Why Do Many Companies in the Gulf Fail Within the First Three Years?

The Gulf region, encompassing countries like the UAE, Saudi Arabia, Oman, and Bahrain, has become a thriving hub for new businesses and foreign investments. With numerous companies being formed each year, it's also noticeable that many do not survive beyond their first or third year. From partner conflicts to poor financial management, various factors contribute to these premature closures. Below, we explore the top three reasons many brands in the Gulf liquidate within their early years.

1. Partner Conflicts

One of the most prevalent reasons for early liquidation in the Gulf is disputes among business partners. Many startups in the region are built on partnerships, which require alignment in terms of goals, vision, and management style. Unfortunately, many partnerships fail due to:

• Miscommunication or lack of clarity on roles: When partners do not establish clear roles or expectations, it leads to confusion and frustration.
• Diverging business visions: If partners have different approaches to scaling or managing the business, conflicts are inevitable.
• Unequal effort or capital contributions: If one partner feels they are contributing more—financially or in terms of work—than the others, it often leads to friction.

A 2019 study from the Dubai Chamber of Commerce found that nearly 40% of business liquidations involved some form of partner dispute. These internal disagreements can hinder growth and, more importantly, erode trust, leading to business closures.

2. Wrong Recruitment

Hiring the right team is crucial to any business’s success, especially in the Gulf region, where competition is fierce. Poor hiring decisions can cripple a business in the early stages, particularly when:

• Incompetent leadership or management is hired, leading to poor decision-making and execution.
• Cultural misalignment between expat employees and the local market results in ineffective strategies that don’t resonate with the Gulf’s unique business environment.
• High turnover rates due to uncompetitive salaries or lack of incentives make it difficult for startups to retain talent long enough to thrive.

The cost of a bad hire can be devastating. According to a study by the Society for Human Resource Management (SHRM), a poor hiring decision can cost a company up to five times the employee's annual salary. In the Gulf, with its high reliance on expatriate labor, this financial burden is often more significant, contributing to early closures.

3. Financial Mismanagement: Debts and Credit Issues

Another common reason companies in the Gulf region liquidate early is financial mismanagement, particularly related to debts and credits extended to customers. Some common pitfalls include:

• Overextending credit: In a bid to attract and retain customers, businesses often offer generous credit terms. This can strain cash flow, especially if customers default or delay payments.
• Unsustainable debt levels: Startups in the region may take on too much debt to fund initial growth, without considering repayment capabilities. High-interest loans and unfavorable credit terms can rapidly erode profits.
• Lack of financial oversight: Small businesses, in particular, often lack the infrastructure or expertise to manage finances effectively, resulting in liquidity issues.

The Gulf's regulatory environment can also present challenges. According to reports from Deloitte, many small and medium-sized enterprises (SMEs) in the region struggle with cash flow management and debt recovery, leading to insolvency and liquidation.

Final Word

While the Gulf offers numerous opportunities for new businesses, it also presents challenges that can lead to early liquidation. Partner conflicts, wrong recruitment, and financial mismanagement are three key reasons many companies don't survive their first few years. For businesses to thrive in the region, they must prioritize strong partnerships, smart hiring practices, and sound financial management.

By addressing these common challenges, new ventures in the Gulf can increase their chances of long-term success and avoid becoming just another statistic in the rapidly evolving business landscape.