UAE: Experts share insights on why some family businesses fail, yet some survive

Dubai - Family enterprises are engines of growth and recovery in times of great challenge.

Family businesses make up more than half of the world’s gross domestic product (GDP). They are engines of growth and recovery in times of great challenge and in the last decade, they have been outperforming the wider equity markets in a number of sectors.

In the Gulf Cooperation Council (GCC), family-owned businesses make up 80 per cent of non-oil and gas GDP and account for more than 90 per cent of the private sector.

They are also big job creators, generating more than 70 per cent of the employment in the region. The figures are no different in the UAE, with family-owned businesses constituting 90 per cent of the private sector.

Despite their critically important role in economies, perhaps the most commonly cited statistic about family businesses is their rate of failure. Several studies and research often point at the ‘three-generation rule’, which suggests that most firms do not survive beyond three generations.

The Middle East has had its share of success stories. The recent list of Top 100 Arab Family Businesses by Forbes Middle East features at least 10 families known for their success over the last 100 years.

However, not every family-owned firm has been able to clinch that achievement and survive generations. There are many grappling with issues unique to such a business structure.

The PwC’s ME Family Business Survey 2021 states a rise in family conflicts. “We have also seen an uptick in family conflicts, highlighting the importance of professionalising not just the family businesses but the family itself,” said Amin Nasser, private business senior advisor at PwC Middle East.

“Conflicts are inevitable if the right checks and balances are not in place. We have a number of cases where siblings and family members are filing cases against each other,” said Khalid Farooq, CEO of Resilience Chartered Accountants and Advisory Services.

A UAE-based retail business operating since the 80s is a case in point.

“This business was doing well throughout the 90s and early 2000s but problems started cropping up in the last two decades. We were recently called in to assist in cost reduction. It wasn’t so much of an issue with weak systems and procedures, but with the culture and unethical practices,” explained Farooq.

“Lack of governance was the prime issue. There was no monitoring. The higher management was running the business like a corner shop. Funds were being taken out of the till without accountability. There wasn’t any cash closing at the end of the day. A quarter of the money was being spent on undisclosed expenses or parked under miscellaneous expenses.”

Governance is certainly the number one issue that plagues family-owned businesses, said Farooq. “It is followed by ego issues and excessive reliance on the management or the total opposite of it.”

He added: “The management should understand how process enhancement can make their business more effective. Businesses should also look at moving from old school ways to adopting new technology.”

The next generation of leaders need to figure out how to transform their companies into agile, tech-savvy, future-proof organisations. And as families expand in size, a recent study noted that an average GCC family business would have to grow at an approximate rate of 18 per cent a year to maintain the same level of wealth.

“If tomorrow’s family business leaders are to achieve this, they will have to ensure their companies can compete at a global level; innovate at a rapid pace; and embrace the diverse, inclusive leadership necessary to navigate complex issues,” wrote Amjad Ahmad, director and resident senior fellow of empowerME at the Atlantic Council’s Rafik Hariri Center for the Middle East, on his blog.

Last year, Dubai issued a new regulation to help protect family wealth and grow their contribution to economic and social development. The law allows new family ownership contracts that set out the rights and responsibilities of family members.

The government is there to regulate, keeping pace with the ever-evolving world of family businesses. The onus for building better governance and technologically agile structures, however, rests with family business owners.

Common mistakes families make in running their firms

>> Not allowing daughters, sisters, mothers to be part of businesses

“This is a fundamental mistake a lot of families are making, and this should change,” said Farooq.

“Men and women create the best balance. Everyone in the family should be well aware of how the business is being run and the vital finance and management-related details. This is not about women empowerment, but more about strengthening the grip on businesses.”

>> Failure to structure processes

“There should be delegation of work and segregation of duties. Daily accounting practices and adopting the best management practices can go a long way in building robust structures that minimise swindling, unethical processes, and risks of fraud. Instead of relying too much on people, family businesses should have processes in place. For instance, preferring a committee-based decision over an individual-based one in case of awarding projects,” said Farooq.

>> Lack of communication on key issues

Succession planning is part of this process, which is often underestimated in smaller firms. Management consultants suggest this process should start years in advance and potential candidates should be groomed well before they are given the reins.

“Succession planning sits at the heart of any entity, and it should start from a very early age. You need to bring children into the office, and allow them to see how discussions take place. You may have one child fit for the business and the other may not be right, but both should be aware of what the business is all about,” added Farooq.

• UAE