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Family Businesses

Fawaz AlOtaibi On Restructuring The Family Business

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You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

"There's a reason why larger firms tend to adopt corporate structures: it accelerates growth which is something every generation in a family business should strive for if they want the business to continue," explains Fawaz Moeid Sadoon AlOtaibi, CEO, Awab Holdings. AlOtaibi joined the family business in 2009, directly after completing his Engineering degree at Carleton University in Ottawa, Canada. He returned to Saudi Arabia and quickly took over the family firm. "I didn't have the chance to work elsewhere because my father wanted to retire, and so he did. I had his full support in running the business, but I didn't know how! Nevertheless, being an engineer I was trained to solve problems, so I started self-learning the business by reading numbers, asking for reports from management, and observing. Thinking back to that time, I wish I had a mentor. I started a three-year project and failed, and I vowed to never venture into a project or investment without a proper study beforehand. I took what I learned from my failure and realized that I needed a vehicle to be able to manage multiple companies efficiently, so we created the holdings company."

Awab Holdings, then Awab Trading Establishment, was launched in 1977 as a general trading and contracting company. The company transitioned in 2010, becoming purely a holdings company acting as an umbrella owner of several businesses across a diverse list of industries including automotives, healthcare, information technology, and real estate. "My father was not born into wealth, and from a very early age he had to work along with his siblings to provide for the family, but he also realized the importance of an education so he completed his secondary education. My uncle had a talent for fixing cars, and my father used to help him with the finances. In 1965 they decided to create a company called Takwa, today one of the largest auto spare parts dealers in Saudi Arabia."

A few of the Awab Holdings companies include their real estate development arms like Ousatco in Lebanon and namesake Awab operating in the Kingdom, their company Cepco Medical Services specializing in hospital preparation, Jubail Motors Company and Takwa Group for automotive spare parts, and Codeit, an IT-consultancy and application company. Each of the aforementioned companies are managed by professionals, and have Awab Holdings as a board member. The holdings group also has a portfolio of investments managed by investment firms on behalf of Awab. Moeid Sadoon AlOtaibi, Fawaz's father and Founder of Awab, now acts as Chairman of the Board at 76 years of age.

Why was a holding company needed for their family business? AlOtaibi says that while it's also about preservation of the existing business and legacy, it was mostly motivated by potential success and growth- part of a larger strategy of incorporating tactics that are a part of laying the foundations for future expansion. When discussing introducing measures that impose organizational order, 29 year-old AlOtaibi points out that family firms often lack the structure and the hierarchy of non-family enterprises, so a corporate outlook is needed. "Corporates introduce aggressive accountability which is sometimes lacking in a family firm. Today as family members working in the firm, we all have responsibilities and are held accountable for them- meaning a family member is also at risk of losing his or her position if he or she does not deliver, just as much as he or she stands to reap the rewards of that position."

The AlOtaibi family, led by Moeid, went about creating their holdings group. The senior AlOtaibi transferred all of his equity to the holdings company, giving his children their shares in accordance to Sharia (Islamic law), "leaving him owning practically nothing. Some considered it a bold move, yet –as most bold moves do- it turned out to be a great move. With equity comes responsibility, and my siblings and I started acting much more responsible after that. In the GCC, the founder is usually the patriarch of the family, and we are blessed that our father is still with us as he always has the final say if any dispute arises. There should always be a patriarch who would hold a certain authority so not to have disputes turn into power struggles or internal conflicts. So although today my father is not involved in the business decisions, he still holds the chairman position and we must seek his approval before venturing into something new."

On the topic of succession, AlOtaibi discusses the danger it can pose to a family firm that is unprepared for the transition of power. "Inheritance is a course of life, and Islam has given us a creed of how to go about inheritance. Unfortunately, more often than not in a family business, inheritance leads to the collapse of the business as it is hard to divide a non-monetized entity without dissolving it, and in the absence of the family patriarch it might also lead to the breakdown of a family." Fawaz says that a "family constitution" is needed, that all founding members agree with and can adhere to, helping to prevent the damage that an irresponsible or disenchanted family member can cause to the business. AlOtaibi frankly comments that he's thankful that he has not yet had to experience that particular challenge.

One challenge he has fielded since he became CEO? "Resistance, resistance, resistance. If you are someone thinking of going through this process, expect a lot of resistance from the existing employees- especially the previous generation's 'team'. You will not be able to fire people on the spot because of their history with your father, uncle or whomever, regardless of how incompetent they might be, and you'll realize that sometimes you don't have the final say in the company you're heading. But that's okay! Create your own team, be much more efficient, and write-off those costs by creating more growth. Also, the process is a lengthy one that will take years to finish, so don't expect instant results."

High prevalence of the family business model across the GCC makes it a hot topic of discussion. Deeply ingrained in the enterprise culture of the Gulf, family businesses and their success or potential failure has far-reaching economic implications. The SME space, heavily permeated by the family business model, stands to gain when clans do well, and stands to take a serious hit when they don't. "Family businesses contribute to approximately 80 to 85% of the global GDP, and in the GCC they are the top non-oil, nongovernment contributor to the GDP. That is why maintaining and ensuring the succession of family business is a national matter, not only a private matter." A Saudi Arabian national, AlOtaibi says that his contemporaries in the Kingdom are talking more and more about the family business model. Between him and his friends, restructuring techniques and other family firm corporate introductions are a constant topic of discourse.

"Saudi Arabia has a relatively young economy, and many family businesses are today making the transition to the second generation. Add to that masses of the new generation -my generation- that have been educated abroad, and are now coming back to join the family business. They're eager to put their mark on the history of their companies," he says. He is a big proponent of the family firm going corporate, and instilling some procedural layers in the areas of human resources mentioning "employee retention strategies, career paths, clear responsibilities, and job security," as a few examples. "Creating a holdings company is just a vehicle that would make managing different companies across several industries more efficient. Each company should have its own management structure and freedom to create new strategies. The holdings should only appoint, monitor and support each company's management board. The only disadvantage is that the subsidiaries might lose the family feel and atmosphere present at the holdings level."

While AlOtaibi is a champion of the corporatization of the family business, he still has strong attachments to some of the more traditional aspects- like family values. "I believe that families should start structuring their businesses as corporates, yet still keep the family values they would always live by and keep- sort of a family corporate which is kind of an oxymoron." AlOtaibi says that a benefit of transitioning is that his family has been brought closer, family members that are employed by the business feel a strong sense of support, and that the overall morale in the company has improved noticeably. Awab Holdings has put a series of checks and balances into place with stipulations, keeping the shareholders satisfied with the company's direction. "In our model, we segregate equity from management. Some equity owners man- age, but not all do. We have an owner's board which convenes once a year to discuss how the business is doing, and convenes regularly for family matters. Then there's a management board which convenes quarterly to discuss with the CEO detailed matters of the business, and to make sure the plan is adhered to."

AlOtaibi adds that family members must be voted into a company station, and that once they're voted-in they hold the position for five years. To continue to hold that same position, they must be re-elected, and cannot spend more than two terms –a total of 10 years- in the same position for several reasons: to bring fresh ideas and innovation to the post, to ensure equality of family members and equal opportunities, and finally, to prevent internal power struggles. What about shareholders? "Shareholders usually complain when the business suffers, so the best way to avoid shareholder concerns and complaints is by creating growth and profits. Easier said than done, I know," admits AlOtaibi indicating that they have seen a considerable rise in profitability, and it's largely because some of the businesses under the umbrella were under-performing prior to the transition.

There's also a bonus for family members with an entrepreneurial eye who aren't employed by the company: "We have a structure that helps retain non-involved family members with entrepreneurship spirits by introducing a 'sweat fee'. The family entrepreneur presents his ideas to the management board and if approved, the holdings will fully finance the idea, and the family entrepreneur will receive 25% equity in the new company and manage it on his own for five years." So if you aren't already part and parcel of the family and the family business, you can pursue your own entrepreneurial venture and still have both the financial and systematic support of the family behind you.

"Being an entrepreneur means being flexible and always wanting to challenge the status quo whether it's in your business, community or even culture. That's why it's absolutely important to keep that flexibility and realize that no business structure is set in stone. My model was really a collection of more than one business structure that I have come across, and will keep on changing throughout the years. It's also important to know that there's no pre?t-a?-porter solution in business models, and what might work for my family might not work for another. Also, what might work for my family today might not work five or 10 years down the road, but we do our best given the circumstances we are in and we try to predict any changes that might happen in the future and place the solutions today."

Above all, AlOtaibi is most keen on preserving his father's legacy and the solvency of the family business. His shifting schema centers around a formula built to last, and it rests on the foundations of family values blended with a corporate-type democratic fairness and approach. AlOtaibi is big on unity: "I always say to my siblings, 'It takes the whole family to build the business, and it takes one family member to bring it down.'" His careful planning, research and measured action should prevent anything of the sort for Awab Holdings, and hopefully take their business into a third generation.