Companies in the region must be properly prepared for succession when the time comes for founding fathers to step down, say experts.
Gulf’s family firms face critical transition period
Family businesses in the Gulf have for years been run by patriarchs who operated largely on instinct. They expanded rapidly to take advantage of the flood of prosperity that washed over the region.
That business approach may no longer be sufficient. "The model has been working very well but we believe the next few years are going to be very competitive," said Constantin Salameh, the chief executive of Abdulla Al Masaood & Sons, one of Abu Dhabi's largest family-owned firms.
"So if you don't have your act together you are going to miss out on opportunities," he said.
As the Gulf emerges from the global financial crisis, family businesses find themselves in the midst of a critical transition. The founders are typically approaching retirement, which raises issues about the transfer of the business to the next generation, but they also are transforming their operations to better reflect their size and global reach.
Handshake deals and business units operating without close oversight by management are becoming relics of the past.
"This is how business was done when the business was not as large and debt was not as prevalent," said Ahmed Youssef, a partner with Booz & Company in Dubai. "It is different when you are making an investment of Dh50 million and when you are making one of Dh500 million."
Mr Youssef said there were two extremes among family businesses in recent years, with some expanding too rapidly and taking on too much debt, while others grew cautiously and managed cash conservatively.
Although the latter was more common, since most family businesses still rely mostly on their own money and do not borrow heavily, Mr Youssef said, problems at a number of companies in the region that are restructuring debts have captured headlines. Some of those issues arose because most company founders are what Mr Youssef calls "restless entrepreneurs" or those who trust their instincts to guide them as they dabble in a range of businesses.
Khalaf al Habtoor, the chairman of the Al Habtoor Group, said he learnt that the "dabbling" strategy was counter-productive several years ago, most notably when he got involved in soap and jewellery businesses he did not fully understand.
"In English, they call it trial and error," he said. "Sometimes when an idea is proposed to you by friends, you are shy … But joining hands with them makes losses. Since that time, we are only concentrating where I know my people understand the language of it."
This lesson is increasingly important, as many observers believe sponsorship laws and other regulations will be liberalised in coming years, leading to increased competition for local firms.
At Al Masaood, which specialises in "small to medium sized businesses with steady cash flows", according to Mr Salameh, the group's leadership is in the process of transferring more than 40 of its businesses into a holding company called Al Masaood and Sons. That company will consist of only those businesses in which Abdulla al Masaood, the chairman of the company, and his sons Humaid and Khalifa own a majority interest.
Instead of each business operating almost autonomously, as they did before, the companies in the new structure will share services including legal, human resources and banking. Particularly in regard to banks, the new structure should allow the holding company to negotiate better terms and conditions, Mr Salameh said.
This structure is also significant because the practice of "name lending", in which banks lend to prominent family businesses without conducting as much due diligence as they would ordinarily, is out of favour. "That trend has stopped, or at least slowed down considerably," said Walid Chiniara, the co-founder of the Family Business Advisory Group.
Mr Chiniara said such structural changes were also increasingly being done with succession in mind, which other analysts agree is critical. From countries with more developed economies, it is clear that the handover from the founder to his children is often smooth. It is the next step that causes problems. "If you look at the experience worldwide in countries that have gone through this, the transition from the second to the third generation is very tough," Mr Youssef said. "If you don't have that regulated well enough, it might create chaos."
Mr al Habtoor said he was well aware of that. He has already concluded that the best solution for his company is to hold an initial public offering, possibly within the next year or two.
"If you leave it only as a partnership, the partners will fight. This is not my opinion - it happens all over the world," he said.
Other family businesses may choose the same route, while others may look at selling or spinning off units of their business. The big Gulf conglomerates are evolving just like any other business, Mr Youssef said, but the huge growth in the region meant the stakes of managing the changes ahead were that much greater. In some cases, the skills that created successful businesses may not be the same ones required to thrive in the years ahead.
"How many executives in this region have the experience of taking a company global? Very few," he said.