Future-Proofing Family Businesses in the Middle East

Date 20/06/2024
5 minutes to read
Future-Proofing Family Businesses in the Middle East

Family businesses form the backbone of the Middle Eastern economy, driving innovation, creating jobs, and contributing significantly to GDP. However, these enterprises face unique challenges when it comes to succession planning and governance. The transition from one generation to the next often brings complexities that can threaten the longevity and stability of the business. To address these challenges, many families are turning to structured solutions such as family constitutions, business holding companies, family councils, and trusts. These tools not only safeguard the family legacy but also ensure that the business thrives across generations.  

The Importance of a Family Constitution  

A family constitution is a comprehensive document that outlines the values, vision, and governance structures of the family business. It serves as a blueprint for managing the business, resolving conflicts, and making critical decisions. The creation of a family constitution involves extensive consultations with family members to encapsulate the wishes of both the first and second generations of business owners.  

There are multiple benefits to creating a family constitution. Firstly, it provides clarity and reduces the potential for disputes by clearly defining roles, responsibilities, and expectations. Secondly, it ensures continuity by establishing a framework for decision-making that aligns with the family's core values and long-term objectives. A well-drafted family constitution fosters unity and commitment among family members, enshrining the core principles of the patriarch/matriarch and enhancing the overall governance of the business.  

Structuring Business Assets Through Holding Companies  

An effective way to future-proof family business assets is through the creation of a business holding company. A holding company can own the various operating companies within the family business portfolio, allowing for a consolidated and efficient management structure. This approach offers several advantages:  

  • Asset Protection: By placing business assets under a holding company, families can protect these assets from personal liabilities and potential business risks. This segregation ensures that the core business assets remain intact and are insulated from external threats.  

  • Simplified Governance: A holding company can streamline governance by centralising decision-making processes. This enables more consistent and strategic management of the family business portfolio.  

  • Flexible Ownership Structures: The holding company can issue shares to different family branches in accordance with the family constitution. This allows for equitable distribution of ownership while maintaining control and coherence in business strategy.  

The Role of Family Councils  

To ensure that the governance framework established in the family constitution is adhered to, many families establish a family council. The family council acts as a governing body that oversees the implementation of the family constitution, facilitates communication among family members, and resolves disputes.  

A family council typically comprises representatives from each family branch, including both current and future leaders. This inclusive approach ensures that all voices are heard, and that the governance framework remains relevant and effective as the family grows and evolves. The family council also plays a critical role in succession planning by identifying and mentoring the next generation of leaders, thus ensuring a smooth transition of leadership.  

Trusts: An Additional Layer of Protection  

In addition to holding companies, families may also consider using trusts to further protect business assets. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of beneficiaries. This arrangement can provide significant benefits for family businesses:  

  • Enhanced Asset Protection: Trusts can protect business assets from claims by creditors, ensuring that these assets are preserved for future generations.  

  • Tax Efficiency: Trusts can offer tax advantages by minimising estate and inheritance taxes, thereby preserving more wealth for the family.  

  • Complex family dynamics:  Whilst we all wish for families to interact harmoniously, in some circumstances this isn’t possible.  Having a professional trustee representing your interests in the family business can lead to less emotive decision making and more harmonious interactions.  

  • Control and Flexibility: Through the terms of the trust and associated documents such as letters of wishes, the family can retain some influence over how the assets are managed and distributed. This ensures that the business assets are used in accordance with the family's wishes and long-term goals.  

How can Equiom help?  

Advising families on their succession planning requires a nuanced understanding of both the cultural context and the complexities of family dynamics. By creating a family constitution, establishing business holding companies, forming family councils, and utilising trusts, families can future-proof their business assets and ensure a seamless transition of leadership across generations.  

Equiom is well equipped to assist families with their succession planning needs through a variety of tailored services.  Acting as a trustee, Equiom ensures that family trusts are managed with the highest levels of fiduciary responsibility, safeguarding assets for future generations.  Additionally, Equiom can provide professional board members to business holding companies, bringing expertise and impartiality. This professional involvement is complemented by their corporate governance services, which include organising board meetings, preparing agendas and meeting minutes whilst also offering independent strategic guidance.    

Drawing on extensive experience spanning over 45 years, Equiom advises families on best practice and proven strategies that have been successfully implemented for multi-generational, multi-jurisdictional family businesses operating in the region.  

These strategies not only protect the family's wealth but also promote unity and shared vision among family members. As a result, family businesses can continue to thrive and contribute to the economic and social fabric of the Middle East for many generations to come.  

If you would like to learn more about our Family Office Services, contact our team

This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. This article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained within this article without obtaining specific professional advice. Please contact Equiom Group to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it. 

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