Introduction: Family Businesses Between Economic Strength and Organizational Challenge

Family businesses are considered one of the fundamental pillars of the Saudi economy, representing a significant share of commercial activity, contributing effectively to the gross domestic product, and providing wide employment opportunities across various sectors. Despite this economic importance, family businesses face a complex structural challenge arising from the overlap between family considerations and the requirements of modern business management.

This challenge becomes more acute during the transition of ownership and management from the founding generation to the second and then the third generation, where legal and administrative issues emerge related to governance, management authority, ownership distribution, and decision-making continuity. The new Saudi Companies Law issued in 2022 was introduced to address these challenges by providing a more flexible legal framework that takes into account the specific nature of family businesses without undermining general legal principles.

First: Governance and Conflict of Interest Within Family Businesses

1. Overlap Between Family and Managerial Roles

One of the most prominent challenges facing family businesses is the clear overlap between:

  • Legal roles within the company (owner, partner, manager, employee)

  • Family roles (father, son, brother, relative)

This overlap often leads to difficulties in applying sound governance standards such as transparency and accountability, making managerial decisions vulnerable to personal and family considerations rather than professional and commercial criteria.

2. Centralization of Decision-Making by the Founding Generation

In many cases, the founding generation retains full administrative and financial authority, which limits:

  • Delegation of powers

  • Empowerment of younger family members

  • Engagement of professional executive management from outside the family

This, in turn, hinders institutional development and delays the orderly transfer of leadership.

Regulatory Treatment Under the Saudi Companies Law

The new law does not impose a mandatory unified model; however, it explicitly encourages the adoption of a Family Charter as a flexible organizational tool. Although not legally binding, the Family Charter:

  • Regulates the relationship between the family and the business

  • Defines employment, promotion, and compensation policies

  • Establishes clear mechanisms for resolving internal disputes

This contributes to reducing the likelihood of family disputes escalating into judicial conflicts.

Second: Financing Challenges and Ownership Restructuring

1. Fragmentation of Ownership and Decision-Making Difficulties

With the transfer of ownership to subsequent generations, the number of partners among heirs increases, leading to:

  • Fragmentation of ownership shares

  • Difficulty achieving the required quorum for strategic decisions

  • Disputes over profit distribution or reinvestment policies

2. Exit Strategy Challenges

The exit of a family partner from the company is one of the most complex issues, particularly due to:

  • Difficulty in fairly valuing the ownership share

  • Family concerns about the entry of external parties

  • Absence of pre-agreed and structured exit mechanisms

Legal Treatment

The new Companies Law provides greater flexibility in:

  • Choosing the legal form of the company

  • Restructuring ownership

  • Regulating relationships among partners

It also encourages arbitration and alternative dispute resolution mechanisms to reduce prolonged litigation and preserve business stability.

Third: Succession Planning and Leadership Transition

1. Leadership Gap Between Generations

The absence of advance planning for leadership succession is among the most serious threats to the continuity of family businesses. Failure to prepare the second or third generation often results in:

  • Leadership vacuum

  • Disruption in decision-making

  • Decline in performance after the founder’s absence

2. Succession and Inheritance Disputes

Upon the founder’s death, the company becomes part of the estate and may be subject to inheritance and division procedures, potentially leading to:

  • Suspension of business activities

  • Disputes among heirs

  • Threats to the company’s continuity as a productive entity

Regulatory Approach

The law emphasizes the importance of advance succession planning and encourages:

  • Separation between ownership and management

  • Appointment of professional executive management for daily operations

  • Retention of the family’s supervisory role through a family council and board of directors

This model helps ensure continuity away from direct family conflicts.

Conclusion: Governance as the Only Path to Sustainability for Family Businesses

The new Saudi Companies Law does not impose rigid solutions; rather, it grants family businesses flexible organizational space to design structures suited to their culture, size, and business nature. The Family Charter and succession planning are among the most important tools provided to achieve sustainability.

The survival and growth of family businesses can only be achieved through:

  • Sound corporate governance

  • Clear separation between ownership and management

  • Regulation of family relationships within a pre-established legal framework

The pivotal role of lawyers and legal advisors remains essential in drafting these charters and legal structures, protecting companies from fragmentation, and ensuring a smooth transition from one generation to the next—preserving them as a national economic legacy.