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WORKING WITH FAMILY BUSINESS CONSULTANTS



Reproduced with permission from CCH INCORPORATED, 2700 Lake Cook, Riverwoods, IL 60015
Journal of Practical Estate Planning, June-July 1999, p. 42.

Beginning in 1986, I made the transition from trust and estates lawyer to family business consultant. My purpose here is to introduce you to family business consulting, and to suggest ways in which the family’s outside advisors (lawyers, CPAs, insurance agents, financial counselors, etc.) can collaborate with family business consultants in the best interests of the client family. Let’s begin with a typical case taken from my recent book, The Survival Guide for Business Families.

A Case Study: JacMar Corporation


JacMar Corporation is one of your firm’s most important business clients. The company is well-established, quite profitable, and relatively free of debt. Stock in this S-corporation constitutes well over 90% of the combined net worth of the founder, Jack, and his wife Margaret.

Jack JacMar (age 63) has few hobbies or interests outside the business, and no concrete plans to retire. Jack is highly intuitive, makes most business decisions from his gut, relies on a few fanatically devoted key employees, and strikes sparks wherever he turns. Margaret (age 60) does not work in the business, but is a powerful force behind the scenes in her role as the family’s “chief emotional officer.” When Margaret’s father died suddenly years ago, he left their family’s business to her two brothers. Margaret is still hurt and angry about being left out.

Their eldest son, Jack, Jr. age 40, (known as “Jay”) has worked in the business since completing his MBA degree. Jay is introverted and prefers email to personal conversation. Son and father quarrel openly about how the business should be managed, and who should make decisions. Jay’s wife, Judy, is a lawyer. They have one child, Jack III, age eight. Their marriage is in trouble. The specter of divorce haunts the JacMars, as it haunts all other business families.

Younger son Frank, age 38, dropped out of college to enter the business. Frank has two DWI convictions. He directs JacMar’s surprisingly successful sales effort from the golf course at the country club. Frank’s quirky laid-back work style infuriates Jack, who insists that every family member should set an example by working a 70-hour week. Frank and his wife Frances have four children, all teenagers. From time to time, Frances has tried to talk to Jack about business, but Jack teases her and ridicules her lack of business knowledge.

Karen, age 29, the youngest child of Jack and Margaret, is an engineer like her father. Karen works for a large manufacturer on the west coast. She exhibits much more talent than either of her brothers. Karen has no aspiration to work for JacMar Corporation so long as her father is there. Jack has never offered Karen a job, but has a standing offer of employment to her husband. Karen doubts her brothers’ abilities, and is jealous of their generous salaries and perks. The brothers largely ignore her business suggestions, and belittle her requests for larger distributions.

As an outside advisor, you gather only bits and pieces of the JacMar family story, mostly from conversations with Jack. In your presence, Margaret insists that the family is harmonious, that the sons are quite competent and content at JacMar, and that they will manage quite successfully whenever Jack decides to step down. Privately, Jack and Margaret aren’t at all sure their sons could continue JacMar’s success, upon which their lifetime financial security ultimately depends.

The JacMar family hasn’t begun to ask the critical questions about the future of their family business. Outwardly, they behave as though the critical questions have already been answered to everyone’s satisfaction. This unresolved situation is emotionally painful and financially risky for everyone.

As their trusted advisor, you have done what you can to alleviate the tensions. But you have neither the skills, nor the training, much less the inclination to tackle the JacMar family’s highly charged emotional agenda. You don’t want to be around during family arguments—the family might turn on you and replace you. Besides, Jack and his company have been your firm’s clients for years. If you try to address family conflict, you might quickly generate a major conflict of interest. Who is your client? The ethical rules of your profession don’t give much guidance or comfort about representing families. Consider a family business consultant.

Exercising the Family’s Collective Best Judgment


The ultimate goal of family business consulting is to develop a process by which the family exercises its collective best judgment about the future of the business. This process can be the successful business family’s most valuable resource. Families who develop and refine their collective best judgment are the most formidable competitors in the market place. Those like the JacMar family, who aren’t asking the right questions, or who pretend their problems don’t exist, may be courting disaster. They are ignoring a list of basic needs that must be met before they can get beyond their problems:
  • the need to communicate candidly but respectfully
  • the need to organize for effective decision making
  • the need to deliberate in a fair forum where everyone is heard
  • the need to decide what’s best for the family and the business
  • the need to act—to carry out good decisions

Until these fundamental needs are met, the JacMar family will continue to struggle. This is how family business consultants might address these unmet needs.

Communications


Like the JacMars, most business families we see complain of “communications problems.” Failed communications create an atmosphere of suspicion, doubt, of being left out. Jack and Margaret have shared some misgivings about their sons’ abilities, but haven’t really discussed who should succeed Jack. Margaret assumes Jack’s successor will be a family member. Jay assumes he will be chosen because he is the eldest. Jack hasn’t told the family he is considering a highly talented non-relative to succeed him.

It’s elementary that parents don’t want to become dependent upon their children. Yet with most of their net worth tied up in JacMar Corporation, turning the company over to their sons would create precisely that dependency. Moreover, work is life to Jack. He notices when one of his contemporaries dies shortly after retirement. For Jack, retirement sometimes seems like suicide.

Jack and Margaret haven’t disclosed their estate plans to their children. Each spouse owns 41% of the JacMar stock. By virtue of annual exclusion gifts, each child has received 5%. The remaining 3% is owned by the general manager, received years ago as a bonus. All stock is voting. As present owner of 41% of the stock, and as eventual QTIP trustee of another 41% after Jack’s death, Margaret might choose herself to succeed Jack, or choose Karen, in part to right the wrong she perceives done to her by her own father who left her out of his business.

Because their parents haven’t talked to them about their estate plan, the sons can only speculate who would vote their father’s stock after his death. They have invested their lives to the business, but don’t know when, if ever, they might own it. Their mother might control JacMar Corporation for the remainder of their working lives. Karen isn’t pleased with the prospect of her brothers’ management. She doubts their competence. She certainly doesn’t want them managing her inheritance. Karen would like to see JacMar Corporation sold, or would like to be bought out at the price her shares would bring if the entire company were sold—without discount for minority or lack of marketability. Nor does Karen relish the prospect of owning 1/3 of the JacMar stock after both her parents die. So long as her brothers vote together, they would continue to ignore her as a minority shareholder. If they were to disagree, she would have to break the tie. Karen keeps her misgivings to herself.

Most family business consultants would begin by interviewing each family member separately, paying careful attention to their aspirations, expectations, disappointments, understandings and misunderstandings. They would delve into family history—discover that Jack’s father was an alcoholic, that Margaret is still hurt by her father’s will, that Frank’s DWI convictions occurred years ago. Both sons would have the opportunity to vent their frustrations about Jack. The consultants would question them closely about their commitment to the company. The family as a whole would be coaxed to discuss whether the business should be kept or sold, and the consequences of keeping or selling. Consultants would pay particular attention to the picture of the family given by the in-laws—perhaps even convene a meeting of in-laws to discuss their family perspectives.

After individual interviews, the consultants would meet with small groups. They would encourage Jack and Margaret to be candid about their views of succession; about sharing the details of their estate plan with the children. They would question the brothers about working together, about the prospect of their mother’s lifetime control of the company, about Karen’s role as an outsider and what would really be fair to her in the long run.

Most consultants defer a first meeting of the entire family until these preliminary interviews are completed and reviewed. (A premature family meeting can do more harm than good if in the process the discussion unnecessarily reopens old arguments and rebruises old hurts.) Most families will select a retreat setting for their meetings. Consultants help prepare the agenda, establish ground rules, guide the discussion, and keep the family on track. The meeting may be interspersed with further individual interviews and small group discussions.

Properly facilitated, family meetings can clarify and improve communications. A family meeting may be the proper forum for Jack and Margaret to share their concerns about succession and Jack’s retirement; to “walk through” the sale of JacMar Corporation, to hear Margaret’s views about her eventual voting control, to determine level of the sons’ commitment to the business, and Karen’s desires to terminate her ownership. Notwithstanding the emotional nature of families and the risk that family meetings can degenerate to tears and shouting, the JacMar family will discover, that they can talk with each other about sensitive matters once thought to be undiscussable.

Organization

Family councils. Even though they run business well, the JacMars as a family are poorly organized. They have had no regular family meetings—hence there is no forum or procedure for submitting important issues for family discussion. They haven’t even decided who is “family” i.e. whether in-laws, or older teenagers should be included in serious business discussions, or allowed to speak, or to vote.

After several successful meetings, the JacMar family may formalize their meetings into a family council. Ordinarily, family councils have little or no legal authority. But they provide an important forum where family members feel free to speak openly. If others are attentive and respectful of their views, the family council becomes a perceived arena for a fair hearing. Those who perceive a fair hearing for their opinions tend to “buy in” to the family’s decisions, even if their desires don’t prevail. This is “getting to win-win” in family business. There is no other alternative. “Win-lose” in families always becomes “lose-lose”.

Outside boards. Like most family-owned businesses, JacMar Corporation has an inactive (and therefore ineffective) board of directors composed of relatives, employees, and advisors who are beholden to Jack. Board meetings (if held at all) are unproductive, boring, and awkward.

Consultants can help the family activate its board by adding outside directors who are Jack’s business peers, but who exercise independent judgment and express candid opinions. To the family’s surprise, Jack may be most enthusiastic about his new board. Eventually, he will learn to trust them; rely on them; confide in them; empower them. Eventually, the board will decide who is to succeed him and when. Eventually, the board will weigh the pros and cons of whether JacMar Corporation should be kept or sold. The family will be surprised and pleased by the high qualifications, the sophistication, and the dedication of its outside directors.

Interaction. Properly structured, the family council can insulate the board from potentially troublesome family matters. For example, should succession come down to a choice between Jay or an unrelated family member, the board can decide whether both are qualified. If both candidates are qualified, the board can ask the family council whether Jay should be given the nod.

Reunions. Meetings of the family council can become the nucleus of family reunions, where the family meets for the dual purpose of doing business and enjoying each other. In larger and older family businesses, shareholder meetings and family council meetings are often held concurrently in a resort setting. These occasions send the message to the younger generation that family business can be fun!

Deliberation


The JacMar family isn’t accustomed to discussing sensitive business issues. They aren’t fluent in “business talk.” When emotions run high, they resort to “family talk”—e.g. speak of “laziness” rather than “productivity”.

Consultants will help the JacMar family learn how to talk with each other in business conversation, using business vocabulary and business concepts, creating habits of healthy business discussion. Cultivating “business talk” and laying aside “family talk” is a required skill for all business families who search for their collective best judgment.

Good patterns of deliberation help business families become “businesslike” in conducting their affairs. If Frank needs a company loan to help educate his children, or if Karen needs an extra distribution to cover an extended maternity leave, they can present their requests objectively to the family council. This acknowledges their maturity and takes Jack and Margaret out of the middle.

Deciding


Currently, decisionmaking in the JacMar family is unclear, haphazard, and unpredictable. Historically, Jack as head of the family and founder of the business…just decides. There has been no discussion, no debate, and no announcement. Jack talks over some important matters with Margaret before he decides, but their conversations are very private. The JacMar family needs a different decision making process, a process that acknowledges everyone’s stake in the company.

An important first step in that change may be Jack’s willingness to submit some important decisions to his newly activated outside board. This may signal his willingness—eventually—to share more power and control with his family. Sharing power won’t happen all at once. Autocrats don’t become democrats just because they appoint outside directors. But over time, as he learns to listen to his board, Jack should be better able to listen to the family council. Jack may never take directions from the family council or the board, but he will hesitate to go against their collective best judgment.

Instinctively, “hard side” outside advisors associate the transition of power and control with the transfer of stock ownership. In families, the dynamics of transition may be very different. Jack may transfer his stock, but retain power and control through the force of his personality and his position in the family. Or he may surrender de facto power and control but retain stock ownership until his death. The transition of de facto power and control in family business can be very subtle and complex. Transition takes place over time, in stages and phases, sometimes in fits and starts. Real transition of power and control begins with changes in the decision making process. Guiding families through real changes in decision making is a formidable challenge to consultants’ skills.

Action


Families need to do what they decide. The JacMars may leave a family retreat with firm resolve that later fizzles. Implementation can be shoved aside by more pressing matters, failure to clarify who does what and by when, bad timing, or ill-conceived publicity.

In converting family decisions into action, consultants work very much like personal trainers. They help design the regimen. They follow-up and remind. They coax and coddle. Getting a family to just do it is a true test of the consultant’s diplomacy and effectiveness.

Putting It Together


Unfortunately, meeting these basic family business needs—communication, organization, deliberation, decision, and action—doesn’t always follow in orderly sequence through the consulting process. We don’t solve communication issues, and then set them aside once and for all while the family organizes itself. Sometimes pressing business decisions must be made before everyone learns effective “business talk.” Some family members progress faster than others. Some have secret agendas that surface late in the process. Some have regrets and misgivings about decisions previously approved. Yet despite their histories, their faults, their misgivings, and their conflicts, most families like the JacMar family can discover how to exercise their collective best judgment. I firmly believe that most families, who have the resources to grow a successful business, also have the resources make “good enough” decisions about the future of that business, despite their current conflicts and differences.

The Profession


Family business consulting emerged as an identifiable profession in the 1980s, but is still defining itself. There is no formal agreement as to how consultants should do their work, or what their client families are entitled to expect. There is no licensing requirement, no accrediting organization, no disciplinary mechanism, no recognized academic preparation or degree. There is no equivalent to the Martindale-Hubbell Lawyer Directory for family business consultants that rate their competence, reputation, or creditworthiness.

Currently, all family business consultants originated in some other discipline. Their particular professional orientation and experience profoundly affects how they view the work, how they approach the family, and how they play to the family’s needs and expectations. Some come from organizational development backgrounds. According to their orientation, organization and structure is the cause and cure of most business problems. Their training and orientation sensitizes them to interpersonal issues. They pick up on family conflicts other advisors may ignore.

A growing number of consultants come from “soft” backgrounds such as clinical psychology or social work. They witness the emotional wreckage some business families generate. Their orientation in family systems thinking has made an invaluable contribution towards understanding human interaction in family business. However, most therapists and social workers are limited by training that ignores or devalues the importance of money, wealth and property. They may be inclined to shove money and property issues aside in favor of the more familiar emotional agenda.

Consultants from the “hard” analytical disciplines such as law, accounting, economics, may neglect the family’s needy emotional agenda. Hard-siders’ orientation emphasizes the rational, puts down the “touchy-feely.” Some consultants from “hard” disciplines claim they only accept “normal” families as clients and hence don’t need emotional expertise.

The best family business consultants understand and integrate both the “hard” and the “soft” issues. Those who are doing excellent work with troubled business families provide the best available benchmarks for defining what family business consultants should undertake, and what your and your client are entitled to expect from them. Keeping a family on track amid strong cross-currents can tax even the most accomplished family business consultants—those whose work defines the best available.

Your Vested Interest


You have a bottomline vested interest in the consultants’ successes with your client business families. Most clients who retain family business consultants are in crisis. If the consulting process alleviates family strife, you will get part of the credit. On the other hand, if the family remains “stuck” and their pain persists, you risk losing the client and the successors as clients. Business families who are unable to deal with their traumatic crises are prone to hire a new set of outside advisors. They associate the old advisors with their painful predicaments, and (unjustly) blame them for their inability to stop the conflict. You want to be identified as part of the solution, not as part of the problem.

Some Suggestions

Get to know your consultants. Understand their philosophy and approach. Affirm their value. Maintain a dialog. Look for ways to help them in the process. Ask to be kept informed. Offer your assistance.

Watch confidentiality. There is risk in discussing sensitive family issues with family business consultants. Consultants don’t enjoy the privilege of confidentiality. You must weigh the risk of being helpful against the possibility of disclosure if the family becomes litigious. Our experience is that most lawyers take that risk.

Who is the client? Outside advisors are acutely concerned about conflicts of interest in family situations. Family business consultants don’t view their clients as potential adversaries their client is the entire family and the business. Don’t push them to be partisan. Most view the company and the entire family as their client.

The Consulting Agreement. Family business consulting agreements are shorter and less complicated than your engagement letters. Most consultants charge by the day. As with most “hard” side work, it’s virtually impossible to estimate total consulting charges at the outset—before one has a good grasp on the family, the business, and the problems. Just assessing the problem may require several consulting days. Helping the family get “unstuck” and working through its emotional and business agenda will take time. Encourage your clients to be patient with the consulting process.

Assessing Expertise. As indicated, there is no counterpart to the Martindale-Hubble directory for family business consultants. The only “directory” so-called, is published by our emerging trade association, the Family Firm Institute. The FFI “directory” isn’t useful in assessing professional competence. More than likely, your client family must rely on references. Obtaining references can be a problem, since consultants don’t readily disclose the identity of client families. However, if the hiring decision has been made, subject only to checking references, most consultants will supply two or three families as references. It may be helpful for you to talk with the outside advisors for families the consultants have served. They can discuss the consultants’ expertise without disclosing the identity of the client.

Experience. I would look for family business consultants who have been full-time in the field for several years. It’s likely they have also been quite successful in other professions before specializing in family business.

Conflicts of interest. Rule out any direct or indirect financial arrangement prospective consultants may have with other purveyors of goods or services. Some sellers of financial goods and services describe themselves as family business consultants, but can’t offer the consultant services described in this article.

The team approach. Increasingly, family business consultants are working in teams. A team may include a business leader or entrepreneur, a psychologist or social worker, or an expert in organizational development. Some teams offer expertise in financial and estate planning and taxation. A team is almost mandatory with larger, older, more complex businesses. A large third or fourth generation family can overwhelm a consultant working alone. Our experience is that two skilled team members can accomplish much more in one day than one consultant, working alone, can accomplish in two days. The costs are comparable.

The Delicate Balance


Family businesses have all the internal and external problems of other businesses. In addition, they must contend with complex and often baffling family relationships. The business media give us mostly the bad news about family businesses. Bad news sells. Bombarded by bad news, your client business families may fear they are foredoomed to bitter conflict and the eventual destruction of their business.

The public doesn’t hear much good news about the quiet, strong business families who have their act together who are the most formidable competitors in the market place. Strong business families have learned to leverage the precious attributes of trust, love, and loyalty that only families can provide.

Most business families are somewhere in between the good news and the bad news. They leverage some strengths but haven’t dealt with the serious hazards. Family business consultants help business families discover the good news about themselves.

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