How to keep the business in the family
About 90 percent of all businesses in the GCC are owned and run by families
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Most businesses in the Gulf are run by families. But many of these companies don't survive through the third generation due to a lack of successful succession planning, experts warn.
About 90 percent of all businesses in the GCC are owned and run by families, compared with an average of 65 to 75 percent in other parts of the world.
Yet, just 20 percent of these companies in the GCC survive to the third generation, according to data from Skopos Consulting, which has offices in Dubai, Cairo and Manama.
While the regional survival rate of firms to the third generation is much higher than the dismal 5 to 6 percent global average, there are steps managers can take to further boost a company's longevity.
Some business leaders say that successfully passing on the business baton through the generations starts with being able to communicate a long-term plan with loved ones, as well as the appropriate business contacts outside a family's inner circle.
"Companies are facing challenges of how to communicate with families," said Abdullah Al Majdouie, the president of the Al Majdouie Group in Saudi Arabia, during a recent visit to Abu Dhabi.
He notes there should be two systems in place to communicate different aspects of a family business to the right individuals, including a board of directors to ensure shareholders remain protected.
"As for the family accountability, it has a structure. We're talking about a family meeting which doesn't talk about the business. Instead, people talk about health, social things, development of skills of the new generations," says Mr Al Majdouie.
There are other considerations that business owners should keep in mind as well. Dr Hussein El Kazzaz, the managing director of Skopos, shares his findings on what tends to go wrong as families try to pass their companies from generation to generation.
Between the first and second generation
If a business fails to make it past that first exchange, it's normally due to the "founder's syndrome", says Dr Kazzaz.
"Usually one or two people - the founders - are strong entrepreneurs, who have strong abilities to build organisations and run businesses. The challenge here is leadership, because as soon as you grow in size you have to make sure you're not running it as a one-man show," he says.
To avoid this issue, owners can bring on board professional management to build an organisation's structure.
"By the time the business succeeds in establishing itself, the founders are usually in their late 50s or 60s and their concern is 'how can I pass this on to my kids'? That's the main challenge of the founder stage."
Once the children take over
In this stage, companies move away from being primarily centralised in structure, where one or two people make the key decisions. They then become more decentralised for strategy and policymaking reasons.
"The challenge here is actually in building proper mechanisms and a stable culture - and also diversifying the business," says Dr Kazzaz. "What usually happens is the sibling children - the second generation - have different talents and interests."
That can lead siblings to create a more diversified company under the family's corporate umbrella. But how do they diversify without spreading business too thin? "I think you need to use a skilful combination of creativity and diversity on the one hand but proper governance on the other," says Dr Kazzaz.
"People get money and spend it on adventures, rather than business. You need to have the spirit of diversification but a proper governance mechanism on the financial side so these businesses are following proper financial steps."
The third generation steps in
This is the most challenging phase, says Dr Kazzaz, because if the business has survived this long it could last for additional generations. Yet in the Gulf, it's typically not the father or siblings who are in charge anymore.
"It's actually the extended family, usually the cousins," he says.
"This is where you need to ensure you have turned the family business into a corporation that has a base for strategic decision-making, a proper governance model and an extremely effective conflict resolution mechanism. Otherwise you have great successes in the first generation, but by the time it gets to the third it falls apart one way or another," Dr Kazzaz warns.