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4th May, 2017 | Dubai
According to a study from the Family Business Council Gulf, US$1.2 trillion to $1.3tn – without considering any offshore assets – is set to pass from parents to their millennial heirs in the next 10 years. But according to the research, only 15 per cent of the family businesses will succeed.
As per JP Morgan Private Bank, the biggest challenge family businesses across GCC region are facing is the transition to the third generation. In the GCC, between 70 to 80 per cent of the private sector belong to the family business category, making family-run enterprises the backbone of regional economies. In the list of top 65 families based on wealth, the average family net worth in Saudi Arabia stood at $6 billion followed by the UAE and Kuwait, while the entire MENA average stood at $4.5 billion. How will family businesses address this challenge and how the succession planning can help GCC families to ensure this transition is smooth and effective? We interact with Daniel Fleming, Head of Wealth Advisory – Middle East at JP Morgan Private Bank to provide insights around this topic.
Second and third generation business leaders are fairly informed on trends in transparency policy. Current business leaders are highly educated, obtaining diplomas both abroad and locally. Internal procedures, audit and compliance, which are key components of transparency, are part of the curriculum at business schools. I believe that they take all of this very seriously and project that onto their businesses.
Many business owners have multiple children. Choosing their successor is therefore a delicate challenge. Third generation children are becoming more and more involved in the business, each with different roles. This can lead to a lack of clarity on succession planning. Additionally, daughters are now getting increased levels of education and, as a result, are playing growing roles in management succession. Business leaders also have challenges when selecting when to involve third generation members of the family in the business. Some enter directly after graduating from university, while others obtain work experience elsewhere. When they do finally enter the business, leaders must determine who they are going to replace or if there’s a new role. Business leaders must therefore delicately manage the sidelining of a non-family member who may have been involved with the business for decades.
What we are seeing is second generation business leaders looking to avoid making same mistakes as their first generation predecessors when then transiting to their children. Many family businesses are now creating criteria for the next generation. For example, they may impose education and/or outside work experience requirements before joining the business formally.
There are key differences between management succession and ownership succession. For the latter, the general rule is that Shariah succession laws dictate next generation ownership. However, we have increasingly observed family business owners gifting shares of the business to next generation members during their lifetime and at the same time compensating others with non-family business assets. This can partly dictate who will succeed in terms of succession in management since certain siblings can end up with the majority of the control. I should note that many of these family business owners, before considering the transfer of ownership, have and still are going through significant changes in their corporate structures. Some, for example, are changing from partnerships to joint-stock companies or limited liability companies.
The J.P. Morgan Private Bank mainly focuses on managing family wealth outside of the region, and our expertise benefits clients needing help navigating succession planning challenges in this space. As we aim to be our client’s house bank outside of the region, we provide them with access to some of the top wealth advisors in the world to help them implement estate plans and to navigate the challenges surrounding the transfer of a business to next generation family members. As the Wealth Advisor covering the Middle East, my main goal is to ensure that our clients have all of the right conversations around the type of assets held abroad, how they are acquired, and succession of those assets to the next generation. Those conversations will be with their Banker, Wealth Advisor, Investor Specialist and most importantly, their independent legal tax counsel.
I frequently tell my clients to make sure they ALWAYS think about succession each and every time they make an investment abroad. This is particularly relevant when purchasing real estate as there will come a time when the next generation will be involved in renovations, upkeep and other expenses.