Family Businesses in the Middle East and The New Normal: Reflect, Reframe and Optimise

Family-owned businesses are an integral part of economies and societies worldwide, and especially important in the Middle East where they contribute a significant part of the GDP (60%) and employ more than 80% of the workforce (PwC Middle East Family Business Survey 2019). For these businesses, the COVID-19 pandemic was a test in resilience, preparedness and foresight. According to the PwC Middle East Family Business Survey 2021, 56% of businesses reported that COVID-19 had negatively impacted their sales, compared with 46% globally.

Though the dual shock of the COVID-19 pandemic and oil prices created mass economic disruption, it only emphasised how important it is for Middle East family businesses to be resilient and rapidly adapt to exogenous shocks in order to preserve wealth and achieve sustainable growth. Any turnaround is then based on achieving goals such as improving performance, regaining control, reducing risk, repairing balance sheet, unlocking trapped capital and accessing value. As mass vaccination schemes assist economic recovery, the time is apt for family businesses to Act Now to Recover and take a three-pronged approach to Reflect, Reframe and Optimise their businesses as part of their turnaround story.

For family businesses that are looking to marry generational values with organisational ambitions, it is important firstly to reflect on and assess the existing position of the business and understand whether value is being created or eroded. Questions need to be addressed on what the key stakeholders want to achieve in the short, medium and long term, how does the vision and strategy align with family values and how do they fit within the value preservation versus value creation agenda. In establishing the vision and priorities, it is important for key stakeholders to:

Review the existing business portfolio
Understand the three C’s – character, capital and capacity – for each portfolio company and/or underlying investment(s), with a sector-specific lens
Know the cash flow position at each portfolio company and consolidated level
Identify optimisation areas – corporate and capital structure, financing, working capital and liquidity management, cost, governance and control
Understand the evolving legal and regulatory regime (e.g. ESG requirements)
Determine how the business leads or lags in digitisation and/or other sector-specific innovations

Based on the diagnostic exercise above, businesses should reframe their financial and operational strategy, determine what initiative needs to be taken and how each initiative will contribute to value preservation and value creation. Some questions, for example, that would need to be answered as part of the reframing are:

Growth and value enhancement: Where can I grow? Should I diversify or not? What is my diversification strategy/approach? Can I tap into new markets and sectors?
Value preservation: What do I do with legacy non-performing assets or investments? How do I optimise existing operations? How can I use digital tools most effectively?
Funding: How can I deploy capital and manage working capital more efficiently? Should I access alternative pools of capital?

Answers to the above will help most businesses in reframing their investment, growth and value preservation agenda over the next few years. The PwC Middle East Family Business Survey 2021 shows that family businesses in the Middle East have clear priorities for the next two years. Top of the list is diversification, with 58% planning to expand into new markets or client segments and three quarters (75%) saying that digital, technology and innovation initiatives are key priorities. Additionally, the 2021 Middle East Working Capital Study shows that working capital management should be a strategic priority for boards and management teams as improved working capital performance is associated with better balance sheet metrics (revenue, debt and profitability) while generating broader non-financial benefits and unlocking value to fund growth.

Once the business has reframed its agenda, it should then look at one or more of the following initiatives with the aim to execute these over a particular time frame:

Cash flow improvement: Cashflow forecasting and monitoring, cash preservation, contingency planning, working capital optimisation
Balance sheet optimisation: Asset review and divestment, balance sheet right-sizing
Cost optimisation: SG&A activity value analysis, headcount optimisation, external and internal functional benchmarking, direct costs optimisation
Corporate simplification: Corporate structure review and design
Strategic divestments/mergers: Divestment and merger execution, investment rationalisation
Income protection initiatives: Product repositioning and/or pricing for the turnaround phase, turnaround commercial and market strategy
Improved governance and control: Target operating models for finance and treasury functions, central costs control
Debt optimisation: Refinancing, alternative debt structures

The Reflect, Reframe and Optimise approach often requires dedicated specialists to apply an independent lens to a family business’ operations and guide them to “reset” their mindset. With such a “reset”, businesses are then able to reframe their operating and financial ideology and set themselves up for sustained success, value accretion and longevity ‒ a legacy that most family businesses aspire to.

How we can help

PwC’s Business Restructuring team works alongside businesses to increase their options on the road to recovery. We help establish rapid visibility and control, negotiate great outcomes at speed and find the optimal solution to businesses’ financial, operational, and strategic challenges by reducing risk and enhancing value. We have extensively assisted family businesses in all stages of the Reflect, Reframe and Optimise journey and can help businesses in devising and implementing all facets of their turnaround agenda.

To discuss this topic in more detail, please contact us.