Last week’s What’s Next column took a deep dive into the startup end of the pool as we looked at a growing trend of young businesses (most of them venture-backed, with tech or tech-enabled business models) buying up other early-stage firms as part of their growth strategy. It’s an idea that was largely unheard of as recently as a year ago.
This week, we look at privately held companies that are further along in their journeys: Family businesses, only 30% of which will survive the death of their founders, and only 3% of whom are statistically likely to last until the fourth or fifth generation.
Family-owned businesses are critical if you want to know where the next generation of great Egyptian companies is coming from. Without question, many of them are now on Planet Startup. But Swvls — businesses that can grow into IPO-able behemoths in a few short years — are statistical outliers. Most will need more time to reach escape velocity and become IPOable or otherwise sellable. Until they do: The pipeline of the next great publicly traded companies is stocked firmly with family-owned businesses.
This is part one of a three-part series looking at what family-owned businesses need to do — not to be prepared for What’s Next, but to make sure that they’re still around to be ready for it. Part two will include some practical advice from the folks at EBRD and IFC, while part three will feature stories from brand-name family businesses that have very successfully transformed themselves into fully institutionalized outfits.
Omicron be damned, the “covid era” will end. Here’s what family-owned businesses need to do if they want to become nationally and globally competitive when it does.
Anywhere from 50-60% of businesses in Egypt are family-owned, contributing about 80% to gross national income and constituting 75% of private sector activity, according to a paper by law firm Al Tamimi and Co, which cites data from the Egyptian Center for Economic Studies (ECES).
An aside: Those figures sound entirely reasonable, but the data backing them appears to be lost to the dustbin of history: We tried to get consensus on updated numbers for family businesses in Egypt and got … exactly nowhere. From academics to development finance institutions and private equity players who invest in mid-sized enterprises, nobody had an answer. (Maybe something that a budding academic or enterprising DFI might want to look into?)
To keep up with the times as covid recedes — and cope with the speedbumps they’ll hit as it does — family businesses need to get serious about institutionalization, a recent study (pdf) by professional services outfit PricewaterhouseCoopers (PwC) suggests. This means creating more agile corporate cultures, having clear succession plans, and welcoming management talent who don’t share DNA or marital ties with members of the founding family. While the PwC study looks at these issues in light of covid, they’re the problems that have plagued family businesses for decades — it’s just that the pandemic is now amplifying their impact.
PwC put 47 Egyptian family businesses under the microscope. The firm’s inaugural Egypt Family Business Survey spoke with 47 businesses of varying sizes and sectors, from August-October 2020. 36% of respondents operate in more than one sector, 32% operate in more than one country, 43% are wholly based in Egypt and confined to one industry. Some 36% have one dominant individual owner and 45% are co-owned by siblings.
The findings: “Business as usual” won’t work for family-owned firms stuck in their old ways. Family businesses with medium-term strategic plans managed relatively well through all of the disruption brought by covid, the report shows. But the approaches that saw them through the covid era won’t necessarily set them up well for the post-covid economy. Many Egyptian family businesses aren’t prioritizing the digital technologies transforming the global business landscape. Worse: A significant number don’t have management structures and basic paperwork — like shareholder agreements — that allow them to formalize (and regulate) the positions of family members in the business (let alone how often those family members can put their hands in the corporate cookie jar).
What’s been keeping them awake at night since covid began? Mainly cashflow. 45% of the respondents said cashflow and working capital management topped their list of concerns; 21% worried about protecting their people and planning their workforce; 9% felt the need to innovate or make changes to their business model; and 6% focused on digital transformation. Their top priorities going forward include improving lucrativity, followed by diversifying their markets, adjusting an investment strategy, carrying out portfolio reviews of existing businesses, addressing supply chain disruptions, considering financial restructuring, and finally, internationalizing the business.
Family businesses with medium-term strategic plans mostly fared well during covid, which upped their confidence. Among the 57% of companies in the survey with dynamic “three- to five-year” strategic plans, almost three-quarters achieved growth despite the impact of covid, PwC says. Those in food manufacturing and medical supplies came out on top, which may not be news as both sectors saw high covid demand. Some 21% of survey respondents said they had considered seeking assistance during the crisis from other family members outside the business with different skills and experience.
But PwC warns that this strong level of confidence may not bode well post-pandemic. “The fact that Egypt’s family businesses have generally weathered the immediate covid-19 emergency well does not [ensure] that they are set up to prosper in the post-covid economy,” the report states. Results suggest that family businesses should be wary of assuming that structures and cultures that previously served them well are fit for what’s next. The fast-approaching post-covid future where only the most rigorously managed and tech-savvy companies will retain their competitive edge may be troublesome for said businesses.
There’s no taboo in including family members in the business, as long as it’s part of a solid succession plan, the report says. 94% of the surveyed companies said they allow family members to work in the business, but only 55% of the surveyed companies have a succession plan in place. 53% also permit the spouses of family owners to be employed by the business.
Most problematic is that 64% of respondents don’t have formalized governance structures in place. The vast majority don’t have conflict-resolution mechanisms, documented entry and exit procedures for family members, or third-party mediation processes. Only 11% have some kind of family constitution or protocol; 11% have a formal family personnel policy; 6% have a family council, and only one company in the survey has a third-party mediation process in the event of disputes between family members.
And “institutionalization” can’t just be symbolic — it needs action. 45% of the survey group don’t have a formal board of directors, and 39% don’t have risk, audit and compliance committees, the report found. This is one reason family business owners are often accused of a lack of “corporatization.”
But simply having a board, in and of itself, isn’t enough. Of the 55% of respondents who have a board, half don’t request portfolio reviews and benchmarking exercises to identify underperforming units. Some 25% aren’t confident that the board is fully equipped to manage covid-related risks. And 43% said they don’t have a dynamic strategic plan in place for the next 3-5 years, though 80% reported they’re likely to introduce one.
And embracing tech is also key for these companies to prosper: Only 9% of the survey respondents said they need to innovate or make changes to their business model, and a mere 6% ranked digital transformation as a top concern. “Egypt’s family businesses need to work harder to introduce digital technologies across their companies, from supply chain management to customer sales and relations,” PwC highlights.
So how can family businesses best learn from their covid adventure? Asking tough questions should help pinpoint the governance and operational gaps. These could include: Did we have the best executives on the crisis team, with clear accountability? Did we have an effective enterprise-wide crisis response plan? Did we communicate effectively and rapidly with employees and other key stakeholders? Did we react quickly to our competitors’ response to the crisis? Did we use the right technology and data to manage our response to the crisis?
Bottom line: Family-owned companies need to be institutionalized, PwC suggests. This includes ensuring independent board oversight and strict audit, compliance and risk management functions. It also entails more rigorous succession planning, training the next generation with the right skills and qualifications, and creating rules and protocols to formalize business relationships between family members. It also means preparing for a post-covid future by creating clear strategic plans that leverage the power of digital technologies. “Family businesses which embrace these changes, rather than resist them, will be best placed to survive and prosper as Egypt recovers from the pandemic,” the report concludes.
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