David Harland, FINH’s Managing Director, has commenced writing regular monthly articles for Qld Business Review Publications on Family Business matters. These articles will cover issues such as family councils, integrated personal and business services, advisory boards, succession issues, tax planning and business valuations.
In this introductory article, the case study of bus transit and manufacturing powerhouse, The Grenda Corporation, is reviewed and David provides feedback on the necessity of and challenges faced when planning for business succession.
Click here to read the article as it appears in the magazine or read the text below.
The Family Plan
Fiji, perched deep in the South Pacific Ocean beckons families to spend time together, relaxing on the beaches and taking in the sights.
Like many Aussie families, the Grenda clan headed to Suva 12 years ago for a Fijian get-away, but this was no ordinary trip to paradise, it was a time for tough talking.
The Grenda Corporation is one of Australia’s best-known and possibly the largest family-run bus and coach enterprise. Started by George Grenda in 1945, the business passed on to sons Ken and Lance and their families, later to be operated solely by Ken which he grew into a multi-million dollar bus transit and manufacturing powerhouse.
Each year the business gets bigger, both in numbers of passengers carried by a string of Grenda-owned bus companies across four Australian states, and in size and scale of the bus building division, Volgren.
As each year passes and the next generation of Grendas grow older, family succession planning takes on a dimension requiring strategic thinking and careful management. And getting it right has become a ‘moving target’ for brothers Scott and Geoff Grenda, which harks back to the Fiji excursion in 1998.
“We had single family ownership where Dad was still active in the business,” Grenda Corporation Managing Director Scott Grenda explains.
“There were five kids, and two were working actively in the business, Geoff being the oldest and myself the youngest.”
Grenda says his father Ken decided 12 years ago that is was time to talk about family succession, and what happens with the next generation in the business.
“We started talking about issues that can cloud a family business,” he says.
“Ken decided on a location that was a nice place to have this discussion, so we went to Fiji – 11 family members including spouses.”
Accompanying the family was advisor Sue Prestney and Grenda Corporation General Manager David Willersdorf.
“We had to be dealing with some messy topics, so we sat on the beach from about 9am to 11am and worked all afternoon for five days.”
The first item of business was Ken Grenda’s reading of his will to the family.
“We then went through what was fair to those working in the business and how we set their salaries,” says Grenda.
The family discussed several family business matters, including the dividend policy and what could be taken out of the business.
“We ran a survey among the family members at the meeting, asking everyone to fill in what they wanted from the business and what was important.”
Prestney’s survey asked each family to rank items in order of importance, ranging from whether business strength was more important than profit share or reinvesting profits. Grenda says everyone at the Fiji meeting voted, deciding that it was important to re-invest revenues back into the business and that the financial viability was highest priority.
“Everybody wanted the business to be stronger – that the priority was business wealth not family wealth,” Grenda says.
As the Fiji conference concluded, each family member signed a 15 page document drawn together through the meeting, setting rules on how each of the siblings and their descendants engaged in financial terms with the business.
“We christened this document the Family Constitution,” Grenda says.
“It’s not a legal document, but could be tendered in any legal proceeding if required.”
Marital partners now understood there would be notional values of the business.
“And if there were messy divorces there was nothing in it for them,” Grenda says.
At that time, Geoff and Scott were moving into senior executive positions, with Ken still in command as the company’s patriarch.
FINH Managing Director David Harland says many families find it hard to deal with issues of shareholding and succession planning.
Harland has several years’ experience advising families on these difficult matters.
He says the big question is how to sit down with your parents and ask them about their will.
“People don’t want to talk about death,” he says.
Harland says family shares for non-working members can also be a thorny issue as there is confusion over ownership and employee benefits as they can be perceived as being part of a package that cannot be separated.
The Grenda family has taken a hard line on share valuation, opting for a formula which found its way into their Fiji constitution.
“At the Fiji meeting we determined the salaries of Geoff and I working in the business,” says Grenda.
“We looked at the salaries inside organisations with similar functions and equated our salaries to the market.
“Independently of that if a dividend was paid, Geoff and I would get the same dividend as other family members.”
Grenda says a formula for share value was worked out based on two-thirds of net assets and one-fifth of two-thirds as a notional value of the business – a formula which has since been dropped.
“Everybody agreed that any buy out could not put the business at risk, and that any buyout could not be a lump sum payment but made over a progressive period.”
These days, Grenda uses the standard EBITDA method of valuation.
“There have been so many sales of smaller family bus and coach businesses of late, which might give you an indication of what a bus business is worth,” he says.
A conservative estimate of Earning Before Interest Taxes and Depreciation Amortisation (EBITDA) is made each year.
“When you value businesses you value as a multiple of EBITDA,” says Grenda.
“We know roughly what the value of our business would be by using this method.”
He says having a mix of family members working inside and outside of the business can lead to unrealistic expectations.
“We always explain the positives and negatives going forward because we don’t want people to believe there is a pot of gold that might not be there.
“And we are in a liquid market where valuations could either double or halve overnight.”
Harland says having an internal measure of valuation is necessary.
“The first thing I ask my clients is how they value their business,” he says.
“When you sit down and talk about the value of a business it can highlight many factors for example that there is no measurable strategy information or that the value of the business is less than the value of the assets.”
He says the complexity of valuing a business is working out the intangible value of the relations built up through contracts, staff, and recognition of the brand name in the market place.
“The difference between a private company and a public company is that a public company can have its shares traded regularly, such as on the Australian Stock Exchange, providing a daily independent performance measure..
“You need to create an internal measure so that when the door closes each afternoon a mental note can be taken of the company’s price based on what happened in the marketplace that day. ”
Harland says this provides a methodology for understanding what drives value in a business, rather than what creates profit. Whilst profit is important it only one part of the complete picture.
“It’s always good to have a valuation methodology as it’s fundamentally important to everything about business.
“What people often forget is that profitability can sometimes diminish and your balance sheet can grow (requiring more capital) in a blind drive for greater sales/market share.”
The Grenda family are now making decisions on how to limit shareholding in the company, and have amended the constitution by placing age limits and the intention of members to take an active role in the business.
“We know that somewhere over the next ten years we have to dilute our current shareholdings from five prospective family shareholders down to two,” Grenda says.
A shareholder condition is that if a family member by the time they turn 30 has not expressed an interest in working in the business they are then bought out.
“We know that heading to a generational change we didn’t want five families in the share holdings,” he says.
“We believe that one family in the business is preferable, two is okay and three is too many.”
This raises the question of when to bring the next generation into the business, which family among the Grenda’s extended clan they will come from, and how they will take positions of leadership.
Harland’s view is the earlier succession planning for the next generation starts the better.
“You really have to set the processes up and the comfort zones for that to happen,” he says.
Grenda believes its difficult finding the best way to introduce the next generation to the business.
“My father Ken is very keen to show the business to Geoff’s kids who are in their early 20s,” Grenda says.
“The view is to be careful not to see the business with rose coloured glasses.”
A common thread in family succession planning is to get the kids working outside the business before coming back. It wasn’t until a few years after Fiji that ‘generation next’ entered the picture.
“At that time we were five or six years away from thinking about how the third generation might work in the business,” Grenda says.
“We started to create rules around the grand children wanting to work in the business, having to do an appropriate university course and gaining outside experience for at least three years with another firm.”
Pre-Fiji, before the rule was written. The family tended to support this approach.
When Geoff Grenda finished university he worked for Hamersley Iron in WA as a mechanical engineer, and similarly Scott gained a business degree and worked with Dunlop Olympic Tyres.
“So we cut our teeth outside of the business, and that was before we had these rules in place,” says Grenda.
“It’s useful to make your mistakes elsewhere and learn how to deal with people, and we felt that when we came back to the company you have more respect – we now have it as a rule.”
Grenda says the benefit of having annual family meetings, a practice which started in Fiji, provides space to sort through these matters, amending rules and policies as circumstances change.
“You have to sit down without prejudice as a family and talk about the family business,” he says.
“We are lucky, the reason we went to a nice location for the first meeting it’s a difficult position to start with, and what better than to do it in a relaxed environment.”
The family now meets every October, but not in Fiji, opting for the ease of access to the Grenda Corporation’s board room in Dandenong. Leading up to the October meeting, Prestney, Willersdorf and the Grenda brothers meet beforehand, going through the family document.
“If there are any business reasons to change the constitution they will be highlighted and put on the agenda,” Grenda says.
“The meeting is always confronting, as we still discuss death and illness.”
Much like any AGM, the year’s financial results are presented to the family, along with a summary of profit and loss, and debt level borrowings with banks – tempering expectations.
“We also talk business strategy going forward, such as what Geoff and I might be trying to achieve with the business, and then we go through the family constitution item by item.”
The meeting starts at 9.30am and ends by 3pm to allow for school drop off and pick up.
Prestney chairs and Willersdorf attends the annual family meeting as they have done for the past 12 years.
In the intervening years since the first meeting was held in Fiji, the Grenda family has remained stable with no ‘messy’ divorces or departures – the same eleven family members attend, year by year.
“What we have found, without exception, is that the document changes, and quite considerably, because situations change,” Grenda says.
“Recently we have considered what happens if there was a death to one of the ‘bloodline’, what happens to the spouse who has married into the family, and what happens to the notional shares – at what age do they transfer to the kids.”
He says several ‘what if’ scenarios have emerged.
“It’s a fairly sophisticated document now on those sorts of issues.”
What has remained constant is that the Grendas agree that the business must remain strong and the family will not put an impost on it.
“And I would believe that’s not the case in a lot of family businesses,” Grenda says.
“I think a lot of individuals, even in our industry – bus and coach – want to take too much money out and value their businesses too greatly.”
Grenda also says that generational change in family ownership is becoming a feature of bus and coach, particularly in Victoria.
“My father’s generation was strong when there were about 20 bus and coach businesses in Victoria, operated by fathers of about the same age,” Grenda explains.
“The second generation coming through now are all in their 40s somewhere, and we are all at the stage where we have to start thinking about transferring to the next generation.”
Grenda disagrees with the accepted view that once a family constitution is drafted it remains unchanged in perpetuity.
“That’s wrong – our family constitution changes dramatically each year as people’s circumstances change.”
“It’s a document that you pull off the shelf each year – it’s a moving target.”
He says the Grenda family may be unlike others in that they generally get on well with each other.
“I think the fact that we’ve sat down and discussed these issues has helped all of that.”
And as for having a fluid state of family affairs wrapped in a written constitution, Grenda rests his case on the proposition that it’s better to have a moving target than no target at all.