The Gulf’s family businesses face a generational test

Succession planning presents a formidable challenge for family-owned businesses, especially in the Gulf region where these enterprises account for a significant portion of the GDP. As more families reach the third generation, the need for clear succession plans becomes increasingly important. Disputes and legal battles can arise when a founder dies without a clear plan, particularly if the business was established in the 1960s or 1970s.

For instance, Majid al-Futtaim, the founder of a major UAE-based real estate and retail group, passed away in 2021 with most of his shares still under his control, leading to disputes among his heirs that were eventually resolved with the involvement of a government-appointed committee.

The Gulf region's economy is heavily reliant on private wealth, much of which is tied up in family-owned businesses. If these assets become embroiled in lawsuits and probate proceedings rather than being invested in new ventures, it can hinder economic growth. It is estimated that by 2035, between $500bn and $700bn in wealth in the Gulf region will be inherited, with up to $123bn potentially tied up in probate costs and unclaimed assets by 2030.

Saudi Arabia, in particular, lags behind other Gulf states in having succession plans in place, with nearly two-thirds of family firms lacking such plans according to recent figures.

The regulatory framework surrounding family businesses in the Gulf is still developing, but efforts are being made to improve it. The UAE introduced a dedicated family business law in 2022, which came into effect the following year, covering ownership, governance, and dispute resolution. This is a step in the right direction, but there is still room for further development of these frameworks.

Another consideration is the reluctance of some family business owners to list their shares publicly, as they value control and privacy. However, publicly traded shares offer transparency regarding their value, which can help mitigate family tensions. In some cases, heirs may receive dividends for years without fully understanding the business operations, and in the Middle East, where families often have multiple wives and children, the number of potential heirs can be substantial by the third generation, further complicating matters.

Establishing clear succession plans that focus on ownership and governance responsibilities, rather than day-to-day operations, is crucial. Many founders tend to overlook succession planning until they are older, but it is better to address this issue while still in relatively good health. In some cases, the inheriting generation may lack the skills or training to assume leadership roles in the businesses, particularly if they are highly specialized.

In such instances, it may be more beneficial for the young adult to focus on governance by becoming chair of the board and recruiting a strong executive team. Alternatively, some members of the succeeding generation may prefer to dedicate their time to philanthropic endeavors or explore alternative career paths. Ultimately, a well-structured succession plan is essential to ensure the longevity and continued success of family businesses, benefiting not only the family but also the broader economy and workforce in the Gulf region.