Family business - an investment model

Like a lot of people starting their own business, Bert Dennis did it gradually – almost by accident.

He’d grown up poor, one of five children with a single mother. He trained as an engineer and, in 1960, aged 24, started working as an independent consultant. He then discovered the wonders of property development, first renovating places for sale and then developing and building new ones.

By 1992 he and his wife Dawn had built a sprawling property, construction and farming business with four married children aged between 27 and 33, each of them in (and owning) various parts of the business.

That’s when the Dennis family story gets interesting – and instructive. They had to decide whether to be together as a family business, or for each of the five families to go separate ways. It would have been easiest to do that, to just divide up the various parts of the business like the Smorgons did a few years later and stay friends. Instead, they decided to create a family business that would last for generations.

What’s more, they decided to do it properly, putting all the assets into one ownership structure because of the future risk of surviving spouses claiming parts of the empire and forcing a break-up.

A ten-year vision

It was an ambitious vision, and would you believe it took 10 years of hard work to set up, but the result is the most well-organised family business operation I have ever seen. There is a tight ownership structure through family trusts, mission statements, written rules about everything, formal governance structures including monthly family council and board meetings, both with outside directors, a matrix governing each family member’s rights and responsibilities and, of course, equal ownership of one-sixth each: Bert, Dawn, Adele, Grant, Natalie and Marshall.

Talking to them it’s clear that the whole thing is built on an extraordinary family bond, in turn based on a deep love and respect for Bert, and his philosophy of: “we are family in business, not a family business”. What’s the distinction between those two things? Well, simply that it’s about family first – they could be doing anything. Most family businesses are businesses that happen to be owned by a family.

Bert’s now 78 and still working as hard as he ever has. And he’s not even an executive any more. Grant is executive chairman, Adele runs the Family Office, Natalie is company secretary, Marshall runs the farming operation, and Adele’s husband Peter Levinge is CEO of the residential operations.

They all live within five minutes of each other, apart from Grant who lives in Brisbane. The office – Dennis House – is only a few minutes away. That was all part of the plan.

So what did they spend 10 years doing? Well, some family businesses might call it overkill but the complex structures and procedures set up during the 90s have ensured that Dennis Family Corporation, as it’s now called, will definitely survive through generations; it’s almost impossible – requiring unanimous agreement – for it be sold broken up or sold.

A trust was established to own the assets, with six equal beneficiaries. As part of this process, Bert and Dawn Dennis, enacted their wills.

A family council was established with the six trust beneficiaries plus three outsiders for balance: an ex-banker (Jeremy Nestel) and ex-lawyer (Keith James), who also advised on the structures, and an ex-auditor (Bill Stevens) to advise on risk and governance.

A ‘holdings board’ was created with the above nine plus two business experts: former Jennings chief financial officer and NAB real estate head Michael Johnstone, and former Australand CEO Brendan Crotty. There’s also an independent chairman of the OH&S committee, Bob Glass.

There are also two key advisers: former Reserve board member, Warwick McKibbin and American economist Woody Brock.

A matrix was created with three ways in which a family member can participate in the business: shareholder, director, employee. Alongside them on the table are requirements, responsibilities and rewards.

To be a shareholder, the only requirement is that you have to be a member of the family. The responsibility is to attend meetings of the council and the board, and the reward is a dividend.

Directors have to be suitably qualified and their responsibilities are fiduciary duties and participation in board meetings, and you get a board fee on top of the dividend. By the way, all of the family members did directorship training courses, so they could mix it with professional directors on their own board.

To be an employee, the preference is that you have spent four years working outside the business (not essential) and be properly qualified. You get a market salary according to the role.

Family members can be two or three of those things, but will always be one of them: a shareholder.

For the first ten years, there were no dividends: all profits were reinvested. As a result, the business is now seven times the size it was when this structure was established in 1996 – a compound annual growth rate of 14 per cent.

Things didn’t go entirely smoothly. The family brought in two outside chief executives but neither of them worked out, largely because of a “clash of cultures”. One of them was a debacle and caused a big setback for the business about ten years ago.

Roughly 20 years on from when these structures were put in place, there are now 11 grandchildren ranging in age from 17 to 27, and it’s a measure of how organised this mob is that a Kolbe analysis has been done on each of them to work out what they are most suited for. “We want to recognise and appreciate their differences,” says Adele.

And, typical of the way this family thinks of everything, Bert has been appointed the official mentor for the grandchildren. He’s writing a series of papers on each aspect of the business: cash flow, gearing, land valuation etc, and each of these is been run past, and cleared, by the independent directors.

Maybe the grandchildren will join the business (that is, go for the employee or director option); maybe not. If they do, there’s a full set of documents and a mentoring plan awaiting them. If they don’t, they’ll be shareholders no matter what.

Taking a low-rise direction

And the business? Oh yeah, the business. It’s a national low-rise residential property developer, builder and farming concern. They are going to stick with low-rise detached houses, because that’s what they know, and also because any construction above three-storeys in Australia must involve the building union and they’d rather leave that to outfits like Mirvac and Harry Triguboff.

But higher population and the demand for living closer to the city mean residential housing is becoming more and more dense. This means building new houses in existing backyards, as well as big developments of medium density units.

Grant says they have enough activity on the books now to keep the company going for 15-20 years.

But the thing about this company is that it really is a family in business, rather than a family business. The business that they’re in might change over time, but you get the feeling that the family won’t.

Reprinted with permission from Family Business a Business Spectator publication at www.businessspectator.com.au/industries/family-business