The five crises facing GCC family businesses (page 1 of 4)

No fewer than five crises are now hitting these companies at once, creating a perfect storm that is likely to radically alter the operating environment for family-owned businesses in the region.

Succession issues are looming, as the next generation prepares to step up and management must make hard choices between those who would traditionally be tapped for leadership positions and those who may be more capable of running the business. An ever-increasing number of family members is putting pressure on firms to grow quickly enough to support everyone who expects to work for the firm or draw an income from it. Many firms have diversified beyond their original business into an unwieldy portfolio of sometimes unrelated companies that must be trimmed back to focus on the group's core capabilities.

At the same time, the GCC market, long closed to outside companies, is now open to competition from specialized regional players and international firms looking for high-growth markets. Credit is becoming an issue as well—large merchant families used to have the unquestioned trust of suppliers and banks, but the disruption in credit markets has affected those relationships.

"Each of the five crises poses a very real risk on its own, but in combination, they are even trickier to deal with. They could be broken up to address succession issues or resolve family feuds. And they could be forced to sell portfolio companies or other assets, in order to raise cash to continue supporting other businesses and a growing number of heirs,"

stated Ahmed Youssef, a principal at Booz & Company. At a minimum, family businesses that don't adapt quickly could lose market positions to more focused and established competitors.

Yet while these challenges are significant, isolating them and addressing each with specific solutions will help ensure that these businesses not only survive the current recession but come through with a more focused management, a more coherent set of portfolio companies, and a smooth transition of power.

Addressing the five crises

Three of the looming issues are unique to family businesses; two are universal but have significant implications for family businesses in particular. All must be addressed rapidly and effectively if GCC family businesses are to continue on their strong growth trajectories.

1. The succession crisis:

Many family-owned GCC companies were founded in the mid-20th century, so they are now somewhere between their second and third generation of family control. That is a difficult time to transfer management control for businesses around the world, even when the global economy is healthy. But the current economic uncertainty and other factors discussed below make this a particularly acute issue for family businesses in the region.

Decision-making at these firms is typically controlled by a patriarch, who is not likely to surrender operational control of the company he founded and built. "Also, regional traditions may prescribe transfers of responsibility according to preordained patterns—for example, to the oldest son—regardless of the strengths and affinities of other siblings," explained Youssef.

In some cases, acute succession problems will result in businesses being split among siblings, merely to ensure that everyone gets something to oversee.