Family-run businesses are an important part of the Asian company jigsaw - in fact they dominate it. Advising firms on capital-raising, succession and strategy brings specific challenges.

The following article comes from Rohit Nanani, CEO and founder of Arrow Capital. It examines family businesses in Asia and the kind of advice they need. This is plainly an important topic because family businesses are such a big part of the region’s business landscape. They are also an important part of China’s recent economic history, to take one country’s example. As of 2017, altogether they were contributing 60 per cent of the country’s GDP and employing 80 per cent of the workforce (source: EY). (Although China loosened its one-child policy a few years ago, that restriction also raises questions about succession planning further down the line.) More broadly, family-run businesses remain important in ways that aren’t always appreciated in other parts of the world. 

The editors of this news service are pleased to share these views; we invite responses, so jump into the conversation! The usual editorial disclaimers apply to views of guest writers. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviepwublishing.com

Family businesses have a long tradition in Asia and to this day they remain a vital thread of the region’s economic fabric. However, against a backdrop of ever-changing regulatory reforms and evolving market dynamics, new demands on industry bring new challenges for Asian family businesses. These include managing more complex business operations, greater scrutiny on governance and best practice implementations across the organisation, in addition to understanding new deal structures and financing vehicles, should founders seek to release value from their business. It is the duty of financial advisors to help business heads address each of these challenges.

From a business operations perspective, this could be anything from cash and working capital management, VAT implementation and tax efficiency strategies, to optimising capital structuring. From a governance standpoint, succession planning and multi-generational governance strategies will be key, as well as ongoing regulatory and compliance advisory. At the same time, any family business should be equipped with the knowledge of all possible exit strategies best tailored to their objectives, so that family heads are ready to act when the time comes when they wish to release value from their business. In this instance, investment advisors need to be able to provide up-to-date expertise covering all elements of any potential deal process - from valuation advice, M&A and restucturing advisory, to deal readiness and rigorous commercial due diligence.

As such, it is more crucial than ever for financial advisors to have the required skillsets and be able to offer a diverse, yet comprehensive, range of services to empower family businesses to adapt, remain compliant and plan for the road ahead - not only to preserve the wealth generated from their businesses, but also to unlock new opportunities for wealth creation that will secure the financial future for the new generations that follow.

The dynamics of wealth are evolving and advisors must be on the pulse
For family businesses to stay competitive and deliver meaningful growth they need to have clear frameworks in place that can mitigate risk to protect their capital today, whilst keeping equipped with the necessary investment insights to add to their wealth for tomorrow. This is where investment advisors and wealth managers can prove a valuable partner, providing continuous benchmarking and reporting to assess current performance, and guidance on future performance improvement strategies. In doing so, empowering the next generation of family figureheads with the tools, advice and knowhow required to truly capitalise on new opportunities to create long-term wealth.

Next-generation family businesses need best-in-class advisors on capital allocation and liquidity
New generation business owners may be asset rich, although they may not be liquidity rich. Financial advisors therefore play an important role, and must enable families to leverage this progress as best they can, allowing business owners to sit at the crest of the growth curve and tap into the most attractive growth opportunities we are seeing surfacing in the region - at the right time, and taking on the right level of risk. This will require tailored advice encompassing rigorous financial due diligence, carefully considered capital allocation, and ongoing review of their business and investment strategies.

In an environment where markets remain cyclical and change can set in very quickly, business managers and investors need to be able to draw down on their wealth speedily and efficiently. Consequently, it is essential for advisors to enable families to build an understanding of share ownership structures and their implications, whilst also helping them devise their own family protocols and constitutions to ensure that the business is best placed to maximise value from within the context of its own holding structure. 

The same goes for the businesses themselves. In recent years we have seen the traditional IPO market wane, with companies flocking to private financing or alternative, special purpose vehicles – most notably, Special Purpose Acquisition Vehicles, or “SPACs” - as the route of choice. With a broader range of options and greater flexibility of exit strategies, financial advisors must guide founders through the changing tides of the capital markets, and navigate the best routes for realising value from the years of hard work they have put into their business.  

In this context, preparing for a potential deal or exit strategy is a vital area of support whereby family business must be able to lean on their advisors. M&A advisory, deal readiness and debt advisory services must be core components in any trusted advisor’s toolkit. Similarly, advisors must be ready to provide close assistance in identifying and evaluating potential investment opportunities or sale strategies, whilst supporting with the fulfilment of the required business processes themselves - whether that be capital raising advisory or support on the structuring and completion of Sales and Purchase Agreements (SPAs). 

Advisors must keep one eye on today and one eye on tomorrow
Trusted advisors must set a solid foundation to allow businesses to plan for the future and ensure longevity. Succession planning and estate planning are two of the most important factors for heads of families, in order that they can manage their assets safe in the knowledge that the wealth they have accumulated for their family is protected and secured for the long term. This is where savvy tax-efficiency planning is crucial, and where advisors will need to play an increasingly active role in helping family patriarchs and matriarchs secure a better financial future for the next generations – whether that be, for instance, via developing the right strategy to protect against undue risk, or international tax advisory to ensure that families are protected against tax legislation in multiple different jurisdictions where family members and/or assets are domiciled.

 As governments and central banks seek to mitigate the macroeconomic impact of the pandemic, younger generations of business leaders realise that they need to put their assets to work. As a result, they are shifting from a value to a growth-driven approach. 

At the same time, this new breed of business owners have largely only experienced a bull market, unlike previous generations. This yields the challenge of pairing the desire to push for future growth, whilst maintaining a base level of stability that can withstand ongoing fluctuations in the current market. This is where family business heads must be able to count on their advisors to provide them with a strategy that can both minimise risk, and give the necessary flex to leverage new, more diverse growth opportunities when timely and accretive. 

Looking ahead, there exists a wealth of new opportunities and possibilities which family businesses can capitalise on. However, by the same token, there are undoubtedly new risks, challenges and demands which they will need to get a firm grasp on. As our economy continues to ebb and flow, one thing that will remain constant is the valued guidance that a trusted advisor can bring in helping future generations of family businesses manage these shifting dynamics, whilst securing liquidity and wealth creation for the long term.

About Rohit Nanani

Nanani has held senior positions in banks. For example, he was managing director with Barclays Bank Plc (DIFC – Dubai) heading the GSAC (South Asian Clients) business. He founded Arrow Capital in 2016. Nanani started his private banking career with UBS in Singapore and was its executive director, prior to his move to Barclays Bank Singapore. He has worked in the Far East, Middle East, Africa and UK.

Arrow Capital DIFC Limited is a financial and investment advisory firm with offices in Dubai, UAE and Mauritius. Arrow Capital is regulated by the Dubai Financial Services Authority (DFSA) and by the Financial Services Commission (FSC).