Preserving entrepreneurial legacy through structured transition planning

By Francis Tetteh PADI

The Ghanaian economy has been strongly fuelled by the entrepreneurial attributes of its indigenes over the years. In many Ghanaian homes, there is often a small convenience store set up on a table or a parent who trades in a variety of products from their official place of work.

There is also a growing trend among the more recent generations, in which it has become trendy to trade in fashion items, electronic gadgets and food – with some Gen Zs coining the term “plugs” for certain items. This buttresses the in-grown entrepreneurial tenets possessed by many in the country.

It is not uncommon to find a government sector employee selling pieces of fabric or beauty products to friends and colleagues at their workplaces, or a banker who trades in cooking utensils. Prior to migration from the use of hard-copy recharge cards for the purchase of airtime, you can easily purchase one of those from your co-worker or even your pastor’s wife at church.

Ghana Statistical Service in its 2023 report estimated that small- and medium-sized enterprises (SMEs) form the backbone of Ghana’s economy, constituting 70% of GDP and 92% of all businesses.

The Global Entrepreneurship Monitor (GEM) approximates that 5% of Ghanaians express intentions to start their own business, which further buttresses the strong entrepreneurial spirit highlighted earlier. These businesses are often run to sustain the family’s income or maintain a certain specific lifestyle.

However, not all businesses are created solely to supplement immediate income or sustain a specific lifestyle. Some are founded with the vision of outlasting their originators and meeting the needs of society or a particular demographic. Despite these long-term intentions, it is unfortunate that many such ventures have struggled to endure for a variety of reasons.

Some reasons behind the poor business transition culture in Ghana

Several factors contribute to the poor business transition culture in Ghana. For instance, businesses may suffer from the untimely demise of founders who lack strong succession plans, or from owners’ inability to adapt to new trends or delegate to more capable heirs.

When founders pass away, the absence of proper succession documentation often plunges businesses into family disputes and legal battles, sometimes leading to inexperienced members of the family taking over the business… which leads to its eventual decline.

The owner may have failed to pass on to his successors the list of debtors and creditors and other sensitive business information personally known to him without any written record. The inherent keyman risk leads to a break in organisational memory and eventual decline of business activities. As a result, once-prominent businesses may now be extinct or stagnant.

It is worth noting, however, that most entrepreneurs are known to have a strong emotional attachment to their businesses. Even in the event that these are being glaringly run-down, with quantitative analysis proving the same, business owners continue holding onto the helm until the business’s eventual collapse.

Notwithstanding this observation, there exists a group of founders who are willing to let go of their stake in their businesses to qualified heirs in exchange for a cash and/or equity payout that enables them to step back from day-to-day administration for a comfortable early retirement or prioritise other equally important projects.

Transition planning and keyman risk

The importance of transition planning cannot be overemphasised, as it is one of the surest ways of leaving behind a legacy and not just a business. As a business owner, it is important to mitigate the keyman risk associated with business operations.  Keyman risk is basically the potential threat to a business that comes about due to a crucial individual, usually the owner, becoming unavailable; potentially disrupting operations, relationships and strategic continuity.

These individuals usually harbour the entire organisation’s memory. They may single-handedly possess information ranging from the businesses’ list of suppliers to the secret ingredient added to a product that renders it distinct from the competition. These people may be personally responsible for a significant percentage of annual revenue, as customers tend to patronise the business and its products primarily because of them.

Even though this may indicate the owner’s firm grip of the business and equate to success, it is definitely not a sustainable practice. Absence of the owner often leads to a drastic decline in business fortunes.

Business owners therefore need to factor-in succession planning on the first day of setting up their business. The question at the back of their minds should be: how can I create a legacy and not a mere business?

It is important to have an exit plan in mind. Business owners need to understand the importance of empowering structures within the organisation to run without requiring their direct interference.

Revenues should not depend solely on relationships held together by the owner but should be directly related to the marketing efforts of the sales and business development team.

Supplier and customer contracts, as well as the list of creditors and debtors, should not be held solely in the memory of the owner but must be made available to the departments and personnel responsible within the organisation.

Many business owners have intentions of handing down their businesses to their children and other close relatives. They however sometimes find themselves in a position where their children do not possess the expert knowledge in that line of business.

Imagine an established importer of car parts at Abossey Okai handing down his multi-million legacy to his daughter who is a practicing nurse, or the owner of a widely regarded law firm leaving his business in the hands of his only son who happens to be a fashion-designer. This career mismatch and often a lack of interest may result in failure of the business.

Most businesses in Ghana do not qualify to be listed on the Ghana Stock Exchange (GSE), mainly due to the strict corporate governance requirements for publicly listed companies. Within our market, it is common to see a registered limited liability company being run as a sole proprietorship with one individual, usually the owner, making all the strategic decisions without the presence of a properly constituted corporate board of directors.

In certain situations where corporate boards exist, they usually consist of relatives and long-standing friends and associates of the business owner who tend to rubber-stamp decisions made by the owner without the thorough scrutiny required. The qualifications and experience levels of these independent directors often leave much to be desired.

Some business owners and entrepreneurs are in a phase of their business where they are open to the idea of relinquishing ownership and control of their businesses and stepping back from daily administrative functions in and around their businesses. These exit opportunities, however, are limited and in most cases non-existent.

As discussed earlier, business owners often hand down their businesses to their children, who may not necessarily have an interest in that particular line of business or may not possess the same level of passion and meticulousness as the founder.

Their children often do not have the same zeal as the founder and may view an opportunity of running the business as doing their parents a favour. As the founders advance in age, they can only watch in distress as their once-revered businesses and legacies are run down by their children and successors.

Exit opportunities for business owners

The situation is definitely not all gloomy, as there are some businesses that have transcended generations and are currently excelling. Succession planning definitely played a key role in this. Founders, in the wake of preserving their legacies, often ensure their children’s education aligns with their field of business.

It is not uncommon to meet a lawyer and founding partner of a law firm with their children being lawyers, or renowned pharmaceutical company owners with children who studied and are practicing as pharmacists with the aim of eventually taking over the business.

Some business owners often involve their children and potential successors from an early age to help develop in them a love for the business. This may include bringing them in as interns during summer breaks to work on the factory floor or a department within the organisation, immersing them in their culture and also providing a deeper understanding of business operations.

Additionally, there are venture capital and private equity firms that can take over high-prospect businesses through management and leveraged buyout options. These opportunities are however skewed toward tech companies and start-ups with a high growth and profitability ceiling. This therefore does not benefit mature-stage businesses and those outside the technology space.

It is also worth mentioning that although most businesses in Ghana may be ineligible to be listed on the Ghana Stock Exchange, they may be suited for the Ghana Alternative Market (GAX) as a way of raising additional capital or as an exit mechanism for the owners.

The GAX focuses on businesses with potential for growth, including start-ups and existing enterprises at various stages of development. This exchange is designed with the typical Ghanaian SME business in mind and meant to be more accessible and less daunting to list on compared to the main exchange.

Notwithstanding, many business owners are either unaware of its existence or how beneficial it is as a means of raising capital. Additionally, they may be uninformed about the exchange’s prospects of providing an exit strategy whereby business owners can sell off their stake in their businesses through an IPO for cash payouts.

Conclusion

One of the reasons why the Walton family (majority shareholders of Walmart, founded by Sam Walton) continues to be listed yearly on the Forbes list of richest families in the world is Sam Walton’s vision of creating a legacy that far transcends his existence.

Even after his death in 1992, Walmart has remained a go-to place for all products. This was not by a fluke but proper succession planning and conscious efforts to create a business structure that could operate independently of him.

Proper transition planning and the creation of a business that has minimal key man risk often result in the creation of a legacy and serve as an attractive opportunity for business owners who wish to exit their investments. These can come through being publicly listed on the GSE or GAX to provide a cash payout while diluting the share ownership of the founder, or positioning the business for a leveraged or management buyout by an angel investor, private equity, or venture capital firm.

About the Writer

The writer is a chartered accountant and seasoned credit risk professional with experience spanning financial institutions within the Ghanaian and Canadian markets.

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