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Family businesses form the backbone of Gulf economies, but how well set-up are they to deal with the changing business environment both locally and when they invest overseas?

Over 90% of businesses situated in the Gulf Cooperation Council (GCC) are family- owned, accounting for 80% of the region's GDP and employing 70% of the GCC labour force – 67 million individuals – according to a recent report by accountants EY.

"The key issue facing family businesses in the GCC is, to an extent, the same wherever they are based and applies both to their local activities and international expansion: competition," explains Abdul-Haq Mohammed, international managing partner for Trowers & Hamlins. "The question each business has to answer is whether their structure and operating practices put them in the best position to take advantage of the massive opportunities they have locally and overseas, and to compete against both local businesses in the same space and the increasing number of international investors keen to benefit from the growth of the Gulf economies."

Youssef Boulos, corporate partner in Trowers & Hamlins' Abu Dhabi office, the majority of whose business is with family- owned enterprises, sees a tradition of privacy around business dealings as being a potential obstacle to change.

"The idea of business as a private, 'family matter', is far from unique to the Gulf," he says. "But the GCC economies don't have hundreds of years of business tradition to fall back on in the same way the UK does, for example. Historically it's been standard practice for big land transfers, for instance, to be done with a handshake or single signature, with no written contractual arrangements or the kind of detailed due diligence that many Western companies – and their professional advisers – see as par-for-the-course."

That can become a vulnerability when you're investing abroad, or dealing with foreign investors," he adds.

Nick Green, corporate partner in the firm's Bahrain office, agrees. "The foundation of business in the GCC is one of personal trust," he says. "There's little tradition of constant recourse to third party advisers, as there is in the US and UK, and there's a lack of documentation that can occasionally be problematic where foreign investors are concerned."

"Make no mistake, there is appetite for change at a political level, to see business operating to what are increasingly seen as international norms," says Green. "But the relatively young economies of the GCC lack some of the infrastructure required to implement and police sweeping changes to corporate regulation."

While a new companies law came onto the statute book in the UAE last year and a corporate governance code was introduced in Bahrain, by way of example, Green says progress has been slow in other areas. "In Bahrain, we currently have to work with a bankruptcy law written in 1987 that deals mainly with personal debt and yet can mean a prison sentence for bouncing a cheque. Insolvency became a big issue after the global downturn but the law has not caught up" "The UAE has just revised its version but there is a call from SMEs here for more effective Chapter 11 style protection from creditors, which would be a market leading system in the GCC", Green adds.

"Dispute resolution is often an area of concern," says Boulos. "Just as many deals get done behind the scenes, disputes have been resolved that way too. But if there's a foreign investor involved, then things can become tricky. The advent of dedicated English law courts, for instance in the DIFC, has made a big difference, but family businesses are wary of them, and often don't instruct lawyers quickly enough. They're learning by experience, but it's a slow process."

Corporate structures are also a challenge. "As with most family businesses, it's quite common for fairly inexperienced people to be given very responsible roles, and of course they very rarely leave," says Nick Green. "Whilst this is excellent for continuity, young family members often have to learn on the job at an accelerated pace. If properly advised, they can very much turn this into a strength of the business". "The problems come if there are multiple family members in the same position or if sensible professional advice is not available."

Youssef Boulos agrees. "While familial trust obviously provides a strong backbone for many of these businesses, their existing and future structure can cause challenges, particularly in competitive bidding situations. Very often there's a patriarch, and what happens when he steps back - is he going to be a consultant, advisor or to continue to be heavily involved? Are you going to have a decision-making board with new board members? How are you going to make up for the lack of management experience among some of the next generation of board members, especially if the patriarch has been making all the decisions?"

Green points to another area where family businesses could tighten up the way they operate. "A historic mistrust of professional advisers means many family businesses may do comparatively little due diligence into the business they're buying, the relevant sector or even the country they're investing in. Very often, they go ahead because a friend or trusted contact has recommended it, and that's enough for them. That means many might invest in a particular country or particular investment, with of course the risk that they all end up losing. And there are all sorts of family dynamics going on in the background, sometimes deals are pulled at the last minute not for any commercial reason but for a personal one, and that may have a serious impact on the business."

Youssef Boulos also believes there are benefits for family businesses in getting more comfortable with Western business practices. "There is no history of debt here. There are huge reservoirs of capital but no experience of using debt – as a US or UK business might do – to expand. There is a generational tension there; the older generation doesn't trust the legal framework behind debt. But it means there is huge potential down the line in that area."

Nick Green sees powerful incentives for family businesses to change. "The structural changes in the economy – not least what seems to be a semi-permanent depression in the oil price – mean that family businesses need to focus on adaptation, instituting what we might call 'developed' market practices. Some businesses in the region have made this transition already, often as a consequence of what they've learned in their overseas activities and in partnering with inward investors, and if they choose to expand within the GCC, they'll eat slower-moving competitors for breakfast."

"GCC businesses have all been on a massive learning curve in the last few decades, but it can be a painful learning curve… and proper professional guidance can help reduce the risk," he adds.

Family matters:

  • GCC family businesses prefer face-to-face meetings; "nothing closes without at least one face-to-face meeting." (Nick Green)
  • Relationships are key, and can take a long time to build "You need to be very patient, but once you're in, you're in if you continue to perform at the required level." (Youssef Boulos)
  • They don't release 'family-confidential' information outside the family group. "You often find out things you should have known early on at the last minute." (Nick Green)
  • Family directors don't tend to move once they've been given a trusted advisor role, and if they don't like you, they'll remove you. "They often go through four or five professional advisers before they find someone they like to work with and trust." (Youssef Boulos)
  • UK and European businesses often tend to do better than US ones. "The US willingness to work as hard as possible, round the clock, can lead to frustration on both sides when dealing with the culture in the GCC." (Nick Green)
  • The younger generation use digital comms, text, Whatsapp, and have a greater appetite for risk. "But they still need to get sign-off from dad, uncle, mum or aunt." (Youssef Boulos)
  • The GCC is not one bloc with identical cultural norms. "You have to be everywhere you want to do business, and ideally have presence on the ground." (Abdul-Haq Mohammed)