26 | Deloitte | A Middle East Point of View | Summer 2015

We’re goingon an IPO!

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Becoming a publicly listed company is a milestone in the life of anyorganization. The rewards for achieving such a development areundoubtedly very compelling, but the journey is also fraught withchallenges that require a substantial commitment of time andresources on the part of the business, not only to aid in thetransformation process but also to fulfill the expectations ofexternal stakeholders once the company is listed. This articlehighlights certain Initial Public Offering (IPO) challenges to familybusinesses and how to mitigate them.

Family Business

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Family businesses, are you ready for the IPO?The decision to seek an IPO is typically driven by bothfinancial and non-financial considerations, with theformer including access to broader funding, facilitatingan exit for a partner and realizing financial gains, andthe latter improving a company’s profile, enhancing thefounders’ reputation and achieving a legacy for futuregenerations.

For family businesses, one of the main attractions of an IPO is to aid in succession planning through theenforcement of certain corporate disciplines that comewith being a regulated entity. Although the GDP of theMiddle East is largely oil-based, family businesses are thesecond biggest contributor to GDP, with an estimated

value of US$1 trillion.1 With the majority of familybusinesses expected to be passed down to the nextgeneration within the next ten years, successionplanning will have a major impact on the way MiddleEastern businesses and economies will evolve during thisperiod. Studies indicate that, globally, only one in tenfamily businesses survive to their third generation. Thisissue is even more relevant in the case of Middle Easternfamily businesses, which are, on average larger and more diversified than their American and Europeancounterparts.

GCC market regulators have been increasinglypromoting IPOs as the regional markets continue tomature. In June 2015, Saudi Arabia opened up thecapital markets to foreign investors. As such, the IPOmarket has been very active recently with severalsuccessful family offices listing on either regional orinternational markets as highlighted in the table below.

While the timing of an IPO is critical, it is even morecritical to the success of the IPO that the business isready when the market opportunity presents itself.Hence, it is never too early to start preparing for thismilestone.

While the timing of an IPO is critical, it iseven more critical to the success of theIPO that the business is ready when themarket opportunity presents itself

FamilyBusiness

Country Exchange Sector Listing date

Percentageoffered

Offer size Stockperformance

DAMAC* UAE London SE Real Estate December2013

13.1% US$348m 268.6%

Abdul Mohsen AlHokair**

KSA Saudi SE Leisure andTourism

June 2014 30.0% SAR825m 76.0%

Al HamadiCompany**

KSA Saudi SE Healthcare July 2014 30.0% SAR630m 122.3%

* From listing up to delisting on 16 March 2015 **From listing up to 26 April 2015

Source: Zawya and Bloomberg

Family businesses listed on international and regional markets

Deloitte | A Middle East Point of View | Summer 2015 | 29

Particular IPO challenges for family businesses While there are a number of challenges to beconsidered in the context of an IPO, those that are mostrelevant to family businesses are highlighted below.

Family readinessIt is natural for family businesses to have internaldifferences between family members. These differencesusually arise as the business transfers generations, withmore members of the family who may have differentideas as to the company’s development becomingactively involved in the day-to-day running of thebusiness.

If these differing views and aspirations are notadequately addressed, they can be detrimental to the stability of the business and lead to division, loss in direction of a successful business and destruction in value. For example, due to inadequate successionplanning, the family feud at the internationallyrenowned Gucci business in Italy escalated, resulting in a total of 18 lawsuits between different familymembers by 1987.2

Business readiness Business readiness is a challenge that is pervasive to all businesses, but is even more pertinent for familybusinesses. Sustainability and decision-making in afamily business tend to be dependent on the founder,while decision-making for a listed company is expectedto be centralized and involves all stakeholders as part of best corporate governance practices. For example,owners of family businesses need to be receptive to the possibility of having non-family executives andindependent directors involved in its business affairs.

“An IPO puts significant demands on management’stime and resources in dealing with advisors andinformation requests during the IPO process. What isusually a significant change for family-owned businessesis the additional ongoing reporting and regulatoryobligations post-IPO, to manage external stakeholders

with more frequent performance reporting, managinganalysts and dealing with a governance framework with non-family members on the board. This increasedworkload should not be underestimated at the risk of neglecting the day-to-day business and resourceplanning and should be an important consideration for the board and senior management in the run up to an IPO,” says Adnan Fazli, Head of Equity CapitalMarkets at Deloitte.3

Loss of controlIPOs result in the dilution of control (dilution of 25 to 55percent depending on the exchange) which means thatfamily members will no longer have complete controlover the decision-making process in the business.Furthermore, the company will be held accountable toexternal parties such as active investors and, in certaininstances, even competitors.

Finally, decision-making in family businesses isinfluenced by the long-term reputation and values held by the family founders and their offspring (i.e.contribution to the social welfare of society), whichmight not be the main focus of IPO investors who aremore attracted by the company’s profitability.

CommunicationAccording to Tharawat magazine, IPO communicationconsists of three aspects: explaining the business;explaining the IPO transaction; and post-IPO disclosurerequirements.4 Unlike other companies, family-ownedbusinesses tend to more closely guard information andare more information sensitive.

Family Business

Business readiness is a challenge that ispervasive to all businesses, but is evenmore pertinent for family businesses

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Investors in an IPO transaction will heavily scrutinize the target business. Family businesses have to be in aposition to explain their historical results and businessplan going forward. Special attention will be given torelated party transactions and whether conducted in the normal course of business. Equally important iscommunication with existing stakeholders (e.g. theemployees) who should not feel threatened by the IPO and its added pressures on the business. SuccessfulIPOs include remuneration schemes that increasemanagement and employees’ commitment and loyaltythroughout the IPO process.

Additionally, it is critical that the IPO process remainhighly confidential to prevent potential adverse impacton value. Once a company announces its intention tofloat, the company is expected to operate and will beviewed by analysts as a publicly listed company whencomparing it to its peers.

Finally, post IPO communication with investors makessignificant demands on management, as more frequentand timely financial reporting is required. Listedcompanies are expected to regularly and openlycommunicate their management team changes,historical financial performance and forecast strategies,disclosures that family businesses are not typically used to.

There are several strategies that family-ownedbusinesses can implement to mitigate thesechallenges including: Family governance“Most business families are now conscious of the needto introduce a level of governance separate from thefamily business,” says Walid S. Chiniara, Deloitte Privateleader, Deloitte Middle East.5 Family governance “helpsput the house in order.” It defines the relationshipamong family members, and their relationship with their financial wealth.

Family governance mitigates the risk of family conflictsthat negatively impact the performance of the business.Establishing this governance in advance helps minimizeany disruption during the IPO process.

Pre-IPO restructuring/carve-out During the IPO readiness process and equity storyformation, a family group might decide to exit some ofits non-core businesses, whether for operational or taxstructuring purposes. A company can exit some of thesebusinesses via a separate IPO, giving the family businessowners and management firsthand experience of theIPO challenges (increased demands, loss of control andincreased communication) without exposing the overallfamily-owned business.

According to Tharawat magazine, “a good strategy tominimize some of the negative aspects of going publiccan be to take only part of the business public, keepingthe rest private. This is easier where there are a numberof businesses, but even where there is only onebusiness, there may be appropriate splits–for instance,the product/service side of the business could be listed,while the real-estate side of it remains private.”6

Private placement then IPOA common approach for an IPO involves a two-stepprocess before undertaking the actual IPO, a minoritystake of the business may be sold to another interestedfinancial investor who will partner during the transitionalperiod to get the business ready for the IPO. Havingthese partnerships potentially with a private equity firmor other family-owned businesses that have prior

Family governance “helps put the housein order.” It defines the relationshipamong family members, and theirrelationship with their financial wealth.

Deloitte | A Middle East Point of View | Summer 2015 | 31

Family Business

experience in taking businesses public can be of greatvalue for a first-time IPO candidate.

Additionally, this will expose the family business to someof the challenges of the IPO including the increasedscrutiny and sharing of decision-making with a partnerwho will be more understanding of the sensitivities ofthe family business.

This can be implemented as a dual-track, a parallelreadiness strategy between IPO and private placement,which gives the family business the opportunity tochange between the two options at a very late stage in the process.

IPO readiness “IPO readiness not only helps prepare the business for a streamlined IPO process, it also significantly enhancesthe valuation. It is important to undertake an IPOreadiness well in advance of the proposed IPO as it can take up to 24 months for the business to achievereadiness,” says Adnan Fazli. “The main areas in ourexperience that impact the timeline are articulating an equity story/strategy, corporate and organizationalstructure, appropriate track record to support the equitystory, financial reporting environment in line with otherlisted peers, ability to accurately forecast, and theissuer’s internal resources to ensure they are fit for the demands of the IPO process and the post-IPOenvironment.”3

ConclusionIPO represents the pinnacle of any family business’ long-lived heritage. Recognizing the challenges faced by bothfamily owners and managers and addressing themupfront, will ensure that the company is well preparedfor this transformational change when the opportunityis right and will enhance value. Additionally, undertakingthe right strategies will reduce the risk of the impact ofadverse challenges which are inherent to any familybusiness seeking a public listing.

by Martin Pierce, Managing Director, TransactionServices and Yaser Al Dahoud, Manager, TransactionServices, Deloitte Corporate Finance Limited (regulatedby the Dubai Financial Services Authority)

Endnotes

1. ‘GCC’s family businesses: Leveraging the benefits ofstrong fundamentals’. Article | 16 September, 2012 |By Rashed Al Ansari, n.d. Web. 23 Jan. 2015.http://www.khaleejtimes.com/biz/inside.asp?xfile=/data/opinionanalysis/2012/September/opinionanalysis_September7.xml&section=opinionanalysis

2. Gordon, Grant, and Nigel Nicholson. Family Wars:The Real Stories behind the Most Famous FamilyBusiness Feuds. United Kingdom: Kogan Page, Ltd,2010. Print

3. Adnan Fazli. IPOs for Family Businesses. 26 Jan 2015. 4. ‘IPO Communication - Getting the Story Right’.

Tharawat Magazine 9 (2011): n.d. Web. 4 Dec. 2014.http://www.tharawat-magazine.com/en/family-business-issue-9/1839-ipo-communication-getting-the-story-right-2

5. ‘Family offices in developing economies most costeffective, says new research’. Article | 21 November,2014 | By Michael Finnigan, n.d. Web. 4 Dec. 2014.http://www.campdenfb.com/article/family-offices-developing-economies-most-cost-effective-says-new-research

6. ‘The aftermath of an IPO – what families in businessought to know before they go public.’ TharawatMagazine: n.d. Web. 4 Dec. 2014.http://www.tharawat-magazine.com/en/family-business-articles/finance/1568-the-aftermath-of-an-ipo-what-families-in-business-ought-to-know-before-they-go-public

IPO represents the pinnacle of any familybusiness’ long-lived heritage. Recognizingthe challenges faced by both familyowners and managers and addressingthem upfront, will ensure that thecompany is well prepared for thistransformational change when theopportunity is right and will enhance value.