Ep. 93: Loutfi Echehade - Maneuvering Business following Crisis
Family businesses are an integral part of the regional economic landscapes and stand to be impacted the most with current circumstances. In this episode of Count Me In, Loutfi Echehade, a seasoned financial advisor to family businesses in Saudi Arabia and the region discusses implications of COVID-19 and shares much needed insight on how such business owners can maneuver at such a critical time in their history.
FULL EPISODE TRANSCRIPT
Hi everyone. Thanks for listening to another episode of Count Me In. I'm your host Adam Larson, and this is the 93rd episode in our series. Today's conversation is between my cohost Rouba, and IMAboard member and financial advisor, Loutfi Echehade. Loutfi is a seasoned financial advisor to family businesses in Saudi Arabia and the region and joins Count Me In to talk about the implications of COVID-19 and the current economic landscape. For advice and how such owners can maneuver their businesses. During these times, keep listening as we go to their conversation now.
So, let’s get straight into it. I’m excited to get your insights on the family business segment in the region. So analysts and economists consider family businesses to be the lifeblood of the Middle East region, and crucial to the region’s economic prosperity and stability. Why do you think that is?
Well I mean, you know, family businesses, as you indicated, I mean it represent at least 80 percent, some statistics say 85 to 90 percent of the economy is driven by family businesses. In our region, the largest family businesses are the most critical. They play e a critical factor not only in employment and number of employment, but in contributing to the local economies. So, they drive the whole business, you know, and this is not only in our region. Globally, family businesses really are the main drivers of economic developments, in most of the world.
According to the Middle East family survey conducted last year, they found that 78 percent of family businesses report economic environment as their top challenge. How does such a limitation play out when you are facing one of the biggest challenging moments in the economic history since the 1930s, COVID-19?
Family businesses are just like any other businesses. They go through, of course, cycles and they face these kinds of challenges every once in a while. We had a financial crisis in 2007 and in 2008, before that we had the September 11 events, and before that there were a lot of events and major developments in the world. Family businesses, just like any other business, they were able to sustain and maintain their structure and business, primarily because they have certain features that allow them to do that. The flexibility, transparency, level of commitment, long term commitment. But still, they face external pressure, just like everybody else. I work on a number of family businesses in the region, particularly in Saudi Arabia, and the pandemic, COVID-19 has a significant impact on their operations. So they face the same thing just like any other business. If they are one structure, they can manage to go through these events, major events, and heavy burdens in the future, you know.
How equipped are regional family businesses for this huge task and what are some of the best practices you have noticed from your practice?
By their nature, family businesses are family-oriented, family-directed. They have a clear strategic planning, they commit to the family values, the family culture. So there weree ups and downs for most of their lives, business lives. They go through a lot of turmoil, roadblocks, headaches, pressures. If they are really well managed, and have proper structure, and that’s where comes family governance. If they really have proper family governance, that unites them, that puts them together. As I said, they are not like the corporate world, like businesses for profit. They don’t focus just on the short term, they focus on the long term. There is also the level of loyalty. In family businesses you find a lot, of course, a lot of family members being united and being committed, but at the same time, there a lot of non-family members aligned, committed and work aggressively, even sometimes more than the family members. So, you have that combination of commitment to the long term, not to focus on the short term, the willingness, the desire, the interest, and the commitment to continue to the following generation. And then they have the loyalty part which also drives them into the future, and into the long term. The way I see family business, just to give you an example, there are a lot of companies now in our region and globally they are firing people of course. They put people on furloughs or extended long leaves and they cut salaries. The family businesses that I deal with face the same problems, but they manage, you know, in a way, to keep these employees with them because they have been with them during tough times, difficult times, as well as in good times. So they look at them as really part of their commitment not only to their employees but to the society in a whole to the community. And that is a little different from directional-wise, different from other businesses.
You noted governance, which was going to be my next question. You’ve been providing advisory to family businesses in the region for many years, how committed are they to governance and do they value it? What has been your experience wit this essential aspect of the sector, as you have mentioned as well?
We are on a journey. In the Middle East, you know, of course you know, if you talk about governance, corporate or family governance, not many people will understand, not many people will really decipher it, if you wish. Everyone will give you different. It did not really have a lot of meaning. But you know, things have changed, I would say in the last decade, in the last 10-15 years, things have changed. In the corporate side, governance regulators have put governance regulations, protocols to ensure that corporations have proper structures to maintain their operations as well to really ensure that they provide right and correct information. On the other hand, the family governance is also something that is a process, a set of protocols.. Most family businesses they have hurdles they understand it, but if you are to tell me, are they committed to implementing it, that’s still, we still have a long way to go. I know a well-known large number of family businesses, well known family businesses. They have already proper structures, proper family governance structure. They have what we call a family constitution that defines roles and responsibilities of family members who share on the corporate side, either as board members or on the C-suite level. They also have what we call certain committers to ensure that there is proper alignment between the corporate side and the family side, and also defines who can be employed in the company and who cannot, the matter of dividend, conflict resolution issues, succession planning, all these are critical components of ensuring a successful and easy and smooth transition into the following generations.
With a GPD contribution of more than 60 percent, workforce contribution of 80 percent, a broad range of sectors including food and drink, manufacturing, construction, education and health, and trillions of dollars in revenue, how will the current situation impact employment within the family business segment in the region, and what are governments doing to support and to mitigate this impact?
Of course, you know, the pandemic, COVID-19, as we said earlier, has significant impact on all businesses, all over the world. In the US, we have unemployment reaching over 14 percent. Although I don’t have statistics on the Middle East, like in Saudi Arabia and the GC, but I see a lot of companies that are working at 20 percent or 30 percent capacity. Yes, all are suffering, and all are going through the same issues, of course the focus now is on really maintaining, as much as possible, on moving and operating with what we call the leanest type structure. So, meaning just focusing on cash-flow positions, reducing the impact on the working capital gap, ensuring that they have bloodline over credit, and the governments on the other side are doing. They have initiated a lot of initiatives, put a lot of programs, to help small and medium size companies. That came in handy and it has a lot of positive and contributing factors to maintaining these companies to survive, to continue. And of course, there is also the fact that banks and financial institutions have been a little bit lenient and flexible in extending loans to these companies and waiving some of the covenants, if you wish, in some areas, but it is an extremely difficult and different kind of animal we are fighting now and the fact that it is prolonged, it will have significant long-term repercussions. These companies, family businesses or others, will have to just ensure that they have a proper, well-designed, and carefully planned budget and forecasts for the near future, at least for the remaining 2020 and 2021.
Surely! I mean, some legacy businesses have endured the unendurable in some cases. But, in your view and experience, how are they coping with digitization and digitalization and the whole digital transformation altogether? There was a survey that was conducted pre-COVID-19, that stated that 44 percent of family business-owners are committed, 63 percent of them have confirmed that they do need more innovation. But how likely is that commitment to manifest in-light of post-COVID-19 scenario, even though most businesses are operating remotely for the time being?
The digital transformation era has started long before COVID-19 and many family businesses, leading family businesses, they have already been on that journey. They have done a lot of the steps and initiatives required, to move into the digitalization era. Of course, most of the other family businesses, I would say, are still lagging, they are still behind. They will have a difficult time if they really do not invest in improving in innovation, in new technologies, artificial intelligence, machine learning. All these initiatives and platforms are being introduced and I know some family businesses, as well as other businesses, to be honest with you, they have already invested in that, and I’ve been on their board meetings just a couple of weeks ago. In one, we actually talked about stopping some of these initiatives where we invest in new technologies, new programs, to enhance the business on the technology side, and I said we are not going to stop these initiatives because they are very important, they are more critical at this time than ever before. Most of the retail business now is done now, as we know, online. If you look at the businesses that are thriving now and those that are lagging, you will see that the technology innovations and the digitalization have really helped those that have already invested. This will continue and there is no escape from it. I think that if we have learned a lesson from this pandemic, it is that there will be more significant investment in the digital areas and in the technological innovations and that’s the only way to go, because, as we know, it affected every facet of life, it affected every business.
In some of the recent discussions that we’ve had over the last few weeks and few months, there has been a lot of emphasis on cashflow management. How does that work for family businesses and what have been some of the lessons learned, from where you stand?
One of the, one of the key, uh, attributes or key features, , success factors of family businesses is that they, they don't focus on the early distributions of dividends. I have seen a lot of companies. If you look at the balance sheet, you will see that the capital is, let's say an X a month, and then the retained earnings figure is like five times or, or, or even more. What that means is that, you know, it depends, you know, they have never focused on just making distribution as part of their normal process. We know that corporations, you know, we'll distribute, we'll have to distribute dividends to shareholders almost either on an annual basis, semiannual or quarterly. Family business, don't do that. At the same time.
family businesses by their nature more resilient, their decision-making process is much easier. The level of commitment is there, so they can manage and control the flow of their cash much smoother much easier and more direct. So in the family business side, where I have served on the audit committee, they look at the cashflow almost weekly, because that is very, very important. They want to ensure that they have enough cash really to manage their operations. Some of the matters, initiatives, that they have done is of course not to cut salaries, but they let their employees take their unearned vacations and also maybe have some time-offs. This is on the salaried side. On the other side, for example work with the suppliers, long-term suppliers, and vendors on extended credit facilities. Instead of paying every 30 or 60 days, they will really try to manage a more flexible payment schedule. They also work on reducing unnecessary costs, maybe closing some unessential/nonessential businesses or operations. They take a lot of initiatives. As I said, also, they kept down on their withdrawals, they stopped paying dividends to themselves. They do not take salaries. So all that helps a lot in at least managing the situation until things improve.
You have covered quite a lot of ground on that one and what I wanted to ask you in my last questions is, what advice do you have for family business-owners in the region and is there light at the end of the tunnel? Please say yes!
Yes. In life, you know, we have lived through some difficult times and the world goes through a lot of turmoils once in a while, and I am sure that we will get out of this. It is not easy, it is not simple, and it is costly, unfortunately. Lives, businesses, human beings will suffer all over place, all over the world, but we will get out of it. Life will go on. My advice to family businesses and for all other businesses is to really focus on the long term. Stay the course. Stay focused on what has made you successful so far. If you read the history of well-known family businesses, they have gone through disruptions, they have gone through foreclosure. Some almost went bankrupt and they came back and thrived, and became much stronger. Just keep your head up and keep your focus on the future. And yes, there is light ….
… at the end of the tunnel.
There is light, and there is going to be bright light.
Amazing! Amazing that is what I wanted to hear. Brilliant! Loutfi, thank you so much for your insight, I am sure that a lot of family business-owners and, as you said, a lot of regular business leaders in the region are going to benefit from this conversation. So, thanks again for all your time.
Thank you, it was my pleasure.
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