On 19th September, the United Arab Emirate’s Ministry of Economy launched a new programme – Thabat – to promote entrepreneurship and double family-owned companies’ contribution to the economy. The aim is for their value to reach $320 billion (Dh1.17 trillion) by 2032. This recognises the vital role family businesses play in the Gulf region.
On a global level, according to the Family Firm Institute, family businesses are estimated to contribute 70 to 90 per cent of global gross domestic product and many of the globe’s most successful brands are family-owned such as Walmart, Ford and BMW. Regionally, in the United Arab Emirates for example, family-owned firms represent 70 per cent of gross domestic product and account for 60 per cent of jobs in the country.
Economic resilience and trust – defining qualities
Historically family-owned businesses have been highly successful in the Gulf region, underpinned by their conservative approach to finances. Family businesses typically think in generations, not quarters and plan for the long term. They also benefit from a “trust dividend”. The 2019 Edelman Trust Barometer found family businesses are trusted by 69 per cent of the general population which is 13 per cent higher trust level than businesses in general.
The importance of balancing stability with growth
However, economic stability must also be balanced with continual growth for family-owned businesses to survive and thrive in the long term. According to PwC’s Global NextGen Survey 2022, businesses need to grow 10 per cent every two to three years through organic growth, diversification or impact investing to serve family interests.
It is worth noting that half the Gulf region’s family businesses experienced a reduction in sales in the recent pandemic, compared with the global average of 46 per cent. In response to this decline, family businesses in the Gulf region have had to adapt their business strategies, diversify and digitalise. This has had a positive impact by accelerating technology-powered innovation and collaboration.
However, as further headwinds are predicted, from economic disruption, growth slowdowns and uncertainty to climate change impacts, resilience will be tested even further. Entrepreneurialism will be a key factor in the survival and success of family businesses in the new economy.
The spirit of entrepreneurialism – a key success factor
Howard Stevenson of Harvard Business School defines entrepreneurship as the “pursuit of opportunity beyond resources controlled”, and entrepreneurship is at the core of most family businesses. Like any business, in fast moving, disruptive markets, family businesses must embrace innovative ideas, professionalise, consider external management and become more agile as they strive to compete.
A key challenge, however, is balancing core existing business with stimulating entrepreneurship and supporting embryonic ventures. Creating distinct corporate structures that can be controlled or funded for separately can be effective and encourage innovative or risk-taking cultures to flourish. Family members and management can also be incentivised with options and equity outside of the core business.
Financing entrepreneurialism in the family enterprise
Seeking outside capital may be necessary for entrepreneurial family-owned businesses looking to accelerate growth, seize new opportunities and strengthen equity. There are various options to consider, including private investment, debt issuance and publicly listing a company. Choosing the right option will depend on each family firm’s business objectives and unique circumstances.
Recently there has been a significant trend in the Gulf towards businesses listing on the region’s stock markets through an initial public offering (IPO), where capital is raised through making shares in the business available to institutional and retail investors. And the United Arab Emirates government announced in September that it is working on regulations to help family-owned businesses expand and grow through the IPO route underlining the importance of listing to family enterprise in the region.
Protecting family wealth in times of change
As family businesses adapt and economic factors change, wealth strategies must also respond. Succession planning, investment strategy and risk management may evolve as family-owned businesses become more entrepreneurial. This can be complex as family businesses often combine economic, community and family interests, sometimes in multiple locations, with differing tax and legal considerations.
With so much capital and endeavour typically wrapped up in a family business, diversification strategies are also key to ensure that a family’s wealth benefits from the business but is also insulated from business risks.
Whatever the future holds, family businesses in the Gulf region have shown resilience and longevity time and time again. For the most entrepreneurial families, who seek expert advice and collaborate with wealth management experts and other key players in the region’s network, future disruption will only serve to strengthen and grow their business and sustain their legacy for generations to come.
