Family disputes and insistence on family control regardless of qualification are the biggest challenges facing family businesses, according to a survey carried out at the official launch of the DIFC Family Wealth Centre.

Speaking at the launch, Abdulla bin Touq Al Marr, the UAE’s minister of economy, said apart from succession and managing the legal framework, one of the most important factors for family businesses over the coming decades will be transitioning from the traditional economy, focusing less on real estate and moving more towards the economy of a changing world.

However, a snatch poll taken at the centre’s official launch identified family disputes as the biggest challenge to such businesses. The rest of the top five concerns were talent retention and recruitment, lack of legal structure, digitisation and new technology, and finally tax.

At the launch of the new centre, which offers services to global and regional family-owned businesses, speakers noted that many family businesses in the region had passed to the second generation, often siblings, but more challenges arose when the third generation, known as the “cousin consortium”, became involved.

Essa Kazim, governor of the Dubai International Financial Centre, said, “Globally, we are experiencing the biggest transfer of wealth in modern times, and being [in] a young country, many family businesses are experiencing the transfer of wealth for the first or second time and may lack experience in the process to do so with proper governance in place.”

He added, “87% of high-net-worth individuals say that they believe their family businesses are set up for an efficient transfer of wealth, yet only 24% actually have effective succession planning in place, according to Lombard Odier.” He noted as well that a lack of proper planning means a higher likelihood of loss of wealth. 

Chuck Long, the head of the International Global Family Office at BNY Mellon Wealth Management, said the region currently has higher rates of success at passing on its wealth to the fourth generation, at 20%; by contrast, globally, 97% fail to pass on their wealth to the fourth generation.

Noting that even that 20% could be improved, he said, “The family makes the business go away. It’s not the business going away; it’s the family splitting and not being able to work together.”

For a family business, educating family members to ensure the transition of businesses and wealth to the fourth generation is perhaps most important, he said. “All of us have a tendency to focus on preparing the wealth for the family, but a lot of us don’t focus on preparing the family for the wealth.”

Essam Al Tamimi, the chairman of legal firm Al Tamimi & Co, highlighted the complexity of some regional family businesses, which could, for example, include a founder, two or three wives, 15 children, businesses, lands and properties registered in sons’ or daughters’ names or in a brother’s name. It is important, he said, to create proper structure, dividing family conglomerates into different companies and agencies during the founder’s lifetime to ensure smooth succession.

He noted that families have several legal options: they can use local laws in Dubai or Abu Dhabi, Federal law to help restructure, or the DIFC, where laws have been enacted to allow families to set up their businesses. 

Amin Nasser, Senior Advisor, PwC Family Advisory, said the third generation, the so-called cousin consortium, can be very difficult to manage, as the latter can lack the same bonds among the previous generation, who are often siblings who have taken over from the founder. 

In addition to conflict around unfair treatment among family members, lack of transparency in family employment can also pose a challenge, he said, particularly when it comes to terminating family members who are not performing well.

“Try and terminate a family member and see where that takes you,” he said, adding that some family businesses are nevertheless putting mechanisms into place to deal with that issue.

Yet another challenge is family members who are shareholders wishing to exit, specifically the valuation of their shares and the process of exiting, he said. 

“80% of family businesses fail because of lack of leadership,” he added. “Family businesses here are very focused on making sure there is no gap in leadership.”

(Reporting by Imogen Lillywhite; editing by Seban Scaria)