Why most SMEs die after founder’s exit, way forward

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Most entrepreneurs have not prepared a business succession plan for their businesses in case of their departure, industry players have noted, which has led to the collapse of many Small and Medium Enterprises (SME) in the demise or the absence of the business owner.

In most cases, it is the owner who carries the vision of the business and ensures that the business remains afloat.

Additionally, most SME’s do not have comprehensive risk and asset management solutions, which leaves them greatly exposed to manageable risks and therefore stand a very slim chance of recovering their business in case of an event.

This was reported during an Invest In Africa-Kenya and Liberty Life Insurance forum in Nairobi this week, attended by over 60 SMEs.

The forum was convened to discuss business sustainability beyond the owner under the theme: “Beyond the Business: Is there tomorrow for your company?”

Speaking at the event, IIA Country Manager Wangechi Muriuki said with so many SMEs dying annually, business continuity should be at the top of the mind of most SMEs.

IIA-Kenya Country Director Wangechi muriuki hands over a certificate of appreciation to Liberty Life Managing Director Abel Munda/Courtesy

“We are therefore working to support linkages to finance, markets and skills opportunities,” Wangechi noted.

The event involved a speed networking session and a panel discussion on creating thriving businesses through risk mitigation and succession planning.

During the event, Invest in Africa-Kenya released a report of a survey it had conducted among SMEs on their ‘Biashara.Now platform’ regarding business continuity and cybersecurity threats.

Industry trends

The survey revealed that hat about 60 per cent of the respondents mostly feared for their business continuity while 22 per cent were concerned about staff retention.

Other factors identified by SMEs include meeting statutory requirements by government, political instability, market demand and unfair competition.

Moreover, 36 per cent of SMEs did not have a back-up plan in place in case their company was hacked.

READ ALSO:What family businesses in Kenya fear most

The panel comprised of legal, insurance, data security and financial experts and an SME who dissected the matters arising from the study and offer solutions on how SMEs can ensure business continuity after the owner’s demise.

Expert input

During the forum, it was emphasized that SMEs and businesses at large should work towards retaining and motivating staff, protect their businesses from cyber attacks and leverage on insurance to protect their businesses.

“In the world today where digital adoption has been skyrocketing, SMEs must embrace data security measures to protect themselves from cyber threats,” experts at the form asserted.

According to a study by cyber security firm-Serianu, Kenya lost Ksh29.5 billion (US$287.8 million) through cyber attacks in 2018 alone.

READ:Fake Apps expose Kenyans to cyber fraud

The most targeted include financial services, government institutions, betting and fintech firms.

READ ALSO:Governments and Telecoms Top Targeted Sectors for Cyber Attacks in East Africa

Businesses are hence advised to conduct regular staff training, conduct penetration tests and create an incidence response plan.

Speaking at the event, Patricia Jepkoech, Safaricom Manager, Cyber Security Incident Response and Management highlighted that many SMEs think that their information is not that important and hence no hacker would be interested.

However, in an era where customer data is a new form of business currency, a business can be brought to its knees due to information leakage, Jepkoech noted.

Meanwhile, SME owners have been urged to develop a succession plan for their business. This involves writing and updating a will, investing in staff training and retention.

“In order to retain staff, the business must create initiatives and incentives that attract and retain the best staff. This is not only through salaries but also through training, offering pension and insurance plans and much more,” experts said.

Finally, SMEs should capitalize on available insurance packages that cushion both the business and the employees.

Liberty Life Kenya managing director Abel Munda said: “Our work has been at the heart of SME development, offering a wide variety of long term insurance solutions. We are happy to partner with Invest In Africa to develop solutions for SMEs who are the bedrock of the economy.”

Invest In Africa is a Not-for-Profit, private sector partnership initiative that is working to drive growth and job creation with the vision of ‘Prospering African Economies’ and a mission of enabling trade between small and large corporates.

IIA is working to enhance skills among entreprises, improve access to markets and finance of SMEs through creating linkages. This is supported by its online platform–Biashara.Now.

READ:Boost for SMEs as Invest In Africa regenerates entrepreneurs’ platform

It has partnered with Tullow Oil, Equity Bank, Stanbic Bank, EY, Clyde & Co, Safaricom, Shell, Base Titanium, Stanbic Bank, AMSCO, Strathmore Business School, Keninvest, Africa Management Initiative (AMI), KEPSA among others.

READ ALSO:Invest In Africa roots for more support to bridge SME financing gap

SMEs in Kenya

Kenya has about 1.56 million licensed Micro, Small and Medium Enterprises (MSMEs), according to the Kenya National Bureau of Statistics (KNBS) data, with another approximately 5.85 million unlicensed businesses.

MSMEs are estimated to contribute 28.5 per cent of the country’s total economy–GDP with the Central Bank of Kenya (CBK) data indicating SMEs constitute 98 per cent of all business in the country, creating 30 per cent of the jobs annually.

Statistics however indicate that more than 400,000 SMEs in the country have been dying annually. Between 2010 and 2016, an estimated number of 2.2 million SMEs might have closed shop where 80 per cent of those closing shop do so before their first birthday, meaning they die in their first year.

A big number of the small businesses have been struggling to survive amid a cash crunch to expand, occasioned by the capping of interest rates which has denied them access to credit.

READ:Why banks in Kenya will lend at a maximum 13%

Banks have profiled majority of these small traders as ‘risky borrowers’ and instead prefer putting money in government securities. The law caps interest chargeable by banks at four percentage point above the Central Bank rate, currently at 9.0 per cent.

Government support

To support the growth of small and medium enterprises, the government has been putting into place a raft of measures including setting up funds such as the Uwezo Fund, Youth Enterprise Development Fund and the Women Enterprise Development Fund.

During the 2019/20 budget presentation last month, National Treasury Cabinet Secretary Henry Rotich proposed to amend the Banking (Amendment) Act, 2016 which will include repealing the interest rates cap.

“The proposal was motivated by the need to enhance access to credit and minimize the adverse impact of the interest rate given the challenges that MSMEs are facing in accessing credit from the banking sector and conscious of the need to spur business activities,” Rotich told the nation in his budget speech at Parliament.

“I am convinced this will unlock credit to the private sector and in particular to the MSMEs,” he noted.

The government plans to launch an “SME Credit Guarantee Scheme” to deepen access to credit by SMEs without being subjected to complex application procedures and collateral requirements.

“Our micro, small and medium enterprises play a critical role in wealth and employment creation. We have listened carefully to their concerns which include limited access to credit, entrepreneurial skills and markets, as well as a cumbersome regulatory and working environment,” Rotich said.

The government is also ardent to pay suppliers of goods and services (to the national government) within a maximum of 60 days, a move expected to support MSMEs and the business community. This is expected to be replicated by all the 47 County Governments.

The CS has allocated Ksh1.7 billion (US$16.6million) to support the growth of SMEs in the manufacturing sector in the current financial year which commenced on July 1, running up to June 30, 2020.

READ ALSO:Why Kenya’s manufacturing is uncompetitive

In the capital market, SMEs have a Growth and Enterprise Market Segment (GEMS) at the Nairobi Securities Exchange(NSE) with favourable listing conditions, which allow them to raise finance for growth.

Martin Mwita is a business reporter based in Kenya. He covers equities, capital markets, trade and the East African Cooperation markets.

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