Based on research conducted in November of last year by Hubbis*, in conjunction with Jersey Finance, there is an estimated USD 1 trillion due to be passed down in the next decade from older Middle Eastern patriarchs and matriarchs to the younger generation. Alongside this, the PwC Middle East Family Business Survey 2019** identified Middle East family businesses as historically outperforming their global peers in terms of revenue growth, but that trend may be shifting.
Not only is it necessary to consider the concerns of the founder regarding the long-term survival of the business, but it is also relevant to consider the capabilities and desires of the next generation who might take over the family business in the future.
Corporate and family governance is ever-evolving and has been more widely considered in recent years with entrepreneurial families wanting to avoid becoming a “shirtsleeves to shirtsleeves” family but instead to be in control of their legacy. While governance in the sense of legacy may be seen as relatively new, some families have clearly developed a great skill in ensuring their family business lasts for centuries, leaving a significant and continuing legacy. For example:
To consider the family business, we need to look at who is involved. Whilst we may think principally about control moving down through generations, there are in fact many interested stakeholders that are affected by the business. For example:
The ownership and governance of the family business should be discussed and agreed upon well in advance of the need to shift power to the next generation. The family, whether through formal assembly or informally over dinner, should establish policies to govern issues where interests of the family and the interests of the business conflict or overlap.
Some of the areas that should be covered are:
Will it be family first or business first? Depending on how this is considered, what will the effect be on the culture within the business? Also, how will non-family employees strive to develop their careers within the business?
Some basic questions for the family may be:
A balance must be sought between generous remuneration packages which may leave little profit to distribute to shareholders and miserly remuneration, leaving significant profits to fund generous dividends. This clearly has a considerable impact when considering if owners should work in the business or not.
The other aspect this comes back to is whether the view of ownership is seen as “value-out” or “custodial”. Value out ownership will be looking for a market yield and expect dividends even when profits are low and cash-flow poor. However, custodians are content with whatever dividend the business can afford, often insisting that a certain level of profits and cash flow be retained to build a reserve and re-invest in the business activities.
Whilst there may be a traditional balance of power, it is likely owners may wish to reserve powers to control matters which represent a significant financial or reputational risk.
By discussing these areas and having a clear way forward, it will help with generating fair discussion between family members and provide a clear way forward for those both wishing to be part of the business in the future and those who want to follow a different path.
A Jersey Private Fund ("JPF") is a simple and highly flexible fund product that will be of interest to promoters who are looking to launch funds for groups of investors where a fully-regulated product might not be necessary or appropriate.
As an independent owner-managed fiduciary services business, with a highly experienced board of directors, we can assist with guiding families who are considering their long-term views on the family business. We can meet with the families and support discussion around the governance for the family business and thereafter build a bespoke solution fitting the needs to each family.
We are seeing a growing number of family businesses being settled into trust or foundation structures. This helps with a smooth transition of the business through the generations, rather than relying on the future generations “guessing” what the founder wanted. Depending on the structure put in place, Fiduchi may also be able to provide independent oversight of the business without a need to be involved with the day to day activities, thereby providing for an even smoother transition.
Finally, given Fiduchi’s position as an independent Jersey trust company with a permanent presence in the Middle East, we are aware and sensitive to specific regional and cultural issues, such as the legal implications surrounding holding both GCC and non-GCC assets via international vehicles, as well as the nuances around inheritance and heirship implications for families in the Middle East.