Recent statistics show that, on an international scale, family-owned businesses constitute the cornerstone of the global economy, accounting for four-fifths of all businesses. In the United States, family businesses account for roughly half of the country's gross domestic product with businesses ranging from small stores employing no more than two people, to medium-sized enterprises and Fortune 500 companies. In Europe, more than 75% of all businesses are family owned. In the GCC the figures are even higher with statistics showing that family businesses account for a whopping 90% of all companies.In the wake of the global economic downturn, family businesses are faced with having to revise their business strategies in an effort to maintain longevity and mitigate the challenges they face during difficult economic times. Its normal for family businesses to have unique management challenges, however, the current global recession has brought with it an additional layer of intricacies, especially in the UAE.
Succession planning
The bitter truth about family businesses is that only one-third of them survive the transition from the first generation of ownership to the second, with only 13% of businesses remaining in the family for more than 60 years. Clearly, surviving this transition from one generation to another remains a difficult challenge for family businesses and in order to survive, proper succession planning must be part of the businesses strategy.
Succession planning involves several steps including developing and training a successor, letting go of the reigns and handing over management to the successor. The successor must have an interest in the family business, the requisite knowledge and experience, and of course the ability to run it.
Sometimes, for a family business to maintain or increase its value for shareholder equity and economically as a whole, the business needs to keep a look out for talent and make the difficult decision to hire from outside the family circle. In fact, it's relatively uncommon for a successor possessing the required skills to be found within the family. For this reason, having a proper family constitution in place is instrumental in maintaining harmonious relationships between family members and also for the avoidance and management of conflicts. The family constitution creates a framework and forum for family members to discuss issues, create policies and procedures, clearly define family member rights and obligations, and make decisions about the important issues they share. This structured forum prevents issues from being discussed out of context or in the wrong forum ensuring that information is not leaked to the public that may affect the reputation of the family or the business.
The family constitution assists in avoiding conflicts between family members by clarifying family member roles. It also sets out a clear process for the management of conflicts, which can be very useful. Having a proper family constitution in place also gives comfort to non-family executives and business partners that are involved in business operations as well as helps to maintain the ownership structure of the business within the family as it is intended to increase the commitment of family members to the business.
It is also crucial with regards to drawing a clear line of separation between the family and the business (by applying qualification criteria to family members with regards to their involvement in the management of the business), in addition to regulating the appointment of successors and delegating powers to the successor to allow them to run the business effectively.
Corporate restructuring
In order for family businesses to survive in the current economic climate, corporate restructuring plans need to be put in place. Corporate restructuring involves carrying out comprehensive due-diligence on the asset portfolio of the business. The results of the due-diligence exercise sometimes highlight the need to rationalise the asset portfolio.
A first step in the rationalisation process might include winding-up some business units that are not profitable or selling off some business units that are not bringing value to shareholders. Family businesses need to keep up with fierce competition by focusing on sectors where they have the potential to grow the business or where they can be industry leaders and by rationalising the remainder of their portfolios. Rationalisation such as this should be done leaving aside any of the emotional aspects that are common in family businesses.
A second layer to the rationalisation process is a revision of the legal structure, and sometimes the legal form of the family business entities. This type of revision can ensure that a simple and flexible legal structure is in place, taking into account the specifics of business operations and the expectations of family members. Ideally, the revised legal structure should allow for the leveraging of debt at the level of the subsidiary set-up for the purpose of exercising a specific business activity, thus insulating the holding company against debt. In addition, future spin-offs or partial IPOs (where liquidity returns to the market or to fuel future expansion plans) would then be possible.
As for family businesses still operating under the legal form of an establishment, these would need to be converted into a Limited Liability Company (LLC) so that the owners of the establishment can benefit from the corporate shield provided by this type of corporate entity under the UAE companies' law. Should entities undertake this conversion, it is highly recommended that a proper corporate structure is also put in place to alleviate potential risks.
The third element in corporate restructuring looks at the review of the corporate governance of the business to ensure that the decision making framework and process is properly structured and vested in qualified individuals and committees but still allows for transparent accountability. This process involves some of the following:
- Setting-up specialist committees at the level of the holding company (e.g. investment committee which would lay down an investment policy for the group among other policies; a human resources committee which would put in place a human resources policy regulating the employment aspects of the business including incentive schemes) and at the level of each subsidiary mandated to pursue a specific business activity (e.g. a leasing committee at the level of the real estate subsidiary which would lay down among other policies, a leasing policy for the purpose of regulating the leasing activity of the group's property portfolio).
- Setting out a delegation of authorities' matrix which would govern the authorisation of various actions required for the purpose of operating the holding company and its subsidiaries. This matrix would define the authorities delegated to the various specialist committees, the CEOs, CFOs, GMs of the holding company and the various subsidiaries.
By considering the issues outlined in this article and by recognising the common challenges faced by many family-owned businesses, families and their businesses will be better equipped to weather the storm of economic uncertainty and ensure business continuity for the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
