Ahmad Chahidi, Executive Director – Wealth Planning, Julius Baer (Middle East) Limited
The current pandemic has focused many of our minds on the future and it is fair to say that succession planning and the transfer of wealth form part of almost every conversation we have with family businesses in the Middle East. This is not a new phenomenon. In the last five years or so, there has been increasing recognition that the family business itself may not be the best preserve of family wealth for the generations to follow.
The desire for wealth transition not just to the next generation, but for two or three generations to come, means that many family businesses may have to change their approach and look outside the family to increase that longevity rather than simply relying on the next generation inheriting the family business.
It may be that the skillset or appetite of the next generation to take on the family business simply is not there. Similarly, the values of the family business may not align with those second or third generations down the line. For example, the heightened importance of sustainable investing principles in business has come to the fore, predominantly amongst younger generations. Different viewpoints on this topic can make succession planning difficult to manage if younger generations become disenfranchised by current or past practices of the family business. Furthermore, the inheritance laws governing the transfer of assets locally may vary from those applying to assets located abroad.
There are also long term and more constant factors to consider such as the well-deserved sense of pride that founders or second-generation successors have for the family businesses they set up. This can make any succession plan difficult, as these figures struggle to pass on the mantle seamlessly.
Families in the Middle East tend to be large – their size is on average double that of UK and US families and as per PWC’s Middle East Business survey in 2019. 50% of the families operate a portfolio of businesses in multiple sectors and multiple countries compared to a quarter globally. The survey also highlights that 53% of the respondents felt that succession planning was a key issue for them. The recent economic downturn has also exposed some family businesses to strategic and operational deficiencies. Many family business leaders in the Middle East are reviewing their business portfolios and operating structures in order to figure out ways to become leaner and more competitive.
Out of the 100 family businesses profiled by Forbes this year, 21 of the most powerful families are from the UAE next only to Saudi Arabia which leads with 36.
In light of this, multi-generational plans and the formation of enduring legacies that will do well outside of the family are now increasingly considered.
At Julius Baer, we believe it is increasingly important to consider moving from being a family business to becoming a business family. In the next 10 years, we expect that a significant percentage of the family owned businesses in the region, established by locals and expatriates will start passing on to the next generation. We also anticipate a growth for some specific Sharia’h compliant or similar life insurance products as a part of the detailed wealth framework of family businesses in the region.
As the most of these family businesses are vertically integrated, diversification of risk also becomes an important part of the process. This means approaching the original family trading business as just one element of the overall family enterprise. One strategy to achieve this is by extracting capital from the business through private equity, sale or leveraging against future cash flows. This creates cash, which can be declared as a dividend, rather than reinvesting wholly into the trading business.
Such a strategy can be used to create a pool of liquidity distinct from the trading business but managed in tandem for the benefit of the wider family – whether or not involved in the trading business itself. Structured correctly, this fund can be used, amongst other things, as a source of venture capital in support the entrepreneurial and philanthropic activities of younger generations. It can also be used as a means of educating younger generations about financial markets and the importance of strong governance.
Through strategies such as these, the family business can create the means to preserve and grow wealth alongside the original trading business. This diversification away from the original trading business is most successful when combined with education and advice on alternative ways to grow and control wealth. In this new framework, it is not uncommon to bring in external management – at CFO or even CEO level – to protect the interests of the business. This helps maintain suitable focus on the trading business and the financials, whilst simultaneously opening up time for other family members to engage in a broader portfolio of interests and investments.
This also means that the management team of the trading business is more openly engaged. Discussions around the possibility of an employee buyout or a management buyout are able to happen ahead of time rather than at a later stage when it could be more damaging to the business.
Communication and governance are also critical elements when developing a business family framework. Family charters and councils are increasingly being used to set the purpose, maintain control and professionalize the management of broader family wealth. These councils also aim to remove the undue emotion and perceived negative aspects of the family dynamic from the successful implementation of a long-term strategy.
In more complex frameworks, we now also see legal, tax and wealth planning expertise working in partnership (almost creating a mini family office) around the business family. These advisers are instrumental in facilitating discussions, developing and implementing strategy and maintaining business direction. They report as a whole to the family council on an ongoing basis.
For family businesses be it in the Middle East or globally, thinking long-term can feel challenging but it needs to be encouraged even in the early years and particularly during such globally turbulent times as we are all experiencing now. If the notion of a business family is embraced rather than sticking with a traditional family business, then opportunities are clear.