FAMILY BUSINESS: ACROSS GENERATIONS

Jordan 2019 | ECONOMY | COMMUNIQUÉ

KPMG provides a comprehensive account of the family business landscape in Jordan.

In these modern times, family businesses are seen to have a strong competitive advantage, where they possess strong values with an unshaken purpose. However, the path to success for family businesses in Jordan is not always easy. Some strategies that allowed them to expand and succeed in the past may not be as sufficient in the present and the future. Family businesses are encouraged to strengthen their weaknesses and manage the risks they may come across.

Governance
Risks of family conflict is present in family business if there is no governance structure in place. Therefore, in order for a family-owned firm to grow and prosper, the needs of the company need to be balanced against the demands and expectations of family members. It has been observed that during the early stages of family businesses, the company and family relationships are not distinguished properly, where it is evident in the financial relations and accounts, as the company's assets and the family's assets are not legally separated. This could lead to some issues if the company decides to expand. Another issue that persists in family-owned businesses, is that existing governance-related policies are informal, which would lead to the reliance on key people rather than on structures and policies. These practices in the company would not be understood if situations change and it turns into a non-family business. Flaws in governance systems of family-owned firms are mostly manifested in internal controls, internal audit, and risk management. The control environment is tailored to the needs of the founders or their children, and the problem arises when the company is growing, and these controls do not grow along with it, thus, a complex business with weak, unidentified controls may be doomed to fail.

Generations
Mature family businesses in Jordan have now expanded to second and third generations. Nonetheless, founders are staying involved in their companies well beyond the traditional retirement age. These businesses are having to adjust to multiple generations of the family working in the business at the same time for a longer period of time. Due to this overlap in generations, companies are finding it harder to achieve harmony due to generational differences and lack of proper governance structure. The senior generation is exhibiting overprotectiveness of their lifelong investments, is resisting release of control, and is following traditional means of running the business. While the second and third generations are seeking different roles for the opportunity to leave their mark, including roles that may change the overall nature of the business, all while attempting to allocate these roles among a larger team as families grow exponentially; however, the fact that the founding generation is retaining control allows the next generation to work with current leadership for several years before a complete succession takes place. This also allows the next generation of leaders to explore the innovations and product and service changes that will help the business transition toward the future. This approach helps to preserve key relationships and business knowledge while slowly introducing important changes that may be needed for the future. To manage this, families are refocusing on forms of governance such as family councils and offices to help smooth out the transition.

Family Office
The ideal starting point to establish a family council or office should be around the family's personal vision and values. There are four particular areas with key questions that families need to consider and answer:

Overriding Objectives
• Is the primary goal to help transfer the family's wealth safely across the generations?
• Is the intention to create something that will provide a shared purpose following the sale of a family business?
• Is the family looking to develop some of its philanthropic ambitions?
• Does the family simply want administrative support to help manage its affairs?

Financial Goals
• Is the family office intended to facilitate further wealth creation?
• On the flipside, is the family simply looking to preserve existing levels of wealth for future generations?
• How reliant will family members be on income from the family office versus other sources of wealth

Other Needs
• Families need to consider the variety of assets (investments, real estate, personal assets) to be managed, the locations of these assets, and of the family members themselves.
Attitudes to Control & Delegation
• Does the family expect a fully personalized approach?
• Does the family want to retain control of some or all of the activities or is it comfortable with delegation?
• If there is a number of family members, how will the company make decisions?
• Will family members play a role within the family office themselves and, if so, what expertise do they bring with them?
• How much information will different family members require?

Conclusion & Next Steps
To address the aforementioned challenges, along with the existing most pressing priorities (being improving profitability and increasing turnover), family businesses need to become more innovative, attract new talent, and open up to more financing options. More strategic innovation coupled with the right people and financing could contribute to addressing the top priorities of family businesses.

Although family businesses are not necessarily recognized as innovators, innovation and entrepreneurship have always been at the heart of the success of family businesses. Their longevity speaks to their entrepreneurial mindset and ability to monitor signals of change over time and adjust their businesses accordingly. However, for them, being able to change is not the critical issue—it is being able to change quickly enough to respond to the pressures of today's business world.
Furthermore, as part of their change agenda, an increasing number of family business owners recognize the need to expand beyond their traditional products and services. The focus being placed on diversification is a strong signal of the willingness and desire of family businesses to adapt to any shifts in the economy or the demands of their customers. In addition to recruiting talent that can help them understand and take advantage of new trends, business families are also starting to establish partnerships with other organizations that can bring new knowledge or experience to the table.

The ability of family businesses to stay ahead of the innovation curve will ultimately be determined by how they compete in the war for talent. Most are not struggling to hire laborers or unskilled workers—rather, they are challenged to find the skilled talent they need to succeed as the digital and technological world evolves and customer demands change.
Business families have long taken a unique approach to financing—preferring to reinvest their core business without seeking outside financing. While this protects them from a certain level of risk, businesses that employ this approach run the risk of stunting growth by limiting the equity available for expansion. Family businesses are an indispensable part of Jordan's economic growth. They are economic boosters, growth drivers, and job creators.