Dear reader,

Welcome to the July 2018 edition of The Director’s Dilemma.

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This month our case study protagonist has to decide if, and how, he will stay with the company he founded. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Zefco is a regional supplier of building materials.  At the peak of the housing boom, Bill sold the business to a NYSE-listed corporation. The new owner retained the Zefco brand. Bill was asked to continue running the company. After the deal closed, he was in a financial position to live very comfortably without ever having to work again, but he loved the business and he agreed to remain as CEO.

The new owner wanted to expand Zefco. Rather than open de novo stores, however, the plan was to use Zefco as a platform to grow through acquisition.  Another lumber company in the same region was experiencing financial challenges and it, too, was acquired, doubling the number of stores. Bill was so highly regarded as a leader that he was asked to continue running the business and report directly to the CEO of the public company. He still loved coming to work everyday and the idea of converting the newly acquired stores to Zefco was of great interest to him. The timing was superb. Over the next five years, another housing boom occurred.

After the boom came another bust. New home construction and building permits declined precipitously. Sales and profits plunged. Zefco's highly leveraged parent came under pressure from its bankers to reduce debt. Given Zefco's operating performance and uncertain prospects, it became a candidate for divestiture. Over the next year private equity groups evaluated the opportunity to buy Zefco. The big box chains were also competitive threats to Zefco. Bill wanted to repurchase Zefco. The asking price was $35,000,000.

Bill's Dilemma: Should he risk his wealth to reacquire Zefco? Two of his former directors said the deal was too risky but the two other former directors argued that the opportunity was too great to pass up, assuming the right financial structure.

Ed's Answer

Given Bill's age and his decades of experience in the ups and downs of the home building industry, he should definitely be reluctant to use most of his own capital to buy back Zefco. Asset-based lenders should be willing to evaluate the opportunity. Although Zefco's income statement is not very attractive, the company probably has substantial A/R and inventory. Applying the typical advance rates against the collateral a maximum senior, secured revolving credit facility of $28,000,000 might be available. Bill would likely be asked to invest $7,000,000 of his own money and provide the lender with an unconditional personal guaranty for the full amount of the loan. Given a pro forma 4:1 debt-to-worth ratio, requiring the personal guarantee would not be unreasonable from the lender's perspective.

Bill might be inclined to take the business risk but he should not be a gambler. Accordingly, he should pass on the deal if an unconditional personal guaranty is required. A prospective asset-based lender's desire to do the deal, at an appropriate risk-adjusted interest rate, might be strong enough that Bill's personal guarantee could be limited if not removed from the proposal. Bill understands that he needs to assume some financial risk but he should remain wary of investing too much of his wealth to repurchase Zefco. After searching for a buyer for over a year and mounting bank pressure, Zefco's parent company has become a highly motivated seller. Bill should explain that the $35,000,000 asking price is acceptable but that $5,000,000 in seller financing is needed to make it happen.

The deal structure would be: $28,000,000 in senior, secured debt; $5,000,000 in redeemable preferred stock issued to the seller; and $2,000,000 in cash provided by Bill. The seller gets $30,000,000 in cash to reduce debt. Bill prepares for the next boom.

Ed Freiermuth is a professional Company Director and has served on the board of 12 companies, including service as the chairman of the audit committee of a billion-dollar quick service restaurant chain. He is based in Los Angeles, California, USA.

Julie’s Answer

Bill clearly loves this business and his passion is a key ingredient in the recipe for its success.

Bill needs a board to help ensure the business case is robust. He can possibly scrape by with a board of three people but ideally should think long term and build the board his company will grow to need.

First Bill needs to think of himself; does he want to own the business 100% or to bring on other shareholders? Does he want to leverage the business or to use equity? Does he want active partners or passive investors? A couple of hours with a respected mentor should help him to establish his preferences and think through their pros and cons.

Next Bill needs to investigate the deal. Is he buying the company or the assets and trading name? Can he buy the company with debt in place or must he finance it? What risks and benefits attach to each option? Is $35 million too much? Why did nobody else buy it?

Then Bill must evaluate how to structure the investment. I would suggest acting as if he were to list the company.

Bill knows this business, he should seek to complement his knowledge and build a board comprising directors who:

  • understand M&A at this scale and has a track record of successful investments
  • bring supply chain expertise in this sector
  • have good financial and legal skills gained in similar scale businesses
  • can play 'devils advocate' and challenge the board's experts to extend their thinking
  • will bind the others together into a strong team with high levels of trust and accountability
  • contribute customer skills and marketing insights
  • provide retail skills and the ability to govern a retail workforce

These skills need to co-exist within one person to get a cost effective and manageable board.

Julie Garland McLellan is a non-executive director and board consultant based in Sydney, Australia.

Andrew's Answer


Your problem is that the business you founded and the business you are now proposing to buy back has changed; due to the touch of the NYSE company, and the expansion of the business. Zefco is now a large company which is under threat from competition as well as market cycles.

The risk is that the financial strain required to buy back the business, in a potential declining market cycle, will overstress the cash flow of the business and expose you to lenders. While some of your old board are in favour and some are not, who will have their own skin in the game? Will they be backing the business with the same amount of money and effort as you will?

In my opinion, I would not be rushing to buy back Zefco. You could wait on the sidelines to see what offers play out and the impact on the price of Zefco. At present it does not appear you have any restraint of trade and I would consider the option of setting up a new business or only offering to take the more profitable parts. Existing Zefco may come with such poison pills, as long leases, with excessive escalation terms, supply contracts that restrain your ability to offer customer choice and many other problems.

While you may have a huge emotional attachment to Zefco, it is time to step back, be objective, and make a hard decision as to whether it is the right thing for you to do.

Andrew Skinner is Executive Chairman of Zamia Metals, Non-executive Director of GPS Alliance Holdings, and a Member of the Academic Board of Churchill Institute of Higher Education. He is based in Sydney, Australia.

Book review - Dilemmas Dilemmas II

This book by one of Australia's leading boardroom experts allows directors to practise and develop their judgement. Contributions from international governance experts, including directors, advisers, consultants and academics provide insights that extend and enhance the ability of the reader to respond to situations that arise in boardrooms. Directorship is about judgement and this book provides a range of responses from which readers can rapidly assess and enhance their own responses to more effectively meet the challenges of their own board roles. These case studies are drawn from real life. They are up-to-date, entertaining and educational. They will make you a better director! With contributions from around the world and examples of applying good governance to commercial, family, not-for-profit and government sector boards this book is an authoritative and comprehensive source of inspiration for experienced and aspiring directors.

Available in soft or paperback format through

What's New - In June

The biggest event in my June calendar was the Bounty Mining IPO on the ASX; 19 June (at 11.00am precisely). Such a delight after all those months of work and worry to see the stock start to trade and trend upwards. In the photo you can see our long-suffering (and now equally happy) Company Secretary ringing the ASX Bell whilst our Chairman looks on. Such a happy occasion and well worth all the sleepless nights and hours of poring over disclosure documents to make sure everything was perfect (which it was in the end but not in the beginning).

If anyone wants some director education on the role of the board in an IPO I will be happy to oblige just as soon as I recover!

The month started with a trip to Tasmania for some board performance reviews and a strategy workshop. Both were high on my list of good fun professional activities.

I also had the joy of presenting two Advanced Club Governance Courses for Clubs NSW. It is always a pleasure to meet people who volunteer for Not For Profit board service and especially when they move beyond the mandatory governance training (there is a minimum education required to be on the board of a registered club in NSW as a legislated requirement) and sign up voluntarily to learn how better to serve.

On 15 June I travelled by Tall Ship across the Sydney harbour to hear a presentation on sustainability and governance at Taronga Zoo.

This was one of the most enjoyable ways to learn. In the picture you can see AICD Chair, Elizabeth Proust, enjoying the cool breeze (okay - freezing along with everyone else).

Add in my usual board and committee meetings and the great joy of writing this newsletter and it was another fulfilling and busy month. Good job I love my work!

I am always keen to work more and will be delighted to hear from you if you would like to arrange a board strategy workshop, education session, or board performance review!


Inspirational quote for July - This month my favourite quote is:

Reader Highlight - This month our 'Reader doing exciting things' is Sonny Wang, CEO of the Taiwan Corporate Governance Association. I am looking forward to returning to Taiwan for the annual corporate governance summit in September. It is a massive job to bring together such a cast of international governance experts and it really helps to raise the standard of governance, not just in Taiwan, but all around the world.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study; I 'borrow' them from people I meet or things that I read. Bill is an old English name, it is a derivative of William and means 'resolute protector'. Our protagonist this month has been a resolute protector of his business through several iterations and many years. I wish him continued and great success. He will recognise himself in this story. Hopefully no-one else will.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. They are greatly appreciated. I will answer them all eventually. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas for publication you will be most welcome. Simply reply to this email and let me know.

Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at

Let me help you - If you would like me to speak to or train your board, staff, audience and/or group please contact me at

Farewell until the next issue (due 1 August 2018). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,



Photo Credits:
Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants. Main photo by mentatdgt from Pexels.

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling and do not constitute legal advice. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

I am privileged to have your contact details and keep them as safely as possible. I will alert you if they are ever accessed by any unauthorised person (the technical staff at ayuda help with publishing and issuing the Director's Dilemma and have access so they can send the newsletters to you). I do not sell your details to anyone; they are kept only for the intended purpose - sending you this newsletter and helping to build the judgement of company directors by providing a safe way to consider potential responses to real life events.