Why now is the time for GCC family businesses to review succession planning
Only 25% of family entities have an effective wealth transfer strategy in place
Succession planning for family businesses is challenging given the various elements that need to be accounted for. As with all family businesses, GCC families experience several issues: from selecting a competent successor to possible friction that may hamper a successful transition.
While it is never easy to have discussions around death and succession, it is essential to avoid conflict in the unfortunate event of a loss within a family in normal times or during exceptional times as seen with the Covid-19 pandemic. To future-proof themselves, family businesses must consider all the facets of succession planning, the modalities for passing on leadership roles and ownership across generations, family members and employees.
The current pandemic necessitates that family businesses take stock, review and stress-test existing structures.
Ella Moldoveanu and Faizal Bhana
Family businesses represent 80-90 per cent of commerce in the GCC. They contribute 50-60 per cent of the national gross domestic product and employ up to 70 per cent of the labour force in the region. Yet only 25 per cent of family businesses have an effective wealth transfer strategy and a legally applicable succession plan in place.
The current pandemic necessitates that family businesses take stock, review and stress-test existing structures. Succession planning is particularly key in the GCC as families, family enterprises and groups form the backbone of the commercial structure, be it single sector operators or multi-sector, multi-jurisdictional family conglomerates.
The majority of intergenerational transfer of wealth in the Middle East will occur for the first time after over 30 years of family businesses having been operated solely at the behest of the patriarch. The challenges of managing the expectations of the patriarch generation and reconciling them with those of the young and next generation provide for complicated advisory, financial and governance training and support. It is now that experts in the wealth management industry are called on to provide this much-needed support.
Comprehensive succession planning involves detailed conversations between the founders and patriarchs with the next generation of proprietors and successors of the family businesses. This involves years of preparation, training and capacity building of the new generation’s abilities to effectively take over the roles within the business governance structure. One of the key roles for advisers is to provide businesses and families with legal and viable solutions and put into place robust contingency plans which can be executed seamlessly, minimising risk and guaranteeing continuity. To adhere to an efficient wealth transfer, it is vital that trustees and other fiduciary service providers are prepared to meet the needs and demands of the next generation. Here's how to review a succession plan:
Prepare a trust structure summary
As a first step, it is pivotal to prepare a trust structure summary for members of the next generation that breaks down the trustee’s role and responsibilities, the terms of the trust, what it means to be a beneficiary of the trust, current activities and investments held by the trust and any relevant regulatory requirements.
Engage the next generation of business leaders
Having a discussion with members of the next generation is pivotal – especially in times of rapid changes – as it helps clarify the structure in place and delves into the current circumstances of the immediate family, as well as identify some of their aims and aspirations. It is also important to recognise that they expect fast, accurate and responsive information. As such, incorporating the right style and channels of communication to engage with them is paramount when building that relationship.
Focus on the existing structure and review investments
Identifying whether the existing structure as well as the trust fund investments are aligned with the aims and aspirations of the next generation is a key step. It becomes important to assess whether an existing structure is still suited for the family business needs and whether a new one is required.
Focus on values and future growth
Assess whether the growth of the trust fund can keep pace with the growing size of the next generation and whether the trust’s overall purpose needs to be modified in any way.
With great wealth comes great responsibility and this is becoming increasingly understood by families from the region, particularly during this time of crisis. Understanding and communicating current attitudes towards wealth structuring and leveraging on the decades of experience of international finance centres for long-term planning is a key component of successful business continuation and workable succession planning.
If we are to consider success not as a final outcome, but an ever-aspiring goal, this should give us a growing impetus to understand that adaptability is the key tool towards managing that process for future generations to come. Studies show that the most resilient succession planning takes place when the next generation is allowed to take a leading and driving role in the process, along with the founding members.
Ella Moldoveanu is the director, Gulf Region, and Faizal Bhana is the director, Middle East, Africa and India, for Jersey Finance
Updated: June 1, 2020 08:09 AM