Middle East businesses must take succession planning to protect an estimated US$1 trillion worth of assets

Middle East businesses must take succession planning to protect an estimated US$1 trillion worth of assets

A leading financial advisor urges UAE’s business owners to undertake proper business succession policies to protect their hard-earned assets from getting out of hand due to death, disability or other uncertainties

Date: Dubai, UAE, November 11, 2020

News Highlights

  1. An estimated $1 trillion worth of assets will be transferred to the next generation of family owned companies in the Middle East over the next decade;
  1. Most family-owned private businesses in the Middle East do not survive the second or third generation due to lack of business succession plans;
  1. Business owners remain aloof or unconcerned to protect their assets and wealth while busy running businesses;
  1. Proper business succession plans could ensure the protection of personal wealth and corporate assets under challenging circumstances.

Lack of proper business succession could cost an estimated US$1 trillion worth of business assets in the Middle East in the next ten years, according to the Gulf Family Business Council. If business owners do not take this seriously, their successors might not be able to acquire their hard-earned wealth.

Business succession planning has now become more crucial with the new Ultimate Beneficiary Owner (UBO) regulation (UAE Cabinet Decision No. (58) of 2020 Regulating Beneficial Owner Procedures) that requires companies to declare the ultimate beneficiary of business transactions, shareholder and voting information. The regulation, which came into effect on October 27 this year, seeks greater transparency on the real beneficiaries of the businesses.

UBO is the person or entity that is the ultimate beneficiary when an institution initiates a transaction. A UBO of a legal entity is a person who: holds an interest of minimum 25 percent capital of the legal entity, and/or holds minimum 25 percent voting rights at the general meeting of shareholders.

The Resolution requires entities licenced in the UAE (unless exemptions apply) to prepare and file a Ultimate Beneficial Owner (UBO) register, Nominee Director register (if applicable) and a Partners or Shareholders register, with the relevant authority within sixty (60) days from the date the Resolution came into effect, being 27 October 2020, or by the date the entity is established.

With the UBO law now active, business owners need to protect themselves from future risks that they perhaps do not see now, especially when things go wrong.

“Business owners – individual shareholders and partners – now need business succession more than ever to ensure their financial assets and wealth are protected in case of death or disability,” Leena Parwani, Founder and Chief Executive Officer of LPH Financial Services, says.

“A business owner spends all his life developing business, generating assets and wealth. However, he doesn’t do anything to protect the wealth and the interests of his family, successors. This is normal among most business owners.

“However, it is important for the business owner to ensure that his/her successors gain access and control of his assets and shares in the businesses, or a fair value of the shares if they want to exit the business. Without proper protection plans or policies, they usually do not get their fair share and in most cases, remains at the mercy of the existing shareholders.”

Succession plan, wealth management and estate planning is largely absent in Small and Medium Enterprises (SMEs) as well as family businesses.

According to the UAE Ministry of Economy, the SME sector represents more than 98 per cent of the total number of companies operating in the UAE and contributes some 52 per cent of non-oil gross domestic product (GDP) – a figure the ministry wants to increase to 60 per cent by 2021.

Family businesses that are managed by shareholders quite informally represent 80-90 per cent of commerce in the GCC. In most cases, they are not run professionally and lack transparency and accountability, let alone corporate governance. They contribute 50-60 per cent of the national gross domestic product (GDP) and employ up to 70 per cent of the labour force in the region.

Yet only 31 percent of businesses have a robust, documented and communicated succession plan in place, with only 12 percent making it to the 3rd generation, according to PriceWaterhouseCoopers (PwC).

“Family businesses have always been an engine for growth and their success translates into prosperity for their respective region. As Middle East family businesses transfer control to the second and third generations, a number of challenges arise, and the need to set a robust governance framework aligning the growing number of shareholders becomes paramount,” said PwC in a report.

In the Middle East, family businesses play a particularly significant role in the region’s economy so enabling their growth is high on both the private and public agendas. With a GDP contribution of 60 percent, a workforce contribution of 80 percent, and US$1 trillion estimated to pass from one generation to the next within a decade it is easy to see why this is a prioritised sector.

“A critical scenario that needs to be carefully managed is when a shareholder decides to exit the family business and sell his equity stake. Proactively managing that process is essential for assuring long-term family business continuity, harmonious family relations, and shareholder ownership responsibility.”

Many family businesses in the Middle East have ceased to exist after the demise of their founders due to succession and legal issues owing to succession. Legal successors of the founder of businesses have seen their father’s assets changing hands depriving them from their dues.

Leena Parwani, says, “These are unfortunate and hard facts of life and happens when a businessman fails to take actions while building his business empire and wealth.

“Most entrepreneurs and businessmen remain too busy to think of their succession planning. This is where we come in to advise them on their personal wealth planning, succession planning and insuring themselves against growing risks through shareholder protection plan.”

Shareholder Protection

Business owners, entrepreneurs could protect their assets, estates and business interests from risks in case of the demise of either of the shareholders in a partnership business, by availing shareholder protection against the total risk.

For any business partner or shareholder, their share is the business is likely to be their biggest financial asset so they need to protect it, not only for the benefit of their own family but the benefit of the other partners in order to help ensure continuation of the business and protect it from collapse.

The shareholding partners of private limited companies are in a similar position. Business protection plans, based on a suitable legal arrangement can provide a simple way to protect the interests of the partners and shareholders.

Should the surviving partners be unable to source the required funds, the deceased’s estate could force a sale or, worse still, the winding up of the business, or the family members could become involved in the running of the business, while banks and creditors may want to renegotiate terms or call in loans or the introduction of an unsuitable buyer, potentially a competitor or rival, or a takeover bid.

Shareholder protection provides peace of mind for the remaining directors. It gives the successor of the shareholder the sum of money in case of death of the shareholder against the risks as per the policy. In addition, should a shareholder become seriously ill, critical illness cover ensures a lump sum is paid out to the individual who is suffering.

A carefully planned shareholder protection plan could help ensure that on the death of a partner, a lump sum amount will be available to the remaining shareholders enabling them to buy back the share from the deceased’s family, remain in control and ensure the continuation of the business.

“While the going is good, most people do not think of possible dark days and therefore do not undertake protection. Financial planning including succession, estate planning and shareholder policies are crucial for family business owners to ensure peaceful transfer of wealth and smooth succession,” Leena Parwani, a financial expert on estate, financial and succession planning, says.

“Most entrepreneurs do not think about these risks until we alert them or there is an incident that forces them to think about their succession. However, it should be a priority for every businessman who has generated substantial wealth for their next generation.”

Leenal Parwani has advised a number of successful entrepreneurs, business leaders in the UAE to ensure that their wealth is well protected from any type of risks.

Succession planning in family businesses is challenging given the various elements that need to be accounted for including family and shareholding issues. As with all family businesses, GCC families experience several issues: from selecting a competent successor among rivals within the larger family to possible friction that may hamper the transition.

She urges the businessmen to protect their estates, wealth, assets and business interest against growing risks, especially during the COVID-19 pandemic.

“We have seen too many lives lost during the current pandemic including those of the bread-winners of families and owners of small businesses. Many of their families suffer due to lack of estate and succession planning,” she says.

Leena Parwani, who started her financial services practice in 2013, has been one of the UAE’s top financial consultants for the last seven consecutive years, serving large corporations, entrepreneurs and business leaders.

Her company LPH Financial Services offers financial consultancy on personal wealth protection, estate planning, succession planning against potential risks to individuals and companies against various kinds of loss or damage.

Editor’s Notes:

About LPH Financial Services

LPH Financial Services is a Dubai-based leading financial services and insurance advisory that specialises in cost-effective risk assessment, family estate planning, wealth preservation, wealth creation solutions to corporations, small and medium enterprises as well as high networth individuals – in their estate planning, financial planning and business continuity plans.

LPH has a strong and well-balanced portfolio of business covering health, estate planning, life insurance and education policy coverage. It’s health insurance portfolio covers more than 17,000 lives and keeps growing.

LPH Financial Services is run by a team of dedicated financial planners and insurance professionals who are here to ensure that the clients make the right choices when it comes to their financial plan. It aims to become the most trusted and reputed financial consulting firm in the Middle East by leveraging on the collective expertise of its professional team and always delivering excellence.

Simultaneously, the company intends to build long-term value in the insurance and investment industry through alliances with established global partners. It’s team is also deeply focused on helping create abundance in health and wealth for expatriates living in the Middle East. LPH believes in setting realistic goals, achieving them in a timely manner with coordinated efforts, and living its vision through every milestone.

Established in 2013 by Ms Leena Parwani, Founder and CEO, LPH Financial Services helps businesses, business owners and high-networth individuals with effective, customised financial planning that solutions are of great value and helps them manage their business, life and financial future better.

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