Financing in family business: the past and present

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Family businesses in Egypt have been the backbone of the country’s economy for generations, contributing significantly to GDP and employing a large percentage of the workforce. These businesses range from small, family-run operations of two to three family members to large enterprises with hundreds of employees.

Prodal Distribution, a family-owned business providing supply solutions for the food and beverage industry, was established in 2017 as a private limited liability company by Ehab Abdel Rasoul and his mother with the aim of delivering premium quality products to Egyptian manufacturers and suppliers worldwide. Prodal provides end-to-end supply solutions to the food and beverage industry. The company initially financed 25 percent through personal savings and the remaining 75 percent through credit lines from trusted suppliers, according to its general manager, Abdel Rasoul.

As for any other business, finance can be a challenge. Traditionally, access to formal banking services is limited, and family businesses tend to generally rely on personal savings; reinvesting earnings into the business; and loans from family members, friends, and acquaintances. “Family businesses are protective of their legacy and do not want to compromise control of the business,” said Ahmed Habib, expansion and business development manager at Al-Rowad, a company working in automotive spare parts. Habib continued to say that “an external partner may bring different ideas, but they may also come with a different agenda which may not be aligned with the family’s vision.”

Established in 2010 by Habib’s father and uncle, Al-Rowad relies heavily on personal savings and earnings that are reinvested into the company.

The lack of access to formal banking services means that small family businesses have limited options for growth and development and hence struggle to reach their full potential.

As younger generations take over the reins of family businesses, they typically explore alternative financing options that can help the business grow and expand. The new generation is more open to private equity financing and exploring other non-traditional financing options such as crowdfunding. They see it as a way to gain access to capital and resources that can help the business compete in the market. In contrast, the older generation is likely to be more hesitant to relinquish control and ownership of the business, preferring to maintain traditional financing methods.

Winds of change

Recent years have seen a marked change in the family business mindset. With the rise of a wide range of financial products, family businesses now have access to a range of options and more formal banking services. The government has also launched several initiatives aimed at supporting and promoting small and medium enterprises (SMEs), which are often the birth of family businesses, leading to an increase in access to financing for family businesses in the early phases.

At some point things got difficult for Prodal and the business was about to face bankruptcy. Abdel Rasoul solely relied on his personal savings to get the business back on track. He commented on the challenges faced by family businesses in obtaining loans from banks in Egypt, stating, “banks in Egypt do not finance SMEs with great potential or projects; they only focus on profit and loss.” Nevertheless, after a year of extensive paperwork, the family business was able to secure a government-offered five percent loan through an initiative for SMEs. “It was a long and difficult journey, but we finally made it happen,” said Abdel Rasoul, expressing pride in the perseverance of his business.

Enter venture capital and private equity

Another trend is the increasing availability of venture capital (VC) and private equity (PE) funding. This type of financing is particularly useful for family businesses looking to rapidly expand and grow. VC and PE firms provide capital in exchange for equity in the business, and their expertise and network can help family businesses overcome many of the challenges they face.

These forms of financing provide family businesses with capital, along with the expertise and network of the investors. This can be particularly beneficial for family businesses that are just starting out, as VC and PE firms can provide them with the resources and support they need to get their businesses off the ground. However, it’s important to note that VC and PE funding can come with higher costs and increased scrutiny, as the investors will be looking to realize a high return on their investment.

When considering alternative financing options, Habib mentioned that bank loans and the government’s five percent initiative for SMEs would be the preferred choice rather than seeking a partner who would acquire equity in the company.

Family businesses in Egypt have a culture of keeping the business within the family, and they are often reluctant to explore other financing methods due to the risks that come with bringing an external partner into a family business.

Overall, the future of financing family businesses in Egypt is dependent on the ability of family businesses to balance the need for growth and expansion with the desire to maintain control and ownership. As financing options continue to evolve, family businesses must be prepared to explore new methods and adapt to changing market conditions. By carefully considering their options and maintaining control of their businesses, family businesses in Egypt can continue to thrive and contribute to the country’s economy for generations to come.

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