Richard Narva, moderator
The legal profession is learning to appreciate the special skills and sensitivities required to serve family business clients. As more attorneys enter the market, they are realizing, like Alice in Through the Looking Glass, that things do not always obey the laws of logic in family firms: Long-festering emotions can obscure the issues and impede legal work. Generational disputes can raise questions about who the attorney represents. Lawyers can write fine, state-of-the-art wills and estate plans, but the documents will gather dust in the owner’s desk drawer if the family is bitterly divided over the terms.
When hiring outside counsel, owners are advised to look for training and experience in succession planning and other needs of family firms. To help guide owners in making the choice, Family Business asked Richard Narva, a lawyer and consultant in Dedham, Massachusetts, to lead a panel discussion on what makes an effective counsel for your kind of company. Narva recruited a top-flight panel of lawyers working in the field, along with a well qualified “devil’s advocate,” Bonnie Brown of Baylor University. Brown is director of the Institute for Family Business at Baylor, which often makes referrals for family firms seeking legal advice, and she is thus familiar with some of the issues that arise in the lawyer-family business client relationship. A list of the five participants appears below.
—The Editors
Richard Narva: What makes a good family business attorney?
Joe Goodman: It’s difficult to generalize, but you must definitely have broad skills and experience. You have to be process-oriented and recognize that solutions must be win-win and not have winners and losers. Lastly, you have to be truly empathetic and care about the family as well as the family business.
Bonnie Brown: You have to be more relationship-oriented than lawyers learn to be in law school. In many cases the most effective family business attorney is an older, mature individual.
Narva: Are you suggesting that a certain wisdom, which comes only from practicing over a period of years, is required for serving family businesses?
Brown: I don’t know if it’s a requirement, but it’s certainly an asset. I don’t think most family business owners relate to a young attorney fresh out of law school, or can talk easily with him or her about issues involving their families and livelihoods.
That is not to say that you can’t start to train younger lawyers fairly early to understand and relate to family businesses. In fact, younger members of the firm ought to be encouraged to start building relationships with younger members of the client family.
Narva: If I am an owner and looking to hire effective counsel, what types of questions should I ask in order to determine whether an attorney is suited to working with my family business?
Brown: I encourage potential clients to ask questions like: What percentage of your practice is with family or privately held businesses? How many of your lawyers have some training in and understanding of family systems? What makes your firm specifically suited to working with a family business?
Goodman: The family has to ask penetrating questions about the lawyer’s specific experiences with succession and other family systems issues.
John Powell: Most business owners are going to ask questions of a general nature, to build a profile of the lawyer and determine whether they can trust the person. They are more interested in building trust than in asking a lot of technical questions. It’s sort of like the Japanese way: They won’t do business with you unless they like you as an individual.
Brown: The client may not be able to articulate what his or her real concerns are. That’s evident in estate planning, for example, when it may take time for family issues and hidden agendas to surface.
Not all family businesses have the same issues, either. You have to look at whether the firm is first generation, second, or third, whether the client is actively involved in management as well as having ownership. The principal owner is likely to have a different perspective, depending on how close the person is to the entrepreneurial founding of the company and how active he or she is in management. For example, a first-generation family business is going to have a less clear understanding of how the management and ownership structures should be integrated than one that has been through professionalization.
Narva: Joe, what are the usual “presenting problems” when a family business owner comes to you for help?
Goodman: Many engagements are initiated after another attorney has prepared a basic will, buy-sell agreement, or estate planning documents, such as trusts for the children. Unfortunately, just before or after the documents are signed, the owner realizes the plan does not resolve real but hidden family issues. Typically, the specific problem that stymies the family and their advisors is a buy-sell agreement proposed in conjunction with gifts, sales, and future inheritance. The advisors are not accustomed to dealing with the deeper, critical issues involved in the negotiation.
Interestingly, questions concerning financial security, fairness, and planning with regard to a second spouse often trigger the realization that special help is needed.
Powell: You often have to be able to read between the lines to find out what this person’s real issues are.
Narva: I went to law school a long time ago, but I don’t remember a course on “reading between the lines.” How do you learn to do that?
Robert Richards: You learn it in practice, through trial and error. You come to realize in working with some clients that they are having trouble with your advice because they aren’t ready for it. Because the family issues are paramount rather than the legal issues. All of us have experienced this, as when, for example, we send the client an estate plan that was agreed upon in discussions with the family and it just sits there in the owner’s drawer for months and months, because the family issues haven’t been resolved.
Narva: I know all of you are extraordinarily good listeners. Is that an important credential?
Goodman: I have to fight the fact that I love to talk.
Narva: I have been accused of the same thing. Bob, I remember a story you told about sitting between Red Auerbach and Tom Heinsohn at a Boston Celtics basketball game.
Richards: Yes, they were talking back and forth, and I just listened, because I had trouble talking with Red about basketball. After the game, the president of the team admitted he had the same problem. “I talk to Red about anything but basketball,” this man told me. “He doesn’t really care what you or I think about basketball, because he is the pro.”
Likewise, when dealing with clients in a family business, lawyers should not go outside the scope of their legal practice and pretend to be a business consultant or a therapist. You earn trust by letting the client know what you bring to the table with respect to the legal issues. And if the client has problems with the family system, you can offer help in finding appropriate professionals to deal with those issues.
Narva: John, you have run two companies, one public and one private. How should a family business owner go about hiring an attorney?
Powell: Outside references are very important. You have to find other family business owners who have worked with the attorney and like him or her. Usually family business owners are not just looking for someone to do an estate plan or write a will. They tend to stay with the attorney for a long period of time. So the relationship is important.
My father found the attorney he used for his family business by going to the dean of the Duke Law School and asking for a recommendation. I have always found it helpful in looking for an attorney for a specific project to consult Martindale & Hubbell, a directory which has a lot of information on lawyers’ training and expertise.
Narva: When a lawyer is engaged by a family business, who is considered the client?
Powell: The client is the one who cuts your paycheck.
Narva: Well, that’s getting to the heart of the matter, John.
Goodman: In some cases you may represent one family member or some group of family members with a very strong common interest. And other family members may be represented by their attorneys. That is the more traditional representation.
Most family business attorneys, however, would prefer to represent the family business and not any one individual or group. That, of course, requires us to get informed consents and permissions from each family member, since the traditional attorney-client privilege is, if not waived, at least compromised. Instead of representing individual interests, we are then looking toward the betterment of the entire family and the business.
Richards: There are, in effect, two roles that an attorney can play in a family business. One is an advocacy role, in which you are clearly representing a business and perhaps the owner. In those cases you have to make it clearly understood that you are not representing the other family members and perhaps even suggest that they should be represented by other attorneys.
The second role would be that of a counselor to the entire family. In this case, you might be there simply to guide the family in a process—for example, if they are planning to engage a management consultant or a therapist to help them reduce some tension or conflict in the family. You are engaged to provide counsel to facilitate a process, not to achieve results.
Powell: Basically, the family attorney will represent the owner or CEO, which might put him at odds with the next generation. The attorney should seek to represent the whole family and has to avoid at all costs getting caught in a conflict between generations. Our business had an attorney who actually disqualified himself because of a potential conflict between me and my father. It was necessary under the circumstances—he would not represent my father alone.
An attorney hired by a family business should bring a second, younger attorney into his work with the firm in order to establish trust with the next generation. That will also ensure continuity in the legal representation of the company after succession ultimately takes place.
Goodman: I lost one client because he asked me to assist the family in negotiating a sale price in a redemption situation, and I had to decline because I had been working with the whole family. I did not want to represent any one member of the family in the transaction. They were insensitive and did not understand that the ethical issue precluded my involvement.
Narva: Let me ask Bonnie, who is not a lawyer: Do you think it’s possible for a lawyer to combine the advocate and counselor roles, to be an advocate for a member of the family one day and a counselor to the whole group the next?
Brown: It is hard to wear both those hats. The problem is that sometimes the family business attorney enters a relationship with a client in the counselor’s role, and the owner at some later time then asks the attorney to assume an advocacy role. If the attorney refuses, the owner feels betrayed. This goes back to the trust issue. To be effective, the attorney has to be trusted by the entire family. He or she should bring up these issues from the very beginning of the engagement, so they are fully explored beforehand.
Narva: Is a family business better off with a large law firm, a small firm, or a sole practitioner?
Powell: I personally think the firm should be relatively large, so that the attorney who is in contact with the family business will feel free to refer the client to areas of specialty within the firm.
Narva: It sounds to me, John, as if you are suggesting a large law firm that has a family business boutique within it.
Powell: That would be the ideal. Unfortunately, a lot of law firms don’t have family business practice groups. So when an owner makes contact with an attorney in the firm, there’s no telling what kind of background he or she will have. The attorney could be an estate lawyer or a specialist in contracts. Usually the person will be a business attorney, because that’s what the owner wants to talk about.
Goodman: The relationship of the family business lawyer and the owner is so intimate that it doesn’t make any difference whether the person comes from a large firm or a small firm. Either way, so long as the attorney is professional and diligent. If I were back in a small firm, I could develop relationships with large firms and hand off work that I was unable to do.
Richards: Within our family business practice group, the core practitioner—the older, experienced attorney that was mentioned earlier—usually comes from the business end. To some extent, he or she also may have been involved in contract work, tax work, or estate planning for the business owner.
Narva: Bonnie, do you think family business clients demand a higher level of service from their attorney?
Brown: It’s probably not higher in the sense that all clients expect quality legal advice. But the service demands of family businesses are more complex and obscure. Attorneys that work with family firms are engaged in team building, whether they come from a large law firm or a small one. The client is likely to want them to put together a team of professionals who are comfortable working together—a C.P.A., a lawyer, an insurance company representative, and, in some cases, a person with a therapy background who also understands business.
Powell: I will tell you that the business owner and the family want this attorney to make “house calls.” They want the attorney to give them his or her home phone number and be on call 24 hours a day, seven days a week.
Goodman: I can’t imagine an attorney with a family business practice who doesn’t answer his own telephone. If an owner has to go through layers of secretaries or play telephone tag every time he wants to reach the lawyer, that will jeopardize the relationship.
Brown: Service and availability are really important to family business owners because that is part of their culture. Many of them see it as a chief asset of their business—the immediacy with which they are able to make decisions and respond to their customers. They expect the same from their lawyer.
Narva: How do lawyers tend to charge family business clients? Is there any difference in the way fees are structured?
Powell: Twenty years ago attorneys were given a retainer for representing the family and the business, and they and the owners worked out charges for specific work that both agreed were reasonable. I liked the old system. Charges were billed on the basis of “fairness” for services rendered. Now, because of complaints about the quality of billing, clients tend to be billed by the hour. The result is that the business owner tries to keep discussions with their attorney focused on the legal issues. This tends to prevent the attorney from obtaining necessary background information on family issues.
Goodman: In my perfect world, we would be on retainer, so I wouldn’t have to charge clients for routine phone calls. I accept the hourly billing system, but I’m apologetic about it. I realize that my clients sometimes won’t call because they don’t want to get a bill for a 5-minute phone call. I wish we had retainers to cover ongoing, routine matters, and then could charge appropriately for project-type work. We are trying to do that, and I think other lawyers are, too.
Richards: We departed long ago from the retainer arrangement covering specific services over a given period of time. We found we were just unable to predict what the demand would be for those services. We haven’t had resistance from clients on billing by the hour. This, of course, assumes that the business is successful enough to afford a certain level of professional expense. Then, too, if the attorney is not rendering legal services but is merely an observer to the consulting process—taking care of any legal issues that may arise—a different arrangement may well be appropriate.
Narva: Does anyone charge flat fees?
Goodman: In the initial stage of a family business engagement, which may involve, say, estate planning, the client may not be aware of the full range of options and the varying complications that can be encountered. They may not have dreamed about family limited partnerships, or private foundations, or grantor retained annuity trusts. If I quote a flat fee of, say, $20,000, that will usually sound extremely high to them. They might then go elsewhere, and, for a much more modest fee, get substantially less work that fails to address the real issues.
Narva: Is it possible to identify a successful outcome in a family business engagement? People in TQM say that if you can’t measure quality, you don’t have it—and, in fact, some law firms are jumping on the TQM bandwagon. How do you measure effective legal work?
Brown: Ask the client afterward whether or not he is happy with what you did, what he liked and what he didn’t. You can also measure satisfaction in a more indirect way—whether or not the client retains your firm. If you keep your client after taking them through a succession process, and you are able to maintain that relationship with the next generation, that is, in some ways, the best measure of your success.
Richards: It’s not usually necessary, in my experience, to ask clients whether they are satisfied. Those who are will usually tell you so, and those who aren’t will also tell you so! To me, the best indicator of success is when the emotional conflicts in the family, the anticipation and fear that were present at the beginning of the engagement, have subsided and the members seem to be enjoying a new feeling of congeniality and camaraderie. When that happens, all the professionals who participated in that engagement can feel they have done their jobs well.
The Panel: four lawyers and a devil’s advocate
Richard Narva, moderator, is an attorney and co-founder of Genus Resources Inc., a consulting firm in Dedham, Massachusetts. Narva organized a legal education seminar at Northeastern University called “The Artful Practitioner” for lawyers wishing to learn more about counseling family firms.
Bonnie Brown is director of the Institute for Family Business at Baylor University, which often makes referrals for family business members seeking professional assistance. Brown is based in Irving, Texas.
Joe M. Goodman is an attorney specializing in family businesses with the firm of Boult, Cummings, Conners & Berry in Nashville, Tennessee. He recently helped organize a nationwide professional group called Attorneys for Family Held Enterprise.
John S. Powell, an attorney, was at one time president of his family’s business, Carolina Biological Supply. He is now a consultant with Nova Resources in Burlington, North Carolina.
Robert J. Richards Jr. is a senior partner with Hale and Dorr, a multi-service law firm based in Boston. He is co-chairman of the firm’s Family Business Practice Group.
Sample Questions to Ask when hiring a LawyerThe following are the types of questions a business owner should ask when hiring outside counsel to handle legal work for succession:
Is the attorney a generalist or a specialist?
The family business owner should be looking for an attorney with broad experience, who has served family businesses and takes pride in “relationship lawyering.” Specialists in one field of law, such as corporate, taxation, estate and probate, may not be qualified.
How will the attorney deal with conflicts between family members that may arise in the course of serving the family business?
The attorney should demonstrate that he or she has thought about situations in which conflicts arise in family businesses—as they often do. The candidate should acknowledge that, from a practical as well as ethical standpoint, he or she cannot represent both parties to a conflict. He or she should also indicate a willingness to recommend qualified professionals, if necessary, to help resolve family conflicts.
Does the attorney have the experience and personality to act as a facilitator in a family system consulting process?
Look for signs that the attorney has the patience—and stomach—to help resolve disputes in the family rather than looking for quick, standardized solutions. In other words, does the candidate seem to have the personality and experience to serve in a “process role” instead of the “advocacy role” to which most of their profession are accustomed?
How does the attorney propose that the business owner deal with the question of control of the company in the event of the owner’s death or disability?
The attorney’s answer should demonstrate sensitivity to the family issues that are involved in dividing and transferring ownership. Should the surviving spouse be given control until a successor in the next generation is ready to take charge? How will the division of stock between children who are active in the business and those who are not active affect their relationships?
Should the buy-sell agreement among family shareholders call for a high price reflecting the fair market value of the company if it is ever sold? Or should the price be low to facilitate gift and estate tax planning?
The answer should include an analysis of the benefits and drawbacks of each strategy. It should also show a concern for the financial situations of the different family members and their different perspectives.
What will be the legal costs of developing and implementing a shareholders’ buy-sell agreement for my family business?
If an attorney weighs in with a low-ball estimate—say, $1,000 to $2,000—you should probably look for someone else. Any lawyer who has experience in drawing up these kinds of agreements for a family business will know that, in almost all cases, a great deal of time and expense will be required to do the job right. Costs of $4,000 to $8,000 are not uncommon.