Implementing an integrated operational framework early is critical for unlocking Middle East SME growth

Experts at "Empowering Growth" forum highlight legal, technology & new finance as core pillars for sector success

  
Implementing an integrated operational framework early is critical for unlocking Middle East SME growth

Dubai, UAE: With the GCC start-up & SME sectors recognised as key growth drivers of regional GDP in post-pandemic economic recovery, the Empowering Growth forum held in DIFC last week offered valuable insight for entrepreneurs. Hosted by Hammad & Al-Mehdar Law Firm (HMCO), a leading regional law firm, with additional participation from leaders in technology, international tax laws and venture capital, the outcome of the roundtable session highlighted the critical need for the development of a strong operational framework in the earliest stage of the business lifecycle to enable rapid and robust scaling.

With legal and regulatory considerations sometimes overlooked in the establishment of start-ups, Abdulrahman Hammad, Partner & Head of Private Equity and Venture Capital, HMCO, said: “Structuring a start-up requires planning so that it not only becomes operational immediately, but is also set up for growth in the medium term, is a worthwhile investment from the start. Business license parameters need to be considered from the beginning, and attention given to the different jurisdictions within our region so that there are no surprises or limitations that could hamper the expansion of the business later on.”

Hammad highlighted six key legal considerations for SMEs to unlock growth:

  • Structure and Licenses: SMEs must consider their existing and potential stakeholders in building a structure that accommodates future growth, and understand the laws across the various jurisdictions in which they operate.
  • IP Protection: Protection and ownership of Intellectual Property (IP) needs to be outlined from the set-up of a business to avoid third-party intellectual property risks that could damage and even derail a venture at a later stage.
  • Shareholders' & Founder's Agreements: Understanding the differences between the two agreements is essential. A shareholder's agreement regulates the relationship between investors and the company. The agreement establishes the company's purpose, explains how the company will be managed, provisions regarding buying and selling shares, dealing with deadlock, and ESOP structure. The founder's agreement is the agreement between the founder and the company, and clarifies the founder's obligations towards the company, as well as regulating their overall compensation.
  • Data Protection & Privacy: Being aware of and managing data privacy is crucial for businesses operating in today’s world. Entrepreneurs should have a solid grasp on operational aspects of online services, the information collected from website visitors, and how this information can and should be disclosed. Companies should avoid absolute terms such as 'never' and 'always,' which can have long-term implications for privacy policies.
  • Funding & Raising Capital: Building a virtual data room (VDR) from the start, enables easy planning and efficient preparation for fundraising at a later stage. It is also worth conducting mock due diligence testing by a company’s legal consultants and financial advisors to ensure readiness.
  • Tax Planning: SMEs must understand the tax footprint of their structure and related obligations. Engaging a tax advisor to ensure the building of a tax-efficient structure is essential, to accommodate the different regulatory requirements and implications of Zakat or income tax, dividends and royalties subject to withholding tax, permanent establishment rules, transfer pricing regulations, and the 15% global minimum tax to be implemented in 2023.

The subject of tax was further expanded upon by Thomas Vanhee, Founding Partner of international tax consultancy Aurifer, who highlighted the importance of understanding the tax jurisdictions within which a company operates, and the differences of these across GCC countries. He emphasized that the absence of taxation is not always favourable, especially when dealing with international markets, as transactions from tax-free markets in the GCC can be considered high risk, flagged for audit, and even penalised.

Practical advice on implementing of technology in start-up companies – for both efficiency and cashflow management – was offered by Sami Ali, Head of Microsoft for Startups, who highlighted the technology ecosystem as a critical enabler for growth, as it minimises the risk of operational breakdown.

According to Ali, internal communication, project management, and automation of processes at the early stages of operation are essential for business validation and demonstrate a company’s readiness to scale for potential investors.

Unlocking capital for SMEs through fundraising was addressed by Mahmoud Adi, a Founding Partner of Shorooq Partners, a leading early-stage venture capital firm in the Middle East, and founder of Pure Harvest, a leader in sustainable agriculture.

According to Adi, investors consider five key elements when evaluating a business:

  • the vision set by the founding partners, and the different skillsets of the founding team
  • the market opportunity and potential size
  • market pain points and solutions offered
  • evidence of financial viability
  • how the investment in the company contributes to the diversification of their own portfolio of investments, whether in sector or geography

He also reminded entrepreneurs of the time commitment required for fundraising, citing it as a full-time job that could take away time from the day to day management of a business, so planning was essential.  He recommended not appointing third party brokers or financial advisors at the seed fundraising stage, as founders need to demonstrate their ambition, stamina and resilience to attract investors, but strongly advocated the appointment of the right legal counsel at the earliest stage.   

Abdulrahman Hammad, Partner & Head of Private Equity and Venture Capital, HMCO, concluded: “The UAE and the rest of the region are one of the fastest-growing economies in the world and with that comes rapid changes in laws and regulatory frameworks. With a strong operational framework, incorporating the elements discussed today, start-ups and SMEs stand themselves in good stead to thrive, scale and become the success stories of the future.”

-Ends-

About Hammad & Al-Mehdar Law Firm:

Founded in the Kingdom of Saudi Arabia in 1983, Hammad & Al-Mehdar (HMCO) is a reputed Middle East law firm providing corporate legal counsel for today’s globally oriented businesses and family offices. With a depth of expertise across various sectors, the firm helps to protect and propel clients navigating the rapidly evolving legal and regulatory requirements across the region. Sectors include technology & life sciences, private equity & venture capital, energy & infrastructure, media, real estate, construction & PPP, and private client advisory. HMCO partners operate from Jeddah, Riyadh, and Khobar in KSA, and Abu Dhabi, UAE.

For further information on Hammad & Al-Mehdar Law Firm, please contact HMCO@mojo-me.com   or visit https://hmco.com.sa/.   

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