2019: How to grow and scale your family business
Lebanon is in crisis and the economy is stagnating pressuring businesses to cut cost and let go of their expansion plans for the near future. THIS IS THE BEST TIME TO GROW.
Indeed all Lebanese family businesses are in a very good position to actually grow and scale should they want to. This obviously involves getting rid of many rules we have been applying for a long time now that have clogged our corporate ecosystem. The first and most important thing to bear in mind is the concept of “stability” which contrary to our Middle Eastern habits does not come from remaining attached to what we have but rather embracing “change”. Dr Ghassan Salameh described this phenomena when comparing our culture to cultures in East Asia and specifically Japanese culture. In brief, change is the baseline and we should start understanding and grasping this concept as we move forward. This said Family business owners should understand that whatever remains stagnant is actually failing and time is passing so fast that they will not have time to adapt when they are facing new aggressive competition and globalization which will soon hit them by storm.
The solution is actually available. Family business owners should restructure their business making room for corporate governance and an activation of sound management processes; They should embrace technology and make sure they are on the right track towards e-commerce and online presence for B2Bs.
1- CORPORATE GOVERNANCE
Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides a framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members, and they represent shareholders of the company. The board is tasked with making important decisions, such as corporate officer appointments, executive compensation, and dividend policy. In some instances, board obligations stretch beyond financial optimization, when shareholder resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of inside and independent members. Insiders are major shareholders, founders and executives. Independent directors do not share the ties of the insiders, but they are chosen because of their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interest with those of the insiders.
Good and Bad Governance
Bad corporate governance can cast doubt on a company’s reliability, integrity or obligation to shareholders — which can have implications on the firm’s financial health. Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG in 2015 when it was revealed that the firm had rigged engine emissions tests in America and Europe. Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal, and its global sales in the first full month following the news fell 4.5%.
Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale can publish spurious or noncompliant financial results. Bad executive compensation packages fail to create an optimal incentive for corporate officers. Poorly structured boards make it too difficult for shareholders to oust ineffective incumbents
Make sure to structure your corporate governance so that you can be appealing to potential investors and why not the stock market which we will tackle in the next paragraph.
2. RAISING FUNDS
Money to grow the business: With an infusion of cash derived from the sale of stock, the company may grow its business without having to borrow from traditional sources, and it will thus avoid paying the interest required to service debt. This “free” cash spent on growth initiatives can result in a better bottom line. New capital may be spent on marketing and advertising, hiring more experienced personnel who require lucrative compensation packages, research, and development of new products and/or services, renovation of physical plants, new construction and dozens of other programs to expand the business and improve profitability.
Indeed when you want to raise money there are many ways to do so: You can either raise money from investors through their participation in the company’s capital; or raise debt through loans or other debt instruments; or you can use different securitization methods in order to render your assets more liquid and tradable and potentially raise cash to grow your business.
With the Capital Markets Authority in Lebanon requesting RFPs for the electronic trading platform, and making sure all series pertaining to regulating the market are covering major issues that we might be facing; there is a huge opportunity in 2019 for SMEs and family businesses in Lebanon to use such interments for growing their business especially that Lebanon benefits from a very low level of leverage when it comes to corporate capital.
Make sure to read the next article coming out before 2019 on “securitization in Lebanon”.