Illustrations by Don Sparrow
Despite the fluctuating dynamics of their business interests, the Dilby family has managed to stay together. That is, they all talk to each other, get together amicably for holidays and special occasions, and at least tolerate each other’s perceived idiosyncrasies. Annette, for example, accepts the fact that her father will not change the name of the construction business – Dilby & Sons Construction – out of respect for his deceased father and brother.
Tensions, though, have been mounting in recent years because of several factors, most notably the disproportionate number of hours each shareholder dedicates to business management, and the resulting profit contributed to the shareholders as a whole. The crux of the matter comes down to who should get what, and why?
“The best way to answer that question is to involve an impartial outside professional,” says Sarah Tkachuk, a tax leader at KPMG and certified family enterprise advisor with more than 17 years’ experience in helping family businesses. “Otherwise, discussions around compensation tend to quickly become emotional and reactionary. We often find that families are stuck in historical patterns and don’t know where to turn.”
With the right experience and qualifications, a professional advisor can help families address their issues in the right forum. “When I am working with a family, I help them to set the rules so everyone’s playing fair ball,” Tkachuk explains. “A professional advisor can enable family members to discuss the business objectively and arrive at decisions everyone can accept and respect.”
A critical first step is to ensure that everyone in the family understands each other’s perspective. The way to start is to have the advisor meet with the family together and individually. As a neutral party, the advisor can identify the issues the family is struggling with and frame those issues in a way that will help the family work through them.
Identifying the key issues is a starting point to implementing processes with respect to the shareholders, management, and the family. One example of a process that could be implemented is development of a guideline for determining compensation. This should include a framework for decision-making, the process for involving and communicating with shareholders, and a clarification of roles and responsibilities – with a distinction between family members as employees and as shareholders. “You need to be clear as to how performance is measured – the key performance indicators – and the value of that performance,” says Tkachuk.
Meet the Dilby family and Dilby & Sons Construction, founded in 1957.
Five family members own shares in the business:
In the case of the Dilbys, should Jacob and Annette be paid the same? Is diversifying the business (Dilby Developments) as valuable as expanding, or even maintaining, the business activity of Dilby & Sons Construction? Should Thomas – who only owns shares – be entitled to any compensation? Or should he be engaged more in decisions, but only at the shareholder level? And what about Julian? Would it be best to divest the outfitter business and set him free to run it on his own? Decisions such as these must involve formalized communication with all the appropriate stakeholders at the table.
Ownership decisions need to be separated from business decisions. Family members who work in the business deserve to be paid fairly for their work as employees of that business. Shareholders must agree on when and what would be a fair return based on their ownership. Tkachuk suggests another forum to help with these decisions: a formal advisory board, which could include non-shareholders. Members of the advisory board need to be correctly engaged and may require training to ensure their effectiveness.
The family should also consider a governance structure in the family, such as regular family meetings. Generally, “the process has shown that the more inclusive you are in family communications, the more successful the family relationships will be,” says Tkachuk.
Before initiating any of these discussions, family members need to make an informed, conscious distinction between family and business matters. “It might be that John as the father feels guilty at this stage in his life, perhaps because he has never felt as close to his youngest son as he does to his eldest. That may be affecting his relationship with Thomas and may be a reason why Thomas does not work in the family business. Understanding some of the background family reasons for business decisions often helps the family and the business reach better resolutions.
Underpinning all of this must be the unequivocal commitment from everyone involved to be respectful of each other and to engage in the process in which they’ve invested. Again, this is where an external, impartial resource person can break down interpersonal barriers and biases, changing what used to be uncomfortable if not explosive conversations to objective deliberations. But don’t expect magic.
“At KPMG, we urge families to establish these practices early,” says Tkachuk. “If keeping a family business intact and functioning well is important, think of how even more important it is to keep families together.” Rather than engaging professional family business consultation as a short-term intervention, the Dilbys need to weave it into the fabric of their ongoing business and family relations.
Is it worth it? “We all know stories of family businesses that ended in bankruptcy, or prolonged legal battles, not to mention the stress on family members and the destruction of relationships,” says Tkachuk. To borrow from an old adage, when it comes to determining family compensation and other matters related to a family business, an ounce of intervention is worth a pound of cure.
First published in the September 2019 edition of The Business Advisor.