In the past two decades a new type of professional has been knocking at the door of the family business market, offering to lead struggling family firms toward the Promised Land of business continuity and family harmony. The rise of the family business consultant has been baffling to many business owners who might want professional help but are puzzled about just what a family business consultant does and how to find one who is qualified and right for their family.
Because the approach of the new family business consultants tends to be cross-disciplinary, the field has attracted a wide variety of specialists from different backgrounds. Questions about conflicts of interest have arisen as various service providers have offered to address the broad problems of family firms. The Family Firm Institute, a professional association based in Boston with some 900 members, has developed a code of ethics for practitioners in the field (see below). But as yet no credentialing system exists that can help business owners sort out the experienced professional from the neophyte.
What exactly does a family business consultant do? Why do some family companies need yet another consultant in addition to their traditional advisors—or do they? What sorts of questions can you ask in an interview to find out whether a candidate for a consulting job is, in fact, qualified and able to help you? What sorts of fees can you expect to pay?
To answer some of these questions, Family Business recently convened a panel of five people who are prominent in the field and come at it from different angles. Four of the group met in New York for the discussion, which took place at the offices of United States Trust, with the fifth, Ernesto Poza, occupying a central place at the table on a speakerphone. – The Editors
Family Business: Let’s start by defining a family business consultant. What kind of service does a family business consultant provide and how does it differ from what a management consultant from, say, Bain & Company offers?
Tom Davidow: To some degree, family business consultants can be defined by the tasks they perform. For example, family business consultants work with clients to address ownership and management issues as well as family issues. They may deal with questions of succession, authority and business responsibility, job descriptions and compensation.
Obviously, people in other disciplines perform some of the same tasks. The difference is that a family business consultant has to be able to look at the whole without having a conflict of interest. You don’t provide legal services, for example, and family business consultants should not be selling a product.
Charles Fradin: What we used Tom and Richard for was to take a cold and hard look at everything we were doing—how we were running the business, succession planning, estate planning, the emotional issues. We wanted a quarterback who could look at the whole business and lay out a game plan. And then, when we got into an issue that needed work—for example, our banking relationships—they gave me a list of investment bankers. And that is how we found Dirk.
FB: Dirk, would you define yourself as a family business consultant? Or a financial advisor?
Dirk Dreux:: I don’t necessarily separate the two. When I am called on, the family is usually working through some type of trust or estate-related set of questions, which are inevitably tied to inter-generational kinds of issues. Somebody is going to leave the stage at some point, so that leads to questions about retirement planning. And, ultimately, the question arises: Okay, where is the liquidity going to come from to accomplish all this? While I am not a family business consultant in the purest sense of the word, as a financial advisor I have to deal with some of the same issues.
Like so many others, I came to this field from somewhere else in terms of my training. I always tend to look at things from the point of view of the business owners and what their issues are and what they are trying to work out in the ownership system. Because there is a lot about family business consulting that is outside my purview, I define my role by what I can do well and leave the rest to someone else.
Nancy Upton: There are probably only eight family business consultants in the United States.
FB: Only eight?
Upton: Well, it may make a few people very unhappy to hear that. If you define a family business consultant as someone who takes a holistic approach, there are probably only about eight, including one in this room—and, oh yes, one on the speakerphone. We’re talking about people who understand the family system and the business system, who can analyze and treat both. It can be an individual or a team of three or four people who take the same holistic approach.
I am not a family business consultant. I can facilitate retreats and make referrals. But I am not a consultant. I wouldn’t say a lawyer, a banker, or an accountant is a family business consultant either.
Ernesto Poza: The role of the family business consultant is closest to that of a rabbi, a minister or a priest, in that we really pay attention to the whole person—in this case to the owners and the business. So a Bain & Company consultant will pay attention to the business but not to the other elements that are really important to a family business, such as family harmony and business continuity.
The other analogy I like is to the old-style family doctor. The general practitioner may refer the patient to specialists, but he or she is the one who has overall knowledge of the patient’s history and coordinates the treatments.
FB: Do you think the field has an image problem? I mean, there are all these people with different backgrounds and skills claiming to be family business consultants. You can’t blame a business owner for being a little confused.
Upton: I remember a Forbes magazine cover several years ago that showed a monkey with a briefcase. The headline was something like: “Financial Planner—Anyone Can Be One.” I wonder whether the same thing isn’t happening to the family business field.
FB: I read a Wall Street Journal article about all the professional service firms that are trying to break into this market. One business owner complained that a guy came to him claiming to be a family business consultant and just wanted to sell him an insurance policy.
Dreux: It’s very important for a client to find out how somebody gets paid. I mean, these are commercial activities and I have no problem with self-interest as long as it is spelled out up front. The person should be very straightforward about any conflicts of interest.
Fradin: Right now family business owners are having an extraordinarily difficult time trying to find out who in the field can do what, who is competent and who is not, who to trust and who not to trust. So they have to fall back on traditional methods of finding qualified consultants and advisors—word of mouth and references from a few people who have worked with them. There are also questions that you can ask a potential consultant that can help you determine whether, in terms of competence, that person is at least in the ballpark.
Many families looking to hire a family business consultant don’t act like responsible consumers and do the necessary homework up front. Which is tragic. It’s like the the guy who needs surgery for a back problem and after he’s wheeled into the operating room, he looks up and asks the surgeon: “By the way, where did you go to medical school? And who did you do your internship with?”
Poza: The best safeguard, ultimately, is an informed client. And the best way for clients to inform themselves about a consultant—even after checking references—is to develop the relationship gradually. I advise my clients to test my abilities in our first sessions and to figure out for themselves where I can assist them and where I cannot.
One thing I do that’s probably a little controversial is to insist on getting paid for my first session with a client. The idea is that the best way for a client to find out whether the “fit” is right is to work right from the start on a specific problem that is concerning the client at that time. Instead of just having a polite converstion, the clients, in effect, get a chance to “kick the tires.” If they feel they’ve gotten their money’s worth from that first meeting, there is the possibility of an effective consultant-client relationship and we take it from there.
FB: Dirk, you seemed to suggest that you let the business owners who come to you define the service they want or the problem they want solved. What do you do when you confront a problem with family relationships that is blocking decisions on ownership and control?
Dreux: We will generally not get involved until the relationship problem is fixed. Like many others in this field, we’ve learned that until the family blockage is taken care of, we are wasting our time. I look upon the business as fundamentally the handmaiden of the family. Generally, the people who come to me have a healthy interaction between the family and the business they own. They understand that what I will do with them is a planning exercise. I will refer families that seem to be having severe relationship problems to people like Tom who have a psychology background.
FB: What is the most common reason that family business owners seek the services of a family business consultant?
Upton: My experience at the university has been that when they contact us they are having a problem in their relationships. Rarely do they call to ask for help in solving a problem with cash flow or financing and the like. It is siblings calling because they are having problems with other siblings, or children calling about problems with parents, or parents calling about problems with children. They’ll say, “We all need to get together to talk about the problem. What should we do?” If appropriate, I will refer them to one of the family business consultants on our select list.
FB: How does a consultant get on your list? What type of person do you tend to select, with what background?
Upton: I have personal knowledge of all of them. I have met them and know their work styles. I think consultants ought to be “process consultants.” Not someone who looks at your watch and tells you what time it is, but someone who can teach you to read time on your own. What a consultant should be able to do is teach you a process whereby you, as a family, can make decisions more harmoniously—through family meetings, family councils, retreats, and the like.
FB: Do you need to be a psychologist in order to be family business consultant?
Upton: If you are not a psychologist, or don’t have a psychologist on your team, you are playing with fire.
Davidow: Along with Nancy, I find that the reasons most people call us have more to do with family issues than business issues. So when we go into a company, I make an initial assessment of what is going on in the family—the family dynamics. And Richard does a thorough due diligence on the business issues. Then we’ll analyze how these two systems interact to produce the stress that the family is going through as a result of the tremendous amount of ambivalence in both systems.
Although I can do therapy, I don’t. To me, the client is the business. If I perceive that any of the family members suffer from psychological problems, I may refer them to an appropriate professional—just as Richard, if the family has some estate planning need, will refer them to an expert in that area.
FB: Where do family business consultants draw the line between what they do and therapy? To what extent is the work therapeutic?
Dreux:: It is therapeutic to the degree that the consultant attempts to create a healthy, safe environment in which people can talk about issues that are difficult. Often the issues are very similar to those that are discussed in a therapeutic situation. But the amount of time you spend on those issues is quantifiably smaller. If the personal issues are interfering with the business, it is fine to discuss them. But if you are spending an inordinate amount of time on them—if you are stuck on them—it is time to make an additional referral so people can go someplace where they can get help with their personal issues.
Poza: One of the major differences is that in the therapeutic relationship, there is clearly a power differential between the therapist and the client. And that, in some ways, is what makes it effective. I don’t find that kind of relationship particularly effective in family business consulting. I really want my role to be one of a high credibility advisor or high credibility friend, not a guru or master.
FB: Can the lawyer or the accountant or some other traditional advisor do what the family business consultant does?
Davidow: No.
FB: Why not?
Dreux:: They have usually been around so long that they’re part of the system at this point. It is very hard for them to break free and then come back in…. The new intervenor in the system can ask naive questions that the other people do not think to ask, or they’ve been over this ground before and it’s a closed issue for them.
Upton: Their relationship is usually with the individual instead of with the business. Like the attorneys usually work with the patriarch, and although they pursue the needs of the rest of the family, their deal is with the patriarch.
Davidow: What frequently happens is that we come into a company and make our recommendations, and we will find that those recommendations have already been made by their lawyer or their accountant or another business advisor. The family has been unable to implement the recommendations because they are stuck on the family issues. Once we articulate those issues, and the family starts to move on them, the activity of these other advisors picks up and the plans get implemented. We operate as a team.
Now obviously there are many advisors who are extremely competent and do wonderful things for families and for businesses. We have worked with them, and some are absolutely fabulous. And we’re not saying that we have to be present in every family business. Au contraire. If they operate without us, great. But if they bring us in, it usually means that there is something going on that makes them unable to accomplish what they need to accomplish.
Poza: I think some attorneys and accountants can do what we do. But I agree with Nancy that the tricky issue, particularly for the legal profession, is: Who is the client? And can you, in fact, represent more than one individual party? You can be an advocate for one individual or one group in a family business only so long as you don’t antagonize others in the system. Because if a family business consultant does that, it’s all over.
FB: I imagine that one of the main concerns of a family business consultant is succession planning. Do you get involved with evaluating successors, Tom?
Davidow: Not in evaluating successors per se. But we are part of the process. Actually, with a fair number of clients, not only is the family leadership going through a generational transition but the non-family senior managers have been around as long as the founder and an entire generation of management is changing hands.
So increasingly we find ourselves looking at the business from the standpoint of O.D. [organizational development]: How effective is management? What’s going on in the system? Has the entrepreneur reached a plateau? In a lot of family companies the leading personality has died and the business is just beginning to be more professionally managed. So much of what we do is, like Bain, pure management consulting. What separates us is that we are always paying attention to and addressing the family issues.
FB: Ernesto, what are some of the questions that a business owner should ask before hiring a family business consultant?
Poza: First, I would ask whether the consultant gets any other income from the consulting engagement. I am very clear with my clients that I do not accept referral fees if I refer them to, say, an attorney or financial consultant.
Second, clients should be very clear at the end of the first meeting how they will be billed by the consultant. I always explain how I make my money. For example, I tell them that I do not bill on an hourly basis or for my time with them on the phone, that I am always available to talk between visits—that is part of the agreement.
Third, the client ought to ask about the outcomes. The consultant ought to help the client get clear on what results they can expect to see from the process, what would make them happy.
Davidow: They should also find out how many years the consultant has been doing this work, what type of training they have had for it. I would also ask about what their theoretical framework is in approaching the family or the family business….
FB: Oh, there are different theories?
Davidow: There are different theories of change, because what people usually want from the process is some behavioral change in the family or institutional change in the business. For example, Ernesto approaches the process from the standpoint of management and O.D. Other people in the field come from a background in family systems theory. This theory says that if you want to change the behavior of the person who always gets into trouble—that is “acting out”—every other family member is going to have to change also. So if you are going to change the behavior of the person, everybody in the family has to commit to the process.
FB: Any other thoughts on what clients should ask in the first interview?
Poza: In the first session they should also pay attention to whether the consultant is just telling them how good he or she is, or is demonstrating it. One of the toughest things for a consultant to do is parachute into a family business and quickly assimilate the language and characteristics of that business. After one sitting of a day or a half-day, the client should be able to say: “I’ve been understood. This person understands our language and is not going to need a lot of training about us and our industry to be of use to us.”
The client should also keep track of the kinds of questions that the consultant asks—or doesn’t ask. By taking note of the pattern of the questions, the client can get a better idea of whether or not the person is going to deal with the problems in a holistic way or is really a compensation expert or an estate planner or whatever.
Fradin: I would ask about failures. A lot of people don’t want to ‘fess up about these. And if a consultant claims that “none of my engagements have ever blown up on me,” I’d excuse the individual right then and there. Because that’s simply not the way life is.
FB: We have two practitioners here. What is your failure rate, generally, in terms of not achieving the outcomes that you lay out with the client?
Davidow: I’d say it’s about 10 percent, maybe a little more. I think our success rate is extraordinarily high. And the more families we see, the more lessons we learn and we are able to maintain that rate.
Poza: Yes, I would agree that the failure rate is quite minimal. I don’t know if it’s 5 percent or 10 percent. But I have a higher failure rate in the first six months. Some families that come to me are going through turbulence and chaos, and the consultant sort of embodies for them the hope that they can come through all this with some new strength. So in those circumstances, I’m inclined to give the engagement a shot. We usually find out in the first six months whether that hope was unfounded. If we get over the hump of the first six months, the success rate is much higher.
Upton: The client has to have realistic expectations. Too many times families have unrealistic expectations that all the conflict will go away, that you can, say, fix the relationship between little Johnny and me, and that our family will be just like Donna Reed’s on the old television series. The family has to understand that between the extremes of everyone hating each other and everyone loving each other, there is a place in the middle of the continuum that actually defines success.
FB: Is it important when hiring a consultant for the person to have some background in the client’s industry?
Dreux: Not necessarily. It can be especially useful for the clients to have to articulate for the consultant what their business is all about. Sometimes this is the first time anyone has forced them to do this. The answers to some very fundamental questions that you get from different people inside the business can be very revealing.
Poza: It does help for the person to be able to assimilate the language and terminology of the industry quickly and to understand how some companies measure the bottom line. For me, there are significant differences between working with a company in the supermarket industry, for example, and working for an auto parts manufacturer that sells 80 percent of its products to the three major automotive companies. The client ought to be concerned about whether the consultant has the breadth and ability to understand what makes his or her industry tick.
Upton: I am curious about what you all think about ethnicity, culture, and gender. I happen to work for a university that puts God first, family second, business third. People come to us who have the same perspective. They would sell the business if it infringed on the first two. How important are values when choosing a consultant? If I am a black female business owner, should I look for a black female consultant?
Davidow: There has to be a level of compatibility on those issues. The family members, through asking a series of questions, should get a sense of whether they are comfortable or not comfortable with the consultant’s values. They should trust their intuition in this. When we are successful in an engagement, one of the reasons is that the family’s level of comfort with us is high and they trust our judgment.
FB: Can you tell me about fees? Ernesto, I gather you charge by the day. Nancy, what would you say is the range of per diem fees of family business consultants?
Upton: $1,500 to $3,000 a day.
FB: Can a business with $5 million in sales afford that generally? Or is there some alternative remedy which that size company can seek?
Davidow: In my experience, there is no clear correlation between business size and family wealth. There are generally higher levels of ROI and ROA and operating margins in businesses that occupy special niches. So a business that does, say, $5 million a year in sales may make 40 percent in gross profit. Which means that family may have $2 million in gross profit that they can invest in normal business expenses such as consulting services, if that is what they need.
By the way, I don’t charge by the day. I don’t usually find out all I need to know in the first meeting, or sometimes even in the first 90 or 180 days. Depending on how I assess the situation, I try to set up an engagement over a period of two, four, six quarters. I write a letter that scopes out for the client what we are going to do, what we are going to accomplish, and what it is going to cost. I quote a fixed price that is spread ratably over the period in question. Because, you know, my first question is: Is this person sincere? Does he understand what this process is going to take? If he can’t commit to the engagement as defined by the letter, he and his family may not be able to do the work involved.
Ernesto spoke of hope. Hope is fine and good, but there is no hope without discipline. What we are doing here fundamentally has no magic to it. It’s just work.
Poza: I agree. How I bill really depends upon the nature of the engagement. I recently contracted with a Cleveland area company that wants me to help them engage in a strategic planning process. In this particular case, I developed a proposal broken down in phases over a period of 15 months, with dollars attached to each phase.
This is different from a situation in which a family that has heard me talk at a conference comes to me saying, “Mike here is supposed to be the next successor, but he’s got a brother and sister in the company who are also well qualified. We were reminded by your presentation that we should also look at our strategic plan for the future before making a final decision.”
In this case, the presenting problem suggests we are going to be addressing both family and business issues. The problem is so broad and complex that I know it is going to be an ongoing process, like the peeling of an onion. Because it is difficult to know how long it will take, I charge by the day in such cases.
FB: I’d like to end on the question of credentialing. What sort of credentialing system would you like to see? What kind do you envision coming into effect within, say, the next 10 years?
Dreux: I’d like to see some sort of uniform standards of practice or uniform standards of disclosure. I don’t expect anything as wonderful as the Uniform Commercial Code. But eventually I think we will have, at minimum, some checklists to walk the client through, which we can use to agree that certain work will be done within a certain time frame by certain people. All we can expect in the near term is a well-developed checklist of qualifications and a series of questions that will help clients evaluate the person they are considering hiring.
Poza: This field is still so dependent on new theories and new research and new methodologies that to try to come up with a certification system now would be premature. It might suffocate the field.
That poses a dilemma for me. On the one hand, I am very committed to being part of a field that is ethical, whose practitioners truly care about the client and not just about their pocketbooks. On the other hand, it seems to me we need to know a lot more about what constitutes truly competent, state-of-the-art work and how to measure success or failure before we can come up with credentials and regulations.
The panelists: Thomas D. Davidow, a psychologist, is co-founder with Richard Narva of Genus Resources, a family business consulting firm in Needham, Massachusetts. Nancy Bowman Upton is founder of the Institute for Family Business at Baylor University in Waco, Texas, where she teaches courses in entrepreneurship and family business management. Dirk R. Dreux IV is director of private business advisory services for United States Trust Company in Manhattan and an advisor to many family companies. Charles S. Fradin is president of Copley Distributors, a Rhode Island beverage importer and wholesale firm founded by his father in 1965; Fradin is a client of Genus Resources and Dreux is on his advisory board. Ernesto J. Poza (via speakerphone) is president of E.J. Poza Associates in Cleveland and a leading family business consultant.
Excerpts From the Family Firm Institute Code of Ethics
1. DISCLOSURE
In order for clients to make the best-informed decisions regarding the contracting of services from family business advisors, such advisors are responsible for disclosing:
a. Definition of Client
Because family business advisors have a variety of professions of origin and work with family owned businesses in a variety of ways, advisors may take differing approaches in their work with family firms and may have differing definitions of who is their client. Thus, at the outset of an engagement, the family business advisor will state whose interests he/she is representing during the course of the engagement. Should the need arise to revise this definition of “client” during the engagement, this will be communicated to and negotiated with all appropriate parties involved.
b. Professional Credentials
- Advisors will disclose their education, training, experience, and professional memberships relevant to their profession of origin and to their practice of advising family businesses.
- Advisors have a responsibility to recognize and communicate professional limitations or other constraints that would preclude or inhibit successful performance of their advisory services, and to make referrals to other, appropriate professionals when such limitations occur during the course of the engagement. Such possibility of referral will be disclosed at the outset of the engagement, when known. When referrals are regularly made to specific, other professionals, the existence of such a working relationship and referral network should also be disclosed.
- Advisors agree not to misrepresent their affiliation with the Family Firm Institute in their or their organization’s literature so as to imply that membership in the Family Firm Institute signifies either credentialing or endorsement by FFI.
c. Maintaining Client Confidentiality
- Advisors will maintain as confidential, and will not disclose to any others, proprietary information obtained while serving a client. Advisors agree not to make use of such information in the service of another client, or for their own financial or other personal gain, without the express permission of the rightful owner of this information.
- At the outset of an engagement, the family business advisor agrees to state his/her policies with regard to maintaining client confidentiality among all parties involved within the engagement, including, but not limited to, members of the firm and other advisors.
d. Potential Conflicts of Interest
- Advisors agree to disclose to clients any circumstances that may create, or give the appearance of, a conflict of interest.
- Advisors will refrain from engaging in any activity that could prejudice their ability to carry out their duties ethically, which may include having more than one kind of relationship with a member, or members, of the client organization, or receiving gifts or favors, such that the advisor’s actions would be unduly influenced or appear to be unduly influenced.
- Advisors have a duty to inform the client of any relevant affiliations with other firms or professionals which could have an impact or influence on this engagement.
- Advisors whose services include advice on the purchase of products, or recommendations which have the potential to be financially advantageous to the advisor, agree to disclose such at the outset.
e. Fee Structure
- It is the duty of the family business advisors to explain to the client at the outset of the engagement the basis and terms for all compensation, fees, charges and refunds. Where appropriate, an estimate of the total cost of the service, and basis for costs being performed should be provided to the client, in writing. Fees received or paid for the purpose of referring a client to a third party should be disclosed.
2. INTEGRITY AND OBJECTIVITY
Advisors have a duty to perform with integrity and objectivity and will demonstrate this by communicating both favorable and unfavorable information and professional judgments and findings to clients, by maintaining neutrality in representing the numerous parties in the engagement with the identified client, and by avoiding the development of unhealthy and/or unproductive dependence on the advisor by the client, or the client by the advisor.
DON’T FORGET TO ASK
1. Training and experience. Does the consultant have an advanced degree in at least one professional discipline related to family businesses? How long has the person been doing this kind of work? Does the person’s background suggest he or she looks at business and family issues as a whole?
2. Conflicts of interest. Does the person have other sources of income besides what he or she receives from clients? Is he or she selling a product as well as consulting?
3. Results. How long will the consulting process take, and how will successful outcomes be defined and measured? What is the consultant’s failure rate?
4. Fees. How will the consultant bill—by the day, the hour, a fixed fee, an agreed-upon schedule of phased fees? Will “the meter” be on only during sessions with the client, or at other times, too, for example, when advice is given over the phone.
5. Neutrality. Who is considered the client? The business, the owner, the family members? How will the person go about gaining the commitment to the process of all the key players?
6. Personal qualities. Does the person relate well to all generations and both genders? Does his or her behavior in the initial sessions show an ability to create a comfortable, secure atmosphere in which family members can talk freely and candidly?
7. Industry knowledge. Does the person either have some experience in the client’s industry or demonstrate an ability to quickly digest what he or she needs to know?
8. Values. Are the person’s cultural values as well as other interests similar enough to those of the family to permit a comfortable and harmonious relationship?
9. Other advisors. How will the consultant relate to the family’s other advisors? What types of other experts—strategic planners, bankers, valuation specialists— might be needed to assist the consulting process?
10. Structures. After the consulting is over, will there be mechanisms in place—an outside board, family council, retreats—that will enable the family to resolve difficult issues by themselves?