Why Saudi’s family businesses need to focus on succession planning

Family businesses need to have a solid family constitution and corporate governance framework in place

Family businesses are an indispensable part of Saudi Arabia’s economic growth.

They are economic boosters, growth drivers and job creators. They generate around 60 per cent of the GCC’s non-oil income and create around 80 per cent of the employment opportunities.

As companies worldwide face diverse business challenges, Saudi-based family businesses remain relatively optimistic about sustained economic growth this year. Majority of them are confident about the future and their ability to sustain and grow.

The sustained growth of these businesses is due to characteristics such as an entrepreneurial mindset as well as quicker and flexible decision making.

Geographic expansion is one of the top growth priorities for successful local family businesses, with many venturing into new markets to explore opportunities for growth and diversification. The increasing family size also drives the need for continued growth.

International expansion as well as strategic alliances by these businesses can have a positive impact on the Saudi economy, as it will also facilitate know-how transfers that will create more business opportunities and additional revenue streams.

Despite the high confidence level among family businesses, they do continue to face several challenges such as planning and forecasting to predict changing consumer and market trends, financial management and the rapid pace of technological innovation.

Family businesses have to deal with challenges specific to their family as well such as the issue of succession planning.

Succession encompasses two distinct issues: the ownership succession, as well as the succession of management leadership.

Family businesses need to have a solid family constitution and corporate governance framework in place to deal with both these aspects of transition.

However, majority of family businesses in the past used to follow a reactive and not a proactive succession planning strategy, making it more complicated to deal with the difficulties associated with such a plan.

In KPMG’s Family Business survey 2017, up to 88 per cent of respondents indicated that preparing and training a successor was either important or very important to their business.

Over 60 per cent of respondents indicated that they have members of the next generation in management roles within the company (and 25 per cent have recruitment in process), which will put them in a stronger position when planning for succession.

Successful family businesses are investing an increasing level of time and energy into building their leadership from within the family to ensure the long-term continuity of the business, the survey found.

Therefore, family business must look holistically at both the family and the business from issues surrounding governance to succession to ensure its sustainable growth and continuity. Nonetheless, the succession issue needs meticulous planning in order to manage the complex ties between the business and the family.

Successful family businesses must look at long-term plans, processes and performance management to continue playing a pivotal role in the economic growth.

Fuad Chapra is head of family business advisory at KPMG Al Fozan & Partners