Time for Saudi families to review their succession plans

Succession planning for family businesses is challenging, given the various elements that need to be considered both on the business and family levels. As with all family businesses across the globe, Saudi families face some common issues, including considerations around which family members are experienced enough to steer the business successfully with the support of the other members. Discussions of this nature can ease the friction within the family, as well as between the family and the management of the business, particularly in aligning the vision of the wealth owners with the natural successor’s aspirations for the future.
As family businesses navigate the easing of lockdowns and consider efficiencies to move their businesses into the post-COVID-19 norm, a key element is to consider their plans for succession. With multiple generations typically involved in the family business, the challenges of implementing the family’s future strategy has come to the fore during these extraordinary times.
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.
There are an estimated 538,000 family businesses in the Kingdom representing a staggering 63 percent of the total operating enterprises. They contribute up to $216 billion to GDP and employ about 7.2 million people, 52 percent of the workforce.
Saudi family businesses are generally regarded as sophisticated investors both regionally and increasingly globally. Most large family businesses are conglomerates — albeit private businesses — that are worth billions of dollars and operate across borders.
Closer to home, Saudi family businesses have very close ties with other families in the region, considering the deep and shared cultural and religious ties.
Yet just one in four family businesses in the GCC has an effective and legally robust wealth transfer strategy and succession plan in place.
The Saudi Vision 2030 places great faith in the Saudi private sector as the engine of growth and job creation. Against this backdrop and the Kingdom’s classification as an emerging market in 2019, listings from family businesses on Tadawul will add vigor to the local stock market.
There is a drive for IPOs within family business groups to provide another way for businesses to raise capital through the stock exchange and attract international investors.
With that in mind, a number of Saudi family businesses are taking advantage of this forward-looking opportunity. The current pandemic means they need to review existing structures for their local, regional and global investments and assets.
The majority of intergenerational transfer of wealth in the Middle East will occur for the first time in the next five years, after being operated solely at the behest of the patriarch and the wealth creator for the past 30 years.Comprehensive succession planning involves detailed conversations between the founders and patriarchs and the next generation, the proprietors of the future. This involves the training and capacity building of the new generation to take over positions within the business governance structure.
One of the key roles of business advisers is to provide businesses with viable solutions and to put into place robust contingency plans. To adhere to an efficient wealth transfer, it is vital that trustees and other fiduciary service providers are prepared to meet the needs of the next generation. They must also ensure that Sharia considerations are factored into all aspects of the discussion.
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.
Having a discussion with members of the next generation is crucial as it helps clarify the existing structure and the current circumstances of the immediate family, as well as identifying their aims and aspirations. Incorporating the right style and channels of communication to engage with the family is paramount when building that relationship.
The next point is to identify whether the existing structure and investments are aligned with the aims of the next generation is a key step — whether the existing structure is still suited for the family business needs.
It is essential to 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.
With great wealth comes great responsibility and this is becoming increasingly understood by families across the region, particularly during this time of crisis.

---

• Faizal Bhana is a regional director at Jersey Finance.