rewarded. However, the next value should resonate with all those envisaging a legacy that transcends values is fundamental generation should not be forced to join that lead, work for, partner with, and the current generation, of building a for greater success. a family business but should earn their do business with the group. Adil business that was viable well into the place in the business based on their encourages the team to articulate their future, and one which contributes skills and interest. personal aspirations and to provide good to the society. “I am keen that input into the group’s aspirations as the Simba name resonates with good He says that the family constitution well. He believes that alignment of the work and projects that are visible in is clear about the involvement of company values with people values is the marketplace,” he concludes. spouses and the wider family in the fundamental for greater success. business. Where gaps would be cited in running the business, it is also clear Integrity is also a key pillar for the at what point consultants would need group. They strive for transparency to be engaged. and honesty in running the business 22 | Family22 | Business Kenya Family Survey Business 2018 Survey 2018

Family values and tax compliance

Judy Muigai, Associate Director, Tax Sunny Vikram, Senior Manager, Tax PwC Kenya

Values have emerged as a front-runner issue in this era of instant news and social media, a whiff this year’s Family Business Survey report, and of accusation will set the Twitterverse ablaze E: [email protected] rightly so since values are indispensable when before you’ve had your morning coffee! it comes to sustainable commercial growth and T: +254 20 285 5333 When it comes to taxation, the values that tend to success. dominate the conversation are around openness One area where values contribute immensely is and transparency. It is not enough to report the the area of regulatory and tax compliance. Values least possible information that one can get away enable a business to prioritize tax and regulatory with - complete and accurate declarations are compliance by reinforcing messages about doing required, especially around foreign transactions what is right. and relationships. Strong values are usually reflected in company Providing comprehensive data to the tax authority policies which express zero tolerance to can feel daunting because taxpayers may fear deliberate non-compliance and whose disciplinary that the information will be turned into a weapon procedures reflect how seriously a breach is and used against them. For example, disclosures to be treated. Furthermore, it is not unusual to around foreign affiliates may result in additional see whistleblower portals in larger companies foreign income being incorrectly assessed to tax that enable anonymous reporting of policy or a fuller disclosure in one year of income may E: [email protected] infringements. lead to questions being asked about prior years where the information was scantier. T: +254 20 285 5033 This is because good business ethics are no longer optional - the reputational damage which To these concerns, we make several responses. accompanies non-compliance erodes the bottom First, the Kenya Revenue Authority (KRA) is line swiftly and sometimes even conclusively. In consciously pursuing a more facilitative approach 23 | Family Business Survey 2018

with its customers. This is part of a from investigation into past actions government agencies and institutions higher quality tax services to improve global move by tax administrations that continue to haunt them (related to which will result in the taxman having compliance in future. This is especially worldwide to work together with tax on foreign income or assets). It is access to even more data. true for companies that are becoming taxpayers to achieve co-operative a chance to wipe the slate clean and increasingly complex due to organic Against this backdrop, it is advisable compliance through trust and start on a fresh note. growth, acquisitions and greater cross for taxpayers in the family business engagement. Admittedly, there is still border activity. Third, as tax authorities enter into sector to consider how best to some way to go but the initial signs more treaties for exchange of remediate any prior year exposure. Values need to be visibly represented are encouraging. information and as they eventually The process needs to be handled by behavioral change and we Second, if a taxpayer does not want implement the Foreign Account with care and this is one area where applaud the family businesses that to open a Pandora’s Box by declaring Tax Compliance Act (FATCA) and in-house teams can benefit from the are determined to build a culture of foreign income or foreign affiliates that Common Reporting Standards (CRS) support of external professionals enhanced compliance and openness. have not been previously declared, provisions, details of our foreign whose ethical values mirror their This shows that they’re ready to play then there is an ongoing Tax Amnesty income and assets will become more own. Beyond sorting out the past, in the major leagues where consistent that may offer a solution. A successful visible. We also anticipate greater family business may need to invest and penetrating scrutiny by regulators amnesty applicant will enjoy immunity collaboration between different significantly in tax technology and and stakeholders is unavoidable. 24 | Family Business Survey 2018

Five principles for getting Peter Englisch, Global and EMEA Family value from your values Business Leader, PwC Germany

1. Be specific about your values: codify them, write them down and act on them. Do this with the full involvement of family members. This will strengthen not only your family cohesion but also help you to make better decisions for the family business. 2. Communicate your values internally and externally to activate your family business advantage. Many family businesses have values but don’t always bring them to others’ attention. You can’t get value from your values if you don’t communicate them. 3. Develop business principles and a code of conduct that brings your values to life. This helps to build trust and credibility internally and externally and opens doors for new business partners. 4. Put values at the forefront of your recruitment efforts and embed them into your workplace, as you seek to bring the best talent to your business. Displaying your values is a good way to attract and retain the best talent for your business. 5. Focus on value creation along the entire value chain, such as ensuring that you work according to shared ethical standards. Your values have a mutually reinforcing impact beyond your own business. 25 | Family Business Survey 2018

Purpose and professionalisation Business leaders are talking more than ever about finding the right balance between the profit motive in business and a heightened sense of purpose that is embodied and cascaded by the c-suite. 26 | Family Business Survey 2018

The purpose of an enterprise is its to track their activity and its impact, Expanding into new segments or reason for existence: the expectations such as through Integrated Reporting. markets, digitalisation, external you have about what products and recruitment of senior managers In our survey, 74% of Kenya family services you produce, why those and succession planning are all businesses and 68% globally had a create value and what you will do hallmarks of the family business documented vision and purpose, or with the value you create in the world. professionalisation journey. There are mission statement, for their company. Beyond making money, your purpose other indicators, but our 2018 survey might include providing for your Purpose speaks directly to the shows that a common purpose can family and community, fostering an professionalisation journey, which we unite a family business, improving innovative way to improve the lives have explored in our 2014 and 2016 its performance as well as the of your customers or realising an Family Business Surveys in Kenya. In professionalisation of its operations. aspirational business goal. The family 2018, our survey shows that a larger originally founded or acquired this percentage (66%) are involved in business for a purpose, and unless multiple sectors or multiple markets, that has changed, you are still here to or both, compared to 56% in 2016, realise it. whereas the global percentage change over the same period is negligible. Today, business leaders are talking more than ever about finding the right In the next two years, two-thirds balance between the profit motive in (67%) of Kenya family businesses business and a heightened sense of intend to make significant steps in purpose that runs through the c-suite. their digital capabilities and 61% plan to bring in experienced professionals Survey after survey shows that the from outside the family to help run the millennial generation, which makes business, both significant steps on the up the majority of the working- professionalisation journey for many age population in Kenya, expects family businesses. companies to contribute to society, have a clear purpose based on values Just over half of Kenya family and be more sustainable. They want businesses report having a succession to work for companies that they plan in place in our 2018 survey, feel good about and tend to buy although just 17% report that it is from those that meet their ethical robust, formalised and communicated. standards. To be accountable in this This is largely unchanged from our way, businesses will increasingly need 2016 survey. 27 | Family27 | Business Family Business Survey 2018Survey 2018

Five principles for Michael Mugasa, Leader, Private Company Services pursuing purpose PwC Kenya

1. Purpose defines your ‘license to operate’ beyond making money. Be clear on which problems your business is committed to solve, and what kind of value you want to generate for your customers, employees, stakeholders and society. 2. Define the link between your products and services and the company’s purpose. For example, running a company that sells inputs for farmers means not just being great in sales and outreach terms. It is also about a broader purpose that has to do with feeding populations and helping farmers achieve this efficiently. 3. Focus on real and sustainable value creation according to your defined purpose along the entire value chain. Consider the impact on your business model and leave room for necessary adjustments. 4. Apply and monitor Corporate Social Responsibility (CSR) principles and define key non-financial performance indicators that support you better in long-term decision making to achieve your goals and support your family business brand. 5. Communicate your defined purpose internally and externally, as well as what you’re doing to achieve it. This will help you align and unify various stakeholders, strengthen your employer branding and bring your competitive family business advantage to life. 28 | Family28 | Business Kenya Family Survey Business 2018 Survey 2018

The new revenue standard ‘IFRS 15’ – Is your business compliant?

Akinyemi Awodumila, Associate Director, Capital Markets And Accounting Advisory Services PwC Kenya

Every entity reports revenue and consequently when applied, ensures entities irrespective of their every entity will be impacted by the new revenue industry recognise revenue using the same basis. standard IFRS 15. The degree of impact will vary IFRS 15 is effective for entities with annual from one entity to another. Therefore, businesses periods beginning on or after 1 January 2018. The should conduct an impact study to understand standard applies a 5-step approach for revenue the implications of the new standard on their accounting. These steps, though simple, could business. lead to significant changes in the timing, amount Revenue remains a major measure through and pattern of revenue recognition for businesses which the viability of any commercial venture when compared to the old revenue standard. The E: [email protected] is assessed. The old revenue standard IAS 18, five steps are: developed in 1982 when the business landscape T: +254 20 285 5312 1. Identify the contract with the customer; was basic and straightforward, had become obsolete. 2. Identify the performance obligations; 3. Determine the transaction price; The rapid changes in the business environment, operating models, commercial arrangements and 4. Allocate the transaction price to the globalisation led to the need for a new standard performance obligations and as the old standard had limited guidance on these 5. Recognise revenue as the performance issues, resulting in different industries developing obligations are satisfied. different practices and rules to deal with the For instance in step 1, there is a lot more shortcomings of the old standard. This pushed emphasis and guidance on the assessment of a the International Accounting Standards Board to customer’s credit risks to determine whether a develop IFRS 15, with a set of principles, which revenue contract exists or not. 29 | Family Business Survey 2018

Family businesses might relationships, telecommunication, standard. The former standard, IAS guidance means entities need to technology and membership/joining 18, relied mainly on a concept of risk reassess previous analysis using IFRS need to update systems, fees/activation fees. and rewards, which meant entities 15 to confirm whether entities still processes, controls and recognise revenue as risks and meet the requirements to be principal Determining the transaction price in rewards from goods and services are or agent. This could affect entities policies impacted by IFRS step 3 introduces concepts such as transferred to customers. IFRS 15 on such as dealerships and agency time value of money, consideration 15 accounting changes. the other hand is hinged on a concept arrangements. for revenue received either later of control, which means revenue is or in advance, which results in Contract acquisition costs guidance, recognised on transfer of control on consideration received from a requires costs incurred (incremental) goods and services to a customer. This could impact entities dealing customer to be split between revenue to acquire contracts to be capitalised This could lead to significant changes with a wide variety of customers and interest income or interest and spread over the life of the contract for entities regarding the timing of that are unable to assess customer expense. There is now a concept if an entity expects to recover those revenue recognition. credit risk at origination of revenue of variable consideration that could costs. This could affect entities paying transactions. Some of the industries change the amount of revenue an Also within step 5 is the ability for commissions and brokerage fees for affected include utilities, real estate entity can recognise when there is entities to recognise revenue for contracts acquired. and government related agencies. variability in a revenue contract. goods and services with no alternative It is important that entities plan for use and for which an entity has a Step 2 requires entities to identify all An entity is required under step 4 the tax effect of any changes on right to payment for work done to performance obligations or promises to allocate that transaction price to transition. In addition, changes to the date, over time as opposed to when made to customers in a contract every promise identified in step 2. This timing of revenue recognition needs the project is completed at a point in from the perspective of the customer. allocation now needs to be done using to be effected with the tax authority time. This could affect customised This could lead to identifying more the stand alone selling price for each in mind, because the tax man might manufacturing and long term promises than had originally been promise (to the extent those promises have different timing/trigger for the contracts. identified. are sold separately in the market) collection of tax balances such as VAT in the contract. This has affected Where an entity is a principal, the on invoice. Entities have had to account for free the performance reporting for many entity reflects the gross revenue goods and services including material Family businesses might need to entities at a product level and their and any payments to agents as an rights offered to customers which update systems, processes, controls revenue recognition pattern. expense, however an agent only has changed the pattern of revenue and policies impacted by IFRS 15 reflects the commission earned recognition. Industries affected Step 5 brings to the forefront one accounting changes. (the net revenue). Changes to this include brokerage businesses, agency of the main highlights in the new 30 | Kenya Family Business Survey 2018

Securing your legacy in a digital age Although family businesses recognise the challenge of digital technology, that doesn’t mean that they are ready for it. One place to start is the board, where a strong combination of directors with the right skills can be hugely beneficial as family businesses look to tackle digitalisation. Another focus can be on millennials, who are the best-educated generation in history and are extremely tech-savvy. Part of a family business’ legacy will be determined by the way in which the next generation is encouraged to be involved. 31 | Family Business Survey 2018

Thriving in the face of digital disruption

Alex Muriuki, Associate Director, Technology Services PwC Kenya

Family businesses globally are facing significant better experiences for customers. To name a few disruption from emerging digital technologies examples, companies are deploying chatbots such as Artificial Intelligence (AI), the Internet of to provide a more responsive customer service Things, 3D printing, Augmented Reality, Virtual experience. Others are adopting robotics process Reality, Blockchain and Robotics. automation to automate manual repetitive and rule based tasks to increase productivity, lower costs According to our survey 35% of family businesses and reduce human errors among other benefits. in Kenya feel vulnerable to digital disruption which Yet others see AI as providing an opportunity to is higher than the global average of 30%. As better predict their customers’ specific needs. an example, a new manufacturing entity could establish presence in the market and introduce a From our survey, 67% of family businesses in E: [email protected] highly automated manufacturing process using Kenya plan significant steps in building digital robotics and 3D printing and with the ability to capabilities in the next two years. Those that T: +254 20 285 5250 tailor consumer products to specific customer manage to integrate the disruptive technologies preferences and at lower cost. This would make into their business strategies and to successfully incumbents struggle to compete and result in an implement them are set to gain significant “Uber” effect. For those in financial services, the benefits. traditional brick and mortar model is rapidly being Kenya has characteristics that make it ripe for disrupted by digital channels. digital innovation. Kenya has a young population While the threat of disruption is real, family with almost 75% of the population estimated businesses should also look at these trends to be under the age of 30. This is a generation positively and focus on the opportunities provided that has grown to expect instant services such by these technologies to support innovation of as shopping and banking online and continually their businesses, increase efficiency and provide expect the same level of service across industries. 32 | Kenya Family Business Survey 2018

A young technology savvy population The next step is to put in place hire – including their family members also provides a pool of talent that can capabilities required to successfully – to gain experience outside the family help family businesses reinvigorate implement the digital strategy. Our business. They recognise that no their internal capacity and attain a experience globally tells us that company has a monopoly on digital more innovative culture. For family although family businesses recognize innovation, and it’s better to learn from businesses, the first point of call to the role of digital disruption, it does a broad base of experience. inspire innovation may be the next not mean that they are ready for If not well planned, digital generation of family members. In our it. Digital transformation needs to transformation projects can tend to be survey, 61% indicated that the next be driven from the top and it helps complex and high risk. It is therefore generation was already part of the to have the right experience and important to put in place the right business. sponsorship at Board level as well as A digital strategy governance structure and processes. within senior management. In our experience, there are a helps to define how Good governance will enable the number of critical success factors an organisation can The culture of the organisation needs organisation to define the right digital to successful digital transformation. to support innovation; the right tone strategy, select the right technology An important starting point is leverage specific digital from the top as well as finding the partners, manage delivery risk and having a clear digital strategy that technologies that have right talent can help. From our survey, increase the likelihood of adoption. is regularly updated and that is family businesses globally and in the most impact on As increasing digitisation becomes part of the organisation’s overall Kenya cite the challenge of finding a reality, organisations will also face business strategy. Not all emerging achievement of the talent that is not only skilled in digital more exposure to cybersecurity technologies will be relevant to your but also understands their businesses organisation’s strategic threats. In our survey, 59% of family business. A digital strategy helps well enough to be able to navigate the goals. businesses surveyed in Kenya to define how an organisation can unique demands of each industry. feel vulnerable to a cyber-attack. leverage specific digital technologies The young technology savvy Mitigating cyber security risks should that have the most impact on population in Kenya provides a useful be part of the digital strategy and achievement of the organisation’s pool of talent open to new digital implementation process and not an strategic goals. It is critical to define ways of working while being mentored afterthought. The right partner can this strategy so as to ensure that the by more experienced employees help to mitigate risks and increase organisation’s resources are utilised in that have a deep knowledge of the your chance of success on your areas that have a clear business case business. In our survey we found that business’s digital transformation and where they can make the most 69% of respondents expected or journey, and should understand your impact. encouraged the next generations they business. 33 | Family Business Survey 2018

Family business leaders are waking up to the disruptive reality of artificial Exhibit 6: Where family businesses see themselves in two years intelligence (AI), the Internet of Things, digital fabrication (3D printing) and robotics. Global Thirty five percent of our Kenya Will have made significant steps in terms of digital respondents said that they feel 67 57% capabilities vulnerable to digital disruption, compared to 30% globally. In Kenya, Will have brought in experienced professionals from this is significantly lower than the 61 53% percentage that said so in 2016 (40%) outside the family to help run it whereas globally, the percentage is higher than in 2016 (24%). Two Will be selling its goods or services in new countries 50 38% thirds of Kenya respondents (67%) are aiming to make significant steps in terms of digital capabilities in Will earn the majority of its revenues from new 24 18% the next two years, compared to products or services 57% of global respondents. These discrepancies between the Kenya 20% and global respondents shows that Will have significantly changed its business model 22 Kenya’s family businesses feel more vulnerable, overall, than their global Will have been involved in buying or merging with 17 24% counterparts but they are investing in other domestic companies digital capabilities — perhaps helping them to feel more confident about the Will have been involved in buying or merging with changes ahead, as compared to the 17 18% other companies outside of its domestic market survey results in 2016. Among the specific technological advances cited as challenges by the survey respondents in Kenya were cybersecurity (39%), digitisation (30%) and the growth of AI and robotics (11%). 34 | Kenya Family Business Survey 2018

“Dawa is still dealing with competition by innovating, digitally. The influx of imports from markets like China and India require thinking innovatively about our Business 2 Business (B2B) model and just like online retailing, our traditional models in the pharmaceutical sector will be disrupted.”

- Dr Raju Mohindra, Founder and Chairman, Dawa Group

Although family businesses are In Singapore, one of the most digitally said they were in the early stages of starting to recognise the challenge of connected cities on earth, we recently rolling out their digital strategy. digital technology, that doesn’t mean conducted a separate survey of family Some family business leaders that they are ready for it. Globally, the businesses in conjunction with the recognise this gap and are expressing most likely respondents to say that financial services firm UBS Group concern. Others keep coming back they felt vulnerable to digital disruption and the Singapore Chinese Chamber to the challenge of keeping up with were in retail (53%) and media and of Commerce & Industry. Even digital disruption. entertainment (65%). When asked there, readiness was less than ideal. specifically about digital disruption, Just over 34% of those surveyed Digital technology is a critical priority only a minority could talk about said digitalisation was included in when seeking potential employees. specific technologies, and only 20% their firm’s strategic plan but also The ability to innovate and find the of respondents felt they would have volunteered that it had not been right people to keep the company significantly changed their models mapped out in a well-thought-out competitive is a rising concern. within two years. approach. One quarter of respondents Innovation and skills gaps were 35 | Family Business Survey 2018

two of the biggest challenges jobs. The family businesses that don’t and prospective customers. here. Anecdotally, we hear from mentioned, in Kenya and globally, embrace change probably won’t be leaders that getting their own kids to “My son Richard has been working while business leaders also mentioned here in 20 years’ time because they join the business can be difficult and in the organisation for close to 18 hiring, keeping and rewarding haven’t taken the steps to address require flexibility about what roles months, but you know, we’re dealing employees as top priorities. these issues now. When they do, it they might play. Next-generation with Gen Y here. We have to sit down may be too late.” family members as a group are better One place to start is the board, where and listen to the younger generation educated and have more choices than a strong combination of directors with Interestingly, in our survey, we found and understand what drives them and preceding generations. They demand the right skills can be hugely beneficial that 69% of respondents expected or what makes them tick, and then see more meaningful work and have as family businesses look to tackle encouraged the next generations they how we can use that in our business. higher expectations from employers. digitalisation. Another focus can be hire - including their family members - “So, that’s why I’ve been very specific Luring home next-generation family on millennials, who are the best- to gain experience outside the family with him on developing the online members after educating them abroad educated generation in history and business. They recognise that no store for us,” Maizey says. and widening their horizons presents are extremely tech-savvy. They have company has a monopoly on digital the same hiring challenge. a significant amount to offer family innovation, and it’s better to learn from There is an important note of caution businesses grappling with issues a broad base of experience. In PwC’s such as digitalisation. They are global recent NextGen study (Same passions, citizens and represent a rich source different paths, 2017), we found that of solutions to the skills gap, given young family members are joining their their experience and education. And family’s enterprise and already making there’s an important point: a family a difference in digital technology. business’ legacy will be determined When families recognise the value in part by the way in which the family of the next generation and empower encourages the next generation to be them to take the initiative on digital involved. technology, it can be transformative “There’s a big generational divide for the enterprise. Rikki Maizey, one between the older, grey-haired, silver of our survey respondents, is Chief foxes and the next generation coming Executive of Maizey Plastics, a large in,” says Paul Andrews, Founder and South African maker of industrial Managing Director of Family Business plastics. United, a UK-based resource centre He explains how he has employed for family businesses. “Once they get his son in a new role: developing an these younger people, it’s important online store for the company’s current to empower and allow them to do their 36 | Family36 | Business Kenya Family Survey Business 2018 Survey 2018

How can family owned businesses retain talent?

Jane Kithela, Senior Manager, People and Organisation PwC Kenya

According to the newly released 21st Annual While family businesses want to hire and retain PwC Global CEO Survey, international trends top talent, few have put in place retention show heightened expectations of businesses strategies to enable them retain their key talent. In by employees, society and the communities this article, we discuss some of the strategies that impacted directly by their operations. That’s why are geared to improve talent retention. every business needs a clear and well-articulated First, it is crucial to have in place systems and purpose – one that goes beyond financial goals processes that are transparently communicated to incorporate a broader set of shared values and and consistently applied. This means that from behavioural expectations. the entry stage of recruitment to the off boarding Purpose defines ‘who’ a business is and ‘why’ process upon separation from the organisation, E: [email protected] it exists while values and behaviours define its the employee knows what is expected and what culture. Both purpose and values act as vital support and mechanisms are available to them. T: +254 20 285 5645 guideposts and benchmarks for important The ‘place’ of the employee also needs to be decisions. If a decision or initiative falls short clear – it can take the form of a role profile or job in any respect, it can erode a vital commodity: description together with a clear reporting line. trust. Why is trust important in family businesses? In addition, the links and relationships to other Because family businesses often seem “opaque” colleagues or office bearers should be indicated when it comes to the decision making apparatus in an up-to-date organisational structure. More and therefore their employees can grow to importantly, opportunities for career advancement mistrust the owners. Employees who trust their and growth need to be understood for employees supervisors (and their employers by extension) are to be happy. more likely to stay with the organisation and to demonstrate higher levels of productivity. A second strategy is to manage your reputation 37 | Family Business Survey 2018

“Our family values are by communicating your organisation’s purpose, vision and values with developing a profitable investors, analysts, customers, business and making suppliers, the media and other sure that all the staff, stakeholders. The values cannot just be theoretical, they need to be lived suppliers and customers with concrete examples and success are happy. Overall we stories that can be publicised and want to be the best in celebrated. Such a winning culture will be highly dependent on how the business, having the you treat your employees, whether leading edge over the your employees treat each other competition in how we with respect and care and whether results are rewarded and unbecoming provide service delivery. behavior is punished. Our values are honesty, Third, family business owners can invest in developing a working being fair and sharing environment where people want to stay. A conducive workplace has adequate rewards remuneration packages communicates Numerous studies have demonstrated facilities that help employees to relax with people who how you value your staff. Equal pay that businesses with highly engaged while being optimally productive. should be granted for equal work so employees experience higher have contributed to Workplaces are now evolving to that cases of staff performing lower customer satisfaction and lower staff become like second homes, with the success of the level jobs but earning a higher salary turnover rates. They also outperform a variety of meal options, medical than their superiors does not arise. businesses with lower levels of organisation.” facilities on site, crèches for the young employee engagement. This applies family, gym facilities, nursing rooms Reward key and deserving employees - 2nd generation Family Business Owner, Kenya to family businesses as well hence for returning mothers and an array of with share based schemes and the need to invest in and implement facilities to support people living with other incentive plans. This improves employee engagement and retention disabilities. commitment and motivates them to strategies. It is advisable to consult behave like “owners of business”. It Whilst reward is not the most human resource professionals with the also supports longer term retention, important factor contributing to requisite expertise to craft a solution which is the key to effective staff retention, competitive staff for your particular business and succession planning. circumstances. 38 | Family38 | Business Kenya Family Survey Business 2018 Survey 2018

Challenging the old ways of doing business

Mihir Shah, Head of Strategy, Sales and Marketing Bidco Africa

We spoke to Mihir Shah, a 3rd generation That said, Mihir is careful to note how the stable family member at Bidco Africa, about the role of business environment created by the first NextGens in driving the success of family owned generation has contributed to the success of his businesses. ideas. That generation had installed a cohesive enterprise resource planning system, streamlined Mihir started at Bidco four years ago after shared services and structured and resourced completion of his studies overseas. He had departments adequately, which paved the way for always wanted to join his family in running the successful change. business in Kenya and had ideas of starting new ventures and product lines. He says that working Mihir believes that the customer is king and for the family business allows him the freedom to needs to be recognised and appreciated. The be creative and do more to enrich what is already digital marketing efforts he has led through social going on. He is currently overseeing the strategy, media and other platforms have begun to make innovation, sales and marketing departments at a difference in helping Bidco to connect more Bidco, focusing on Kenya and the export market. effectively with the target customer. Overall, he is cautiously optimistic because just like any other New ideas business in Kenya, the delayed electioneering “Bidco has always been associated with edible period and liquidity constraints in the financial oils,” Mihir says, but from the start he was keen to market have contributed to some uncertainty. innovate and introduce other products. His goal is to give customers more choice by diversifying the What matters? product mix into a wider array of beverages, foods Mihir is clear about where his departments need and snacks. Attracting the right partnerships, to be focusing and prioritises the customer’s such as Bidco’s recent partnership with CO-RO, a positive experience as a key outcome. In order Danish soft drinks manufacturer, is a step towards to connect with the market, he believes in growing Bidco’s Eastern Africa business. offering products that resonate with the customer 39 | Family Business Survey 2018

through direct selling; fast distribution understanding across generations. Moving towards the vision at Columbia Business School, Mihir channels and simplified routes to Running a successful business means Among Bidco Africa’s priorities is to expressed appreciation for the market are therefore important. Many constant change and open channels constantly meet customers’ needs opportunity. “It was insightful and family owned businesses are agile of communication, although perhaps by innovating and building the right informative. I met likeminded NextGen in their decision making processes in a more informal way.” partnerships. Mihir emphasises that business owners, many of whom were and he emphasises this as another my age and ran their businesses with He is a strong advocate for issue- every action he takes has to cause a advantage because customer many siblings. It was refreshing to based discussions devoid of ripple effect towards the achievement complaints can be dealt with swiftly. learn how they managed to keep each personalisation. NextGens require of Bidco’s 2030 vision. There are other happy, engaged and aligned to The people agenda is also important guidance, leeway and trust to checks and balances in place to the founders’ vision.” to Mihir’s view of building a better generate and implement ideas freely ensure accountability at all levels and business. He acknowledges some of and a chance to propose these to the everyone stays true to the course. the challenges related to finding the older generation. “That is the spirit of Reflecting on his recent experience at right local talent for certain positions disruption,” he says. the PwC’s NextGen Leader Academy as he continues to seek out young, ambitious and driven people to drive sales and marketing. “NextGens require guidance, leeway and Bridging the gap with the founders trust to generate and Mihir knew from an early age that implement ideas freely the vision of the family business and a chance to propose was ambitious: “To build an Africa these to the older business that was ranked first in market share among the fast moving generation. “That is the consumer goods and services sector spirit of disruption.” by 2030.” - Mihir Shah, Head of Strategy, Sales and This vision was “big” but he was sure Marketing, Bidco Africa that it could be achieved by the future generations – like his. Regarding owner and NextGen interactions, Mihir says, “Success can only be achieved through 40 | KenyaFamily FamilyBusiness Business Survey Survey2018 2018

Five principles for Five principles for

building a digital Alex Muriuki, a forward-looking Sunny Vikram, Associate Director Senior Manager legacy PwC legacy PwC

1. Accept the reality that, thanks to the digital revolution, the world is different 1. Thinking about the family business legacy — and how the family can from the one you have experienced in the past as a family business founder and should continue it — can often boil down to simply thinking about and owner. You might have to rethink your assumptions about the way your succession. But there is much more to think about. Legacy should involve business creates value. a plan for leadership succession, board succession and ownership succession, all combined. Pulling all of this together into a comprehensive, 2. Recognise that the next generation in your family business can play an formalised ‘continuity plan’ really helps. important role in ensuring you are digitally fit-for-purpose — and so ensure your legacy in a rapidly changing world. Accept that you need help. What 2. Build this up as your forward-looking, mid-term strategic plan for the better way to get help than from the next-generation members of your own business. Remember that it doesn’t merely focus on how you transition family? to the next generation and how they become the new managers of the business. 3. Empower your next-generation family members, let them experiment and let them gain experience outside your business. Crucially, let them 3. It’s important to emphasise that leadership succession is best handled have the resources to do so. When they enter your business, agree with through long-term strategy, not tactically at the time when the successor them on whether they have a custodial or ‘intrapreneurial’ role in a digital is needed. When planned over five to 15 years, the family can find a variety transformation — that is, whether they are merely stewards of the existing of candidates — family and non-family — and give them training and business or they will be given support and space to try a digital idea — opportunities to grow. some incubation capital, for example. 4. Board members with multiple industry perspectives can prove helpful when 4. Enlist and encourage next generations to bring older employees along navigating the vast amount of change that businesses are faced with today, on the digital journey through ‘reverse mentoring’. Reverse mentoring of especially those we highlight in this report around digital disruption. parents counts, too! 5. A good ownership succession plan should look at the most effective 5. Incubate the family’s values and those of the business into the new digital ownership structure for the business and revisit it regularly to determine business you are building. Don’t assume that by adopting digital strategies whether adjustments or improvements should be made. It is a continuous you somehow need to change your family or business values; they usually process and is not something done one time. It is something the leadership remain as they were. of a family should continually assess. 41 | Family Business Survey 2018

Private equity: thinking outside the family Family businesses and private equity are reaching a moment of convergence of interests — on goals, and even values and purpose — at a time when there is an increasing focus on long-term value generation, succession and professionalisation at family businesses. 42 | Kenya Family Business Survey 2018

One of the most striking findings in Demographics and legacy are big our 2018 survey is that whilst 85% of factors. Globally over the coming Kenya respondents rely on internal decade, trillions of dollars will be resources and 83% on bank lending/ passed down from one generation credit lines, 59% would consider to the next in the largest transfer of private equity (considerably higher wealth in history. As owners retire, than the 39% of global respondents). family and private business leadership will change hands. This tells us that family businesses and private equity are reaching a moment In this situation, family business of convergence of interests — on leaders often face a choice between goals, and even values and purpose — an outright sale, maximising growth at a time when there is an increasing potential before a sale, or ‘going for focus on long-term value generation, growth’ and engaging with private succession and professionalisation at equity. family businesses. 43 | Family Business Survey 2018

Perspectives of a private equity investor in family owned businesses

George Odo, Senior Partner and Managing Director AfricInvest – East Africa

“Private equity firms not only oldest office and headquarters in Tunis, Tunisia. bring in capital but expertise Kenya operations began in June 2009. that transforms businesses for AfricInvest currently has over € 1.5 billion under assets in various funds. The firm has closed over the future. Fund managers add 190 transactions since 1994 and overseen 90 value to the businesses making exits. them more attractive. We are not At a time when there is global convergence in financial investors. Private equity all aspects of business, George believes it is no different here in Africa, where AfricInvest continues is different.” to grow. Companies of all kinds are taking advantage of foreign markets and technology - George Odo, Senior Partner and Managing Director, to grow and family owned businesses are also AfricInvest - East Africa looking to create value in their businesses with a The journey so far view to transcend generations and innovate. Private equity firms are playing a significant role Regional trends in private equity in the transformation of family owned businesses The private equity landscape in East Africa has in East Africa and globally. To get a view of the evolved significantly over the past 10 years. At experience and practical challenges of external the time AfricInvest set up in East Africa, most investors into family owned businesses, we of the existing private equity firms were foreign- interviewed George Odo, Senior Partner and based, had a “fly in” model for their operations Managing Director of AfricInvest, Kenya. in Africa and hired mostly expatriate managers. AfricInvest turns 25 years old next year and has This has significantly changed over the years branches in seven countries in Africa, with the with more pan-African private equity firms run 44 | Kenya Family Business Survey 2018

by local professionals seeking to of family owned businesses, while companies outside the financial required from the NextGens as they transfer knowledge across various others may overprice consultations services sector. Some organisations enter the business and clarify existing sectors, influence policy within the and complicate simple deals. In in financial services require longer life decision making processes. governments and mobilise investment recent years, family business owners funds because of dynamic market Timing is always critical to a flows in the regions. are becoming increasingly proactive conditions in East Africa. successful transition of NextGens, in directly approaching private equity AfricInvest’s approach is to roll In some cases, private equity according to George. “Family firms for services or partnerships. up their sleeves and work with funds may exit to each other, a offices” are increasingly helping to management and boards to improve Preparing for private equity process referred to as “secondary manage family investments, address investee businesses. According investment transactions” providing more time for inheritance issues and transition from to George, it is important not the investee businesses to stabilise. emotional discussions at the family George says that many family owned only to understand the business dinner table to more structured and businesses do not prepare their fundamentals, but also to spend time Bringing in the value of the documented conversations. businesses sufficiently for private understanding the personalities of younger generation equity investments. Preparation tends ‘The markets across the continent the owners, families, board members, George has considerable experiences to start too late and hiring transaction differ, and constraints are experienced shareholders, management and with NextGens in family businesses. advisors as a last resort does not help differently in all these areas,” George external stakeholders of family “I have come across instances much. George advises that family says. “Corruption is still a problem businesses. “Relationship building where NextGens, especially in this businesses start good practices in most African economies,” he says with the owners and management is region, were not keen to plug back much earlier, such as by ensuring although he also believes that Kenya everything!” he says. into the business after completing that there are good governance seems to be addressing corruption their business degrees abroad. The George believes that there is still a structures in place with clear decision publicly and that this will help to owners then resorted to engaging gap in transaction advisory skills in the making guidelines and that there is strengthen the business operating private equity fund managers to run East African market for family owned an accountability matrix for the family environment for family businesses and the businesses,” he recalls. In these businesses, particularly in relation members running the business. private equity firms alike. cases, private equity firms can help to “family consulting”. Good family George observes that the typical to ensure channels of communication business advisors are hard to come investment life cycle of five years are open for NexGens and all by: some lack the knowledge, depth or was sufficient to add value and stakeholders, rationalise the skills appreciation of the unique challenges grow typical mid-sized and larger 45 | Family Business Survey 2018

Those seeking to maximise growth private equity as a smart choice. private equity firms are acting in a need a partner who offers more than more collaborative way, focusing At the same time, private equity money. The right partner will help on building operational value and businesses are sitting on significant improve governance and procedures, making portfolios bigger, stronger and amounts of money — but with few add a more challenging board more reliable instead of just trying to good deals to invest in. Investors member, expand the network and generate quick returns. are now increasingly looking for eventually help prepare the business opportunities with family businesses, This means that family businesses for a successful exit or succession. which are attractive because they tend have an opportunity to learn more An increasing number of family to be stable — and often undervalued. about the benefits private equity can businesses might be starting to view To attract these family companies, bring. 46 | Family46 | Business Kenya Family Survey Business 2018 Survey 2018

Access to funding – a post rate cap conundrum

Isaac Otolo, Associate Director, Transactions PwC Kenya

September 2016 brought with it one of the has been a domino effect on businesses, with most significant changes to Kenya’s banking suppliers and customers struggling to access landscape. Amendments to the Banking Act funding in particular for working capital, even introduced a floor to deposit rates applicable when security packages are enhanced to try and on customer funds held by banks and more twist the arm of lenders. fundamentally, a cap on lending rates in local Naturally, distress has been the result, a currency. phenomenon experienced by many entities across While it was expected that the “cheaper” the value chain – including family businesses. borrowing rates would ease the burden for Entrepreneurs have begun seeking alternative borrowers, in reality the majority of banks have forms of capital as opposed to pure bank debt. E: [email protected] taken a more prudent approach to lending, Private equity has been one option but with the being more selective about who they lend to and T: +254 20 285 5690 extended electioneering period in 2017, potential the limits applied based on their perceived risk investors were shy to move in until political profile, and to some extent, preferring to lend to temperatures cooled. Vendors were also worried government through the purchase of Treasury about valuations in this period and preferred to bonds and bills. hold off until the economic environment improved. The impact on businesses, in particular small to The high profile administrations and distress medium sized enterprises has been somewhat of large players in the retail sector have also adverse. The preference for government paper tempered the appetite for deals and contributed in an environment where government has also to lenders taking a more cautious approach. demonstrated an appetite for the issuance of In this environment, there has been an influx debt has constrained the liquidity available to of activity from credit funds providing funds other segments of the economy. As a result there 47 | Family Business Survey 2018

by way of mezzanine finance and hard currency sufficient to repay targeted at resolving working capital borrowings. Their long tenors have constraints. They have needed to been particularly attractive to manage earn the confidence of companies cash flows and usher projects towards unfamiliar with this model. With the a smoother path to maturity. Regional increasing number of deals and a and international players continue better understanding of risk profiles, to increase their presence in the more funders are now coming to the market, targeting trade finance and table from South Africa, the Middle project finance arrangements. This East, Europe and beyond. has put some pressure on commercial lenders, who have recently been The micro lending market, which seen offering structured pricing and (for now) remains free from the rate tenors not too different from those of cap, has been an alternative, in development finance institutions. particular for smaller businesses, but their size and liquidity does limit What’s the way forward? Businesses the quantum of debt and tenors have found themselves in a situation that they can extend. Other parties where they need to reconsider their have resorted to seeking funding business model, seek equity injections from financiers offering high cost, from shareholders or other interested short tenor and non-commensurate parties, aggregate borrowings and security packages. While considered term out debt facilities and where a short-term solution, very often these possible, seek cheaper funding. There arrangements end up being punitive to is no one solution that will provide the borrower. adequate capital but agile and resilient businesses will ride the current wave Development finance institutions, better than others. which by mandate should not technically compete with commercial lenders, have become a popular source of funding, in particular to parties that are able to generate a portion of their revenue in 48 | Family48 | Business Kenya Family Survey Business 2018 Survey 2018

Fraud and corruption in family-run businesses – is the bond strong enough?

Samuel Marete, Manager, Business Recovery Services PwC Kenya

Like any other business, family run businesses are the owners. We shall examine some of the forms at risk of fraud by employees and external parties. of fraud below. However, there is one category of fraud that is unique to family businesses: fraud by the owner Drawings or one of the owners. This type of fraud occurs Drawings are withdrawals of cash or other because of certain unique, enabling elements assets from a business by the business owners. within family-run businesses. Drawings, done correctly, are not a bad thing. The important thing about drawings is that they One of these elements is trust. The typical family- by definition reduce the owners’ equity. However, owned business may operate, day-to-day, on the business owners may not want to account the basis of high levels of trust. Another enabling for these amounts in the correct way, and could E: [email protected] element is what we may term “control issues”. mask the true nature of the value extraction from The principal owner of a family-owned business, T: +254 20 285 5371 the business. Incorrectly accounted-for drawings especially one who has successfully grown may well represent the first step down the slippery the business from a small outfit to a respected slope of fraud in family-run businesses. – even listed – company, commands respect. Other elements that can enable fraud in a family- False expenses run business are related to a difficult business The line between business expenses and personal environment characterised by profit warnings and expenses, in the mind of a business owner, could companies operating with sub-optimal capital and become quite blurry. Suppose a Chief Executive liquidity. travels out of the country to meet with important In this kind of environment, it is possible for a stakeholders overseas. Which of their incurred family-run business to slide down a “slippery expenses are personal, and which ones are slope” of increasingly blatant forms of fraud by business-related? Further, when an executive 49 | Family Business Survey 2018

sees oneself as the business, this Payroll irregularities 1. Owners hold regular meetings rationalisation can lead them to A well-run family business should to strengthen interpersonal loading all of their personal expenses pay its directors salaries. However, bonds, and to ensure that there on the business and feeling quite these salaries should be reasonable is agreement on key matters, legitimised in doing so. This thinking and should not be a burden on such as broad strategy and/or may represent another step down the the business. In instances where key management personnel hiring slippery slope. companies with such employment decisions; 2. Family-run businesses are Climbing up the Income benefits are family-run or owned, the run independently and with Statement risk of fraud can be higher. professional management advice It is profit after tax, typically, from Financial statement fraud past a certain size; which dividends are paid. The owner Eventually, these misdeeds will 3. Key elements of corporate of a loss-making company would have catch up with the business, and the governance (such as an no Profit After Tax from which to make owners may be forced to request empowered internal audit a dividend distribution. Such an owner their accountants to hide important department that reports directly may choose to insert themselves financial information, or to materially to the Board Audit Committee, higher and higher in the income misstate it, leading to financial and a strong and well-enforced statement, by becoming a supplier statement fraud. Another way this may system of internal controls) are to the loss-making business at either happen is when a family member is established. Expense or Cost of Sales level. This put into a management position, and enables them to extract value before a is not fully qualified for the job. This in profit has been realised. If transactions itself is risky, but if the family member between related entities are not feels pressure to perform, this done at arm’s length, such as if, for pressure can lead to their deliberately example, the related entity supplier to misstating financial information to the loss-making business charges that mask their underperformance. loss-making business a higher-than- market price for its supplies, this could Many of the pitfalls outlined in this very well represent fraudulent value article can be avoided by ensuring: extraction. 50 | Kenya Family Business Survey 2018

A final word Values and purpose have been constant features of life at family businesses for a long time. But times are changing — and they are changing rapidly. Leaders of family businesses have an opportunity to reboot their approach to their values and purpose to ensure that they are best placed to thrive in an increasingly complex business and social environment. By doing so, they will secure a lasting legacy that’s fit for the 21st century and beyond. 51 | Family Business Survey 2018

We believe the time has come for We have identified a few key “The message is clear: purpose, as well as ensuring family businesses to view values, principles that may guide you on your that appropriate behaviours purpose and legacy through a lens individual journey: adopting an active stance are recognised and rewarded. that may be quite different from the towards company values Having the correct balance of • Ensure that the next generation one through which they may have family and non-family board is deeply involved. Their views generates practices that been viewed historically. That’s members is essential in achieving are likely to help bring greater because the world is evolving at pay off in real terms. A the appropriate level of board alignment between family values a faster rate than ever, and the objectivity to do this successfully. and business values because the commitment to a clearly assumptions that may have served An effective board with the right members of the next generation defined set of values can a family business well over the past skills and experience will also reap deeply understand some pivotal generation or two may not stand the act as an ‘inner compass’ benefits in how the business deals concepts: the pace of disruption, test of today’s challenges. with disruption in areas such as the impact of digital technology for a family business as digitalisation, as well as in shining In addition, an enormous transfer of and the meaning of purpose. Their it navigates challenges a spotlight on the importance of wealth is poised to take place in the own way of ‘horizon scanning’ of technological and having a proper strategic plan. next decade as family businesses — seeing what’s around the in Kenya and globally, deal with corner — should be properly competitive disruption.” What is clear is that family a generational transition on an recognised and incorporated into businesses that take a more formal - Peter Englisch, Global and EMEA Family unprecedented scale. your strategic planning. One quick Business Leader, PwC Germany and collaborative approach to the win to consider: invite younger determination and application of their For many family businesses, this family members to observe board values and purpose tend to post more change will introduce a multi-year values in writing, embrace them, meetings or establish a ‘NextGen impressive growth and performance period in which there will be a include them in your strategic committee’ to consult with. statistics over the mid- to long-term. compelling requirement to revisit planning, and communicate them It is also clear that new imperatives and reboot their approach to values, • Regard your values and purpose effectively. Doing so will not only are prompting the need for family purpose and legacy, and to position as your unique assets, and as bridge the family interests and businesses to reconsider their themselves competitively for the 21st your own social capital. If used business needs, but also provide resilience and effectiveness. century. properly, these can make a real guidance on better decision making for the long term. difference in distinguishing your At PwC, we are committed to working There is a wealth of collective family business. They can also • Think about the composition with family businesses to help revisit experience in the family business enhance customer and employee of your board in relation to how values, purpose and legacy community that demonstrates how a loyalty, as well as increase how you apply values and should be viewed and effectively new approach can pay dividends, and shareholder commitment and purpose. Boards play a critical deployed in the current environment we believe that our case studies in this financial returns. To bring your role in determining how to of unprecedented challenge and rapid publication help to bring this to life unique competitive advantage practically measure progress change. and will stimulate new ideas. to life, you should codify your in the application of values and 52 | Kenya Family Business Survey 2018

Research and methodology

Between 20 April 2018 and 10 August 2018, 2,953 semi-structured telephone, online and face-to-face interviews took place with senior executives from family businesses in 53 territories worldwide. In Kenya, a total of 46 family business owners and Next Generation respondents participated in our survey. The interviews were conducted by Kudos Research, in the local language by native speakers, and averaged between 30 and 40 minutes. The turnover of participating companies ranged from US$5m to more than US$1bn. All results were analysed by Jigsaw Research. 53 | Family Business Survey 2018

About PwC

At PwC, our purpose is to build trust in partners and over 9000 people in 34 Realising the appeal of the continent society and solve important problems. countries. This means that we’re able as an investment destination, our We’re a network of firms in 158 to provide our clients with seamless dedicated Africa Desk provides countries with over 250,000 people and consistent service, wherever assistance to organisations looking to who are committed to delivering they’re located on the continent. expand their presence in Africa. quality in assurance, advisory and tax services. Find out more and tell us Our in-depth knowledge and In East Africa, our member firms in what matters to you by visiting us at understanding of African operating Kenya, Uganda, Rwanda and Tanzania www.pwc.com/ke environments enables us to put work to build trust in society and solve ourselves in our clients’ shoes to offer important problems. In Africa we’re the largest provider of tailored Tax, Assurance and Advisory professional services with close to 400 solutions for every business challenge. 54 | Kenya Family Business Survey 2018

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Contact us

Michael Mugasa Sunny Vikram Partner & Leader, Senior Manager, Private Company Services Tax PwC Kenya PwC Kenya [email protected] [email protected] +254 20 285 5688 +254 20 285 5033 www.pwc.com/ke/fambizsurvey

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2019 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.