The How-To: Ensuring Integrity And Succession Planning In UAE's Family Businesses Taking certain precautionary measures in governance control is extremely important for the integrity and future of a family business.

Family businesses are extremely common in all markets around the world. Ford, Mars, Red Bull, Samsung, Toyota were all family-owned and run for many years. For much of the UAE's history, family businesses were the only types of businesses out there. According to recent PWC research, 80% of businesses in the Middle East are family owned or controlled.

The unique and often unstable mix of personal family dynamics, business strategy and ownership criteria can create a sensitive environment that makes decision-making challenging. Additionally, as the founding generation ages, succession and power issues across an expanding family can create complicated concerns.

Taking certain precautionary measures in governance control is extremely important for the integrity and future of a family business. According to a recent study by consultancy firm McKinsey, in the next 10 years, UAE family business leaders will be passing on more than US$1 trillion to their heirs. As founding leaders get closer to a retiring age family business governance controls become of critical importance.

In our experience, a great majority of family-owned businesses in the UAE do not have solid succession plans in place, and only review them when managerial changes have been required. Issues concerning power and leadership can create serious complications if not dealt with from an early stage. Setting family business governance structures, in the form of rules, policies, and procedures is a necessity when managing the growing complex dynamics of family businesses.

Succession planning in the UAE

In the UAE, an aging workforce and a skills shortfall are driving many organizations to take succession planning more seriously. CEOs, managers, human resource practitioners and even individuals have important roles to play in that effort.

Today, large family businesses represent 85%-90% of the business community, from local traders to global corporations– all of which contribute greatly to the local economy. These businesses have evolved with Dubai's rapidly growing economy, from a small trading community to the global market it has become today.

Promisingly, in May 2016 the Family Business Council-Gulf (FBCG), the regional association of Family Business Network International (FBN), launched the GCC Family Business Governance Code which serves as voluntary guide on how to organize the family and business together. The bilingual code aims to help family businesses set governance structures in the form of rules, policies, and procedures. However, research by the FBCG also shows that only two-thirds of large family businesses in the GCC have initiated building blocks for effective family business governance structures, and only one-third of those participants have fully implemented the structures effectively.

In 2016, the Dubai International Financial Centre (DIFC), the leading financial hub in the Middle East, Africa, and South Africa (MEASA) region, proposed the establishment of DIFC'S first Family Business Centre. This initiative is focused on supporting and servicing family offices– to ensure they can continue to contribute greatly to the economy.

Mitigating risk – succession planning

At Links Group, we have worked extensively with family businesses, helping them manage their companies while protecting and enhancing the family wealth. Having a plan that helps guide the current state of the business to its long term potential and prospects is necessary. It is imperative for company leaders to train and prepare their successors to assume their future roles in the event of a death, retirement or liquidation of any shareholder.

Concrete succession planning will not only help resolve issues with family members, financial institutions and government entities, but will also minimize the risk of reduced business value. As such, it is crucial that business owners fully understand the UAE's laws and regulations and put in place a coherent structure that will protect the family legacy and wealth, preserve the legal rights of the family members and, at the same time, ensure that the business grows and succeeds.

Related: What Makes The Family-Firm Tick? Five Research-Based Decision Drivers

Company set-up

Mitigating risk and maximizing protection of assets should be the priority for all family businesses. We recommend engaging with a commercial facilitation and advisory service provider to uncover all the facts, establish a corporate structure, and ensure no stone is left unturned.

In the UAE, the most common structure is a Limited Liability Company (LLC), which requires a local individual or company to hold a minimum of 51% shares of the equity. To ensure the protection of the family's interests, Links Group recommends all LLC vehicles are structured through a corporate nominee partnership.

This means a corporate board acts as the 51% percent shareholder and assigns full financial, operational and management control of the entity to the managing family office, normally via a Power of Attorney granted to the General Manager. Such a model not only protects the ownership interests of the family business, it also allows for clear succession planning. Once the best structure for the company has been found, the next step is to appoint a lawyer to incorporate the business and become legally registered.

Succession planning is a key area that needs to be thoroughly looked into by family businesses in the event of a death, retirement or liquidation of any shareholder. At Links Group we have witnessed an increase in enquiries from Boards of Directors wanting to ensure that their company is not at risk.

For example, in the UAE the law states that all bank accounts of a deceased person will be frozen until successors are nominated and dependent visas are cancelled within 30 days. It is also important to note that liabilities, such as outstanding bank loans, guarantees, lease agreements and payments to suppliers are usually not insured, leaving the personal assets of business owners pledged against these liabilities, and potentially leaving family members in financial distress.

Five key tips for succession planning

1. Start early The earlier a plan comes into place, the easier it is to avoid internal conflict. Transfer of power (shares) need to take place before the leading generation retires.

2. Establish competency models Have clear, measurable, objective goals for each level of the organisation to ensure employees' competencies are aligned with the company's future strategy.

3. Define the roles of key stakeholders in the succession plan Key stakeholders play a great role in preparing the next generation of the company and have to stay engaged with the program, performing their duties accordingly.

4.The role of the board The board of directors play a valuable role in a company's succession plan by counselling those passing on the reigns. Being a part of the board is also a great way for retiring members of the business to continue contributing to the business.

5. Invest in education Invest in staffs' growth. Future stakeholders must be fully educated to be competent business owners.

Related: Family First: Securing Continued Growth For Family Businesses In The MENA Region