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Changing Face of Family Business in the Gulf

Faisal Alsayrafi (At Home)
Filed on February 2, 2010

The problems faced by any organisation and company; developing successful leaders, mitigating decision-making hierarchies and consolidating company tradition with new generational ideas, are undoubtedly issues that can be magnified in the setting of the family business.

More than 80 per cent of businesses in the Middle East are family-run or family-owned, with an estimated $1 trillion expected to be handed down to the next generation within the upcoming five to ten years, and with family businesses controlling over 90 per cent of commercial activity in the region, as opposed to 65 to 80 per cent in other parts of the world, the dynamic and effect of their progression and development is huge.

However, with studies showing that historically, family businesses are eventually run down after three generations, we may be at a point where many family businesses will need to start looking around for exit strategies or even welcome new turnaround ideas to keep them afloat.

Developing new ways of doing business may be easier said than done for an organisation, which not only is deeply rooted in tradition, but also in culture and personal values. Over 40 per cent of the current family businesses in the Gulf were established in the 1960s or before, with almost all the major employers (5,000 people or more) were founded during that time, thus highlighting both the huge potential, and with it the responsibility, of family businesses to generate employment wealth and welfare.

Yet, when a recent Ernst & Young survey showed that only 16 per cent of companies have admitted to having a well-defined succession and clear ownership transition plan, it may show that family businesses may soon be looking to restructure or consider alternative routes.

With around 50 per cent of family businesses drawing in annual revenues above $100 million, and over 15 per cent showing annual revenues of over $500 million, going public would be the next logical step in the development of the organisation, yet only 8 per cent of family business are publicly traded. Further, E&Y’s survey also highlighted a critical point whereby only 20 per cent of companies were planning to stage an IPO in the foreseeable future. The pressures of changing social values, new technologies and essentially a very young population, whereby 40 per cent of the population is between the ages of 15 to 35 years, make the challenges facing the development of the family business in the Gulf a unique case.

However, companies are not oblivious to the trend and many have taken the initiative to expand, as 60 per cent of family owned businesses have shown a propensity to diversify into new sectors and regions, both in the Middle East and internationally, essentially marking the way into a family conglomerate.

As to whether the family owned organisations in the Middle East have strayed far enough away from the traditionalist managerial styles in order to be able to make a break in Western markets is supported by the finding that 68 per cent of regional family businesses select their management team purely based on competence and talent, regardless of family relationship, making it clear that the majority of business have been able to adapt to a point of maturity that is able to separate family relationships from business relationships in a professional manner.

Adopting global as well as Western traits into the organisational structure, with many family businesses now inviting non-family members to serve on their boards, shows the willingness to adapt and adopt new perspectives that are ultimately helping to prolong the lifespan of the company beyond the traditional ‘3 generational limit’ as well as amplify the value of the company in the long-term.

Actually, due to their strength and values, many family businesses in the region have shown that they are susceptible to adapting successfully with various potential scenarios currently being developed at management levels, including cross-border acquisitions and alliances.

Expected M&A opportunities are a driver behind the renewed interest in the region, which was temporarily put on hold last year amid the credit crunch on Wall Street, with M&A fees from the region accounting for almost 50 per cent of fees brought in by bankers for the first three quarters of 2009. Growth plans that were put on hold have now appeared to have resumed, and with it family businesses have shown an inclination to start looking abroad, with Germany appearing to be the most targeted country, and the UAE housing the highest number of international acquirers.

A few years ago, although M&A activity in the region saw incredible year-on-year growth, with an increase of 106 per cent in deals as recent as 2006, the activity was considered minimal in global terms, with one of the sited blockades being the saturation of the market by family owned businesses.

Today, we already see the paradigm shift from hindrance to opportunity, where it is exactly these family-run companies that have become both the targets and initiators in acquisition and alliance deals.

Family businesses owners have begun to realise the importance this opportunity presents them, and are heading advice to implement clear and fixed management strategies within the organisations, as many predict they represent the growth drivers forthe future.

Based on the above, it is clear to see that the family business model has developed, and is still developing, as it continues to meet various challenges. The internal problems of succession and decision making hierarchy are similar to those seen by family businesses in the US in the 1930s, however the solutions need to be different amongst new management perspectives and technological advances. Family businesses in the Gulf will need to become more aware of the options of M&A and IPOs, and start by building strong corporate governance, that will help it survive, and be effective for future generations in order to establish continued presence and growth.

Faisal Alsayrafi founded the Financial Transaction House in 1994 and is the first Arab investment banker to pass the American Society of Appraisers’ stringent experience and examination requirements. For comments, write to opinion@khaleejtimes.com





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