Family Run Business in the MENA Region
A Barclays Wealth and EIU report on “Family Business, In Safe Hands?” states that family-owned companies can account for between 70 per cent and 90 per cent of global GDP.
The total assets of family owned enterprises in the MENA region has been put at $1.7 trillion. HNWI’s and ultra HNWI’s in the MENA region derive a larger share of their wealth from inheritance than in any other region in the world. See World Wealth report 2008 and 2009
A recent article by Faisal Al Sayrafi, CEO of Financial Transaction House in Saudi Arabia, claims more than 80% of businesses in the Middle East are family run or family owned. They control almost 90% of commercial activity in the region which is the highest percentage in the world,
Exposure by lending institutions to these types of enterprises has traditionally been high, on a “name lending” basis, however Hani Bishara, Head of Restructuring at Ernst and Young, says that era is over. Should the family business suffer, the knock on effects can be disastrous. By virtue of the fact these businesses have diversified into conglomerates and hold several assets globally, they are also at risk from global macro economic effects.
Family businesses face a unique set of inter-related family and financial problems. For example:
Succession planning and knowledge transference is low, talent recruitment and skill shortages as a result of hiring within the family rather than seeking external candidates, short rather than long term strategic planning with regards to the business’ portfolio of products, diversifying away from the core business competencies as the enterprise expands, and perhaps most importantly; lack of transparency and corporate governance.
The Human Resource
As elder family members become closer to retirement; governance, succession planning and authority matrices are clearly out of scope, while at the same time, retaining outside advisors remains a taboo. In fact, families refrain from retaining outside advisors to prevent that details of their businesses are leaked outside of the family circle or the company.
Instead, many businesses resort to recruiting junior resources, usually at the bottom of the pyramid, who with time are promoted within company ranks, primarily with emphasis placed on perceived loyalty instead of performance. This phenomenon leads in some instances into having senior individuals and decision makers within the company that lack the well-rounded experience or know-how to manage investments and/or introduce best practices.
In some cases even, these very well trusted and loyal individuals, end up suffering from being underpaid and become the source of abuse in the organization, filtering deals to the owners, only after agreeing on kickbacks, etc. and lobbying against any outsider from entering the closed family circle.
Transparency and public markets
Ernst and Young’s survey showed that only 16% of companies have a well defined succession plan. 8% of family businesses are publicly traded, suggesting a huge opportunity in the market, but when asked, only 20% of companies were planning to stage an IPO in the foreseeable future.
Many modest-sized firms in traditional industries would find an IPO with a reputable underwriter impossible to arrange. Even those firms that could go public were frequently anxious about the degree of public disclosure and scrutiny that being publicly traded entailed.
Mergers, acquisitions and consequences
Transferring assets or at least partial liquidation can be done for a variety of reasons – a need to diversify portfolios, to provide cash to minority shareholders and children not actively participating in the business, or to make provisions for estate taxes. Sadly, many family businesses founders do not establish appropriate estate planning prior to their death. These situations frequently have dire outcomes.
In some cases, the businesses are sold to cover the huge estate tax obligations to the federal government; in others, disputes over succession and control leads to the company and family relationships being damaged or even destroyed.
Having said that, many companies have recently been both the targets and initiators in acquisition deals. More willingness to be transparent could see an increase in both M&A and IPO deals across the board, and could ensure business continuity.
Debt vs equity
Another characteristic of family businesses is that they are typically adverse to high levels of debt, preferring that their firms’ growth be financed through equity. High levels of debt associated with leveraged buyouts and recapitalizations are often seen by owners as having two disadvantages:
First, they limit the opportunities to pursue future growth options that might require substantial capital investments; the required interest and principal payments are often so large that even a small economic downturn could throw the company into default. Second, the founders are concerned about retaining control of the firms. In particular, they are concerned that financial buyers might seek to rapidly wrest away control, once the transaction was completed.
Private equity companies cite family businesses as key opportunities for them during the downturn as the latter seek to exit assets they have built up over years of acquisitions. Typically PE firms are highly leveraged and this business model has come under scrutiny given the recent economic events, however Abraaj Capital, one of the largest PE firms in the region claimed that it had enough capital as of last year to take advantage of low valuations.
The recent “We are all Producers”, the first Saudi forum for productive families was held by the Jeddah Chamber for Commerce and Industry and was designed to specifically promote family businesses producing industrial products and services. The JCCI provides loans to small family businesses whilst one of the countries largest family owned business, Abdulatif Jamil, pledges support to long term enterprises who have demonstrated success.
The DIFC (UAE) knowledge series hosted a seminar in March 2009 on “Families, Governance and Markets” by Dr Nasser Saidi, that aimed to raise awareness about its infrastructure and business support services for family businesses.
Zurich Insurance announced in November 2009 it was planning to release a Takaful (Islamic insurance) Family Business product.
So much business is in the hands of family owned enterprises, many of them are large conglomerates spanning several sectors including banking, telecoms and real estate; the key infrastructure that allows business to thrive and succeed. Given the high population growth rates and acute need to provide job seekers employment (especially in Saudi); it has been suggested that there should be a greater stimulus for SME’s to form, to reduce the dependence on these family businesses.
Therefore it is incumbent on these enterprises to be more transparent, and engage in deals as a strategy to monetize assets, to create smaller businesses that perform well, that can employ more people and that can contribute to the overall good of each nation’s economy. This will be the key to survival of the region in the next ten years.