Illustrations by Don Sparrow
Meet the Dilby family and Dilby & Sons Construction, founded in 1957.
Five family members own shares in the business:
It happens in every business – that phone call that sets you and your business on a dramatic, unexpected new course. For John Dilby, the patriarch of the Dilby business family, it came late in the afternoon two days ago, just as he was preparing to head home for the day.
“John, this is Fred Hampton. We’ve met once or twice at the annual construction convention. As you might know, my company’s been expanding into new markets across Canada, and we prefer to do it through acquisitions. I won’t beat around the bush. We want to buy Dilby Construction.” Selling the core business outright had never been part of the family discussions. Until now.
With the offer to purchase and a deadline on the table, the Dilbys have much to consider. If Hampton’s company wants to buy Dilby Construction, might there be other companies willing to make a better offer? Will Jacob, the eldest, be willing to work as a manager in a Hampton-owned company as part of the deal? How will Annette’s interests be protected? Is Julian willing to make his fly-in fishing camp his only source of income? And what about Thomas and his interests as a non-participating shareholder?
This is not an unusual scenario for Matt Duncan, Matt Duncan, Deal Advisory Partner and Managing Director with KPMG Corporate Finance. “Wouldn’t it be nice if the Dilbys could turn back the clock a few years to when they could have started discussing this possibility more calmly and rationally? That’s why I’m a big proponent of proactive strategies, rather than only reacting to situations that arise. But unfortunately, while most business owners agree that ownership transition is important, it hardly ever seems urgent enough to actually address it well in advance.”
When family dynamics come into play, ownership transition becomes more complicated. Ironically, the ease with which families can get themselves into complicated situations can make it so much more difficult to get out of those same situations. Emotions run high and relationships can be permanently damaged. Perhaps that is the most important reason of all for family businesses to put strategic long-term planning at the top of the yearly agenda, and even more reason to have a well-established relationship with an external team of professional business advisors.
“With succession planning and ownership transition in a family business, we would start by thoroughly assessing the options, by determining who wants what,” says Duncan. “We would then discuss the many different scenarios that could arise and give examples of how those situations could be resolved. Then when something does come up, such as the offer to purchase the construction business, the Dilby family is much better prepared to address it, with a much better chance that everyone will come out of it feeling that they were heard, that their interests were protected, and that the whole transaction was fair.”
Best of all, key meetings each year with well-planned agendas, along with consultations with external advisors, can put the Dilbys in a much stronger position to determine their own fate. Annette, for example, could think about and present a plan for separating from the construction business; Jacob could work with Julian to come up with an agreement to divest the fishing camp; Thomas might agree to a buyout of his shares in a way that reduces his tax liability; and John and his wife might agree to help their eldest son buy the construction company by agreeing to carry some of the debt to ease Jacob’s need for third-party financing. Without the pressure of deadlines, and with numerous options to examine, the planning process can reveal a number of pathways for each family member.
Just as importantly, careful and deliberate planning that reduces family dysfunction can play an important role in preserving the integrity and reputation of each of the family’s businesses. There is no doubt that Fred Hampton, with his aggressive expansion plans, knew that John was ready to retire, that he had health problems, and that everything was not running all that smoothly with the Dilby enterprises. He sensed vulnerability. So, too, would the employees and major customers of Dilby Construction and the other Dilby businesses. Many of the rumours might have been avoided if the Dilbys had been more proactive and had the difficult discussions earlier rather than later.
A proactive approach does not mean that everyone in the family will always be happy. A good advisor will lay things on the table, and some feelings may be hurt. But by being presented with unbiased financial models and other resources, all family members might eventually be willing to come to agreement about what is best for everyone, even if it isn’t what they originally hoped for individually. “If we can reach that point,” notes Duncan, “we are far more likely to get to the finish line without delay and get the right deals done.”
All names, characters, and incidents portrayed in this article are fictitious. No identification with actual persons (living or deceased), businesses, places, buildings, and products is intended or should be inferred.
First published in the June 2020 edition of The Business Advisor.