Gen3 family businesses face headwinds
In the middle east and North Africa region, 60 to 80 per cent of the private sector economy comprises family-owned businesses, it is daunting to hear the adage: the first generation builds the business, the second generation harvests it, and the third generation auctions it.
Identifying strengths and weaknesses while laying the foundation to tackle threats and tap opportunities is an exercise preoccupying many family offices at this time. Research shows that more than half the family offices in the GCC are currently in the midst of a transition from the second to the third generation and estimates warn that only 15 per cent are likely to survive it.
Many of the largest family businesses of today were established by entrepreneurial pioneers who were often led by instinct and opportunity while building their empires. Such businesses have grown to encompass many generations, across multiple industries in different countries.
The result is a dynamic but often chaotic portfolio spread across asset classes, sectors and geographies. It is possible, for instance, for a family conglomerate to own agricultural land in Africa and an industrial warehouse in Dubai while operating businesses as varied as FMCG and automobile distribution, industrial manufacturing and construction. From a single founder-entrepreneur with a finger on the pulse of opportunity, the vision is now funnelled through, say, three children and nine grandchildren.
Strategic reassessment
As the region works on a blueprint setting out the vision for 2020, and even 2030, a business needs its financial strategy mapped out to grow in the direction it has set for itself. A strategic reassessment is often necessary for survival. Processes need to be mapped and best practice woven in so that growth can continue through good and trying times.
In our experience, family conglomerates fail to distinguish between wealth creation and running a business, understanding the difference is key for family conglomerates to survive. On the bright side, we have seen several families in the region put the right governance and structure in place to ensure their business creates wealth for generations and ensure their legacy remains. The key for family businesses should be moving from being an owner operator to being a shareholder and let the business grow beyond the capital that the family can afford to put in.
Family businesses, with its trusted advisors, would need to
The Mena region’s family businesses, many now in their third generation, need strategic financial and business planning to ensure they build on the foundation laid by their visionary founders ask critical questions like: Is the planned growth footprint to span multi-faceted sectors in one geography or does it include an international presence? Does it need to strengthen core businesses while divesting non-core operations and assets? Are different categories of assets ring-fenced so that loss-making units are not a burden on the thriving businesses? Is a joint venture the most effective way to enter a new sector? Is listing the business a good continuity option? Are the business and family interests well demarcated? Is a clear and effective succession plan in place?
We know that 42 per cent of family businesses in the region, compared to 32 per cent globally, find it difficult to access capital needed for growth. There are no cookie-cutter solutions. Facilitating the restructuring and financing needed for growth is best accomplished by trusted financial and business advisers rooted in the zeitgeist of the region. Advisers with the local connections, global reach and bandwidth necessary to navigate the complex networks of family relationships while sourcing the most relevant type of financing for uninterrupted growth are few and far between.
In a globalised environment, family businesses today contend with competition from multinationals and listed companies with aggressive strategies for increasing market share. A planned approach is therefore one of the prerequisites of converting threats into opportunities. Effective family relationships, ownership structures, corporate governance, financial management, wealth preservation and public engagement have become not only an increasing need but even a source of survival for the region’s entrepreneurial family-owned conglomerates. The writer is chief executive officer of Emirates NBD Capital. Views expressed are his own and do not reflect the newspaper’s policy.