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Family businesses and future challenges

By Dr Moanis Shogaa

Family businesses are defined as the company owned by one family and where one or more members of that family work and also have the right to make decisions in one way or another. Accordingly, the family business is owned and managed at the same time by the family, whether the founder himself or the first or second generation, depending on the age of that company.

Family businesses are the largest contributor to GDP

According to the National Center for Family Enterprises, family businesses contribute 66% of the Saudi private sector’s Gross Domestic Product (GDP) at the sector level, and their number is about 540 companies, representing 63% of the volume of the private sector enterprises in the Kingdom. Family businesses also account for 12% of the Kingdom’s GDP (approximately $220 billion) and these companies employ 76% of the workforce in the Kingdom; That is, approximately 270,000 employees.

Why are family businesses important?

We can divide family businesses into two main categories.

First category: large family companies that have previously been transformed into closed joint-stock companies or listed on the Saudi Stock Exchange Tadawul, and are therefore subject to the standards of governance and the standards of the Capital Market Authority.

What concerns us here is the second category: family companies that have not yet converted into a closed joint-stock company, such as a one-person company or a limited liability company and other types of legal companies. These companies are still managed by the first owner or one of his sons, and therefore they are exposed to many factors that may lead to their collapse or bankruptcy, and we will review the most important of these risks:

First: The death of the founding owner or the person who runs the institution from the family after the first founder (for example, the eldest son). In this case, the company may be exposed to an internal crisis if the children disagree or do not agree on one of the brothers to take over the management. And its most appropriate solution may be to hand over the executive management of the company to someone from outside the family who is responsible for managing the company and achieving its goals until the heirs agree on their lineage and shares, and then consider appointing the most appropriate among them according to the job needs and not because he is one of the sons of the founder of the company, based on what the Board of Directors determines and with the approval of the appointed director of the company.

A distinction must be made between the company’s board of directors and the family meeting board. The interest of the entity or the company and its continuity must be taken into account and not favoring one of the sons over the entity.

Second: the lack of strategic planning. Because the need for innovation and renewal is a fundamental element of the company’s success in light of the open market globally.
There is a highly unrealistic view of many family business owners, which is that the success of the family business depends on the name of this owner and the founding family. That is not covered by market rules. This is certainly a mistaken view of the situation, as competition is often fierce in open markets, and the coronavirus pandemic has afflicted many companies and small and medium-sized enterprises (SMEs), or even large ones. Thus, family businesses are a large part of the market component and the same applies to other companies and institutions. Therefore, it must have a strategic plan for the coming years that includes the company’s activities and its management as well. It must indicate if the company remain under the management of the family’s children, or will it be converted into a closed joint-stock company with the assistance of executive management?

A recent study indicated that about 39% of family businesses are managed by the second generation, while only 13% are managed by the third generation, and a mere 3% of family businesses are managed by the fourth generation. One of the main reasons for the failure of family businesses is the lack of qualification of the heirs and the appropriateness of their expertise and capabilities for the position they will occupy.

Third: There must be an internal charter for the family business, as the Ministry of Commerce has provided a guiding charter for family businesses that helps ensure their continuity. It included three basic elements: regulating the work of family members in the executive body, clarifying the dividend policy, the mechanism for the shareholder’s disposal of his shares, and how shareholders can exit to avoid disputes.

The existence of this charter binding on all family members who own shares in the company will be the cornerstone to avoid divisions, differences and conflicts that may occur in the future in terms of ownership and management among the heirs.

We can say that the commitment of the owners of these family businesses, which represent the largest percentage of the companies operating in Saudi Arabia’s market, to avoid such factors that pose the greatest risks to them will have a great impact in ensuring the continuity and ability of these companies to survive and compete year after year, and generation after generation.

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