The Growth and Growth of Family-Owned Businesses: the Two Key Pillars of Success

By Kyra Motley and Chelsea Turner

Africa has seen an exponential growth of family-owned businesses (FOBs) in recent years, aligned with a fast-growing ultra-high-net-worth population – a trend that is set to continue on an upward trajectory.

This is particularly true of Nigeria. Nigeria has the largest population in Africa and is a landscape where family businesses are prominent and contribute significantly to the country’s economy. Here, FOBs contribute over $200 billion to the Nigerian economy and one out of two Nigerian businesses is a family business.

FOBs are typically resilient, exemplified by their resistance to recent inflationary pressures experienced in the Nigerian economy. Having experienced a number of challenges as they become established, family businesses are now ripe for growth, pending the stabilisation of the economic climate in the region.

Nigeria is one of the recently coined “Big 5” wealth markets in Africa, which together hold over 90% of the continent’s billionaires, and Africa’s population of high-net-worth individuals is predicted to rise by 42% in the next decade.

Therefore, at a countrywide level, the importance of these businesses to the economy cannot be underestimated, nor their wider contributions to the success of surrounding communities at a local level.

Good governance: a critical pillar for sustainable success

Given family businesses are a staple to the economy, it is therefore cause for concern that only 58% have a form of governance structure, and only 6% have dispute resolution procedures in place. Furthermore, in 2021, only 25% had succession plans and 9% had a family constitution, figures which are unlikely to have shifted notably in this time.

Family businesses must equip themselves with a governance framework to enable the business to progress further. A family constitution can ensure a clear goal for the family business and protect continuity for the business that spans beyond some of the family members themselves. This pre-emptive planning can provide beneficial opportunities for family members to settle into their roles before the practical elements of their positions are required. Another useful tool is shareholder agreements, which can ensure clarity on how the success of the business is maintained, providing peace of mind for families who may be concerned about the challenges to come and changes to follow.

Implementing a forward-thinking governance framework will benefit younger generations, who may themselves progress and lead the business forward. These generations may require specific skills or qualifications to enable them to lead with confidence.

These considerations are inherently important given it is an unfortunate fact that many of these family businesses, which are so important to Africa’s economy, do not manage to survive beyond the third generation.

Securing success through effective succession

The importance of effective succession planning should not be underestimated in combatting the challenges family businesses will undoubtedly encounter, and ensuring there is continued prosperity and success for these businesses and the region as a whole.

The challenges faced by family businesses are not inherently distinct from the challenges non-family businesses face. Family businesses do not hold a unique immunity to the challenges of economic instability, inflation, corruption, and terrorism that exist. These features are also not distinct to Nigeria and are faced by many other businesses globally.

However, in conjunction with these adverse influences, family businesses have a multitude of other considerations. Family businesses, just like every other family, will have disputes between family members. However, these disputes are susceptible to being strained, and complications can arise from contrasting management perspectives, concerns for the business, and dealing with business demands.

Furthermore, families are not fixed, instead altering substantially with time, growing with new generations, and coping with the loss of older generations. Legacy is an important aspect to consider, to withstand the changes and fluctuations of modern times, but most importantly so businesses can thrive through these changes.

The prospect of succession planning can be an aspect that family businesses avoid, yet this can cause significant instability – planning ahead can eradicate some of these fears and threats. Focusing too heavily on the present, without a lens for future generations, can result in these hard efforts being unrealised in the future.

In the unfortunate event someone in the family business becomes unable to continue running the business, there should be a plan in place that clearly sets out the steps that should be taken – these may involve drafting Wills for family members, or potentially establishing a trust structure to ensure shareholdings are passed efficiently.

These considerations are often postponed, yet incapacity and death can, unfortunately, strike suddenly and preparing for moments such as these hold the key to the business’s success and survival.

Ultimately, family businesses have a critical role to play in the Nigerian economy and with the right approaches and frameworks in place, they have the potential to propel their established success forward for generations to come.

Kyra Motley is a Partner at Boodle Hatfield, and Chelsea Turner is a Trainee Solicitor at Boodle Hatfield