Adapt and thrive

Practitioners must adapt to the needs and characteristics of the family dynamic if they are to successfully advise a family business, says Dr James Cunningham

Family businesses are unique, peculiar and without question set-aside from non-family rivals. Dealing with them can be an emotional rollercoaster for both practitioner and client. The discussion surrounding family businesses over the past 15-20 years has attempted to develop a particular understanding of their support requirements. However, by way of a disclaimer, much of the academic research in this area has been sporadic
in nature.

Inconsistent views on best practice when dealing with family business clients is symptomatic of a broader concern in the field of family business research, where definitional warring and scholarly bias do little to clarify the minefield of issues a practitioner may come across. Pragmatically, this article attempts to refine our understanding of family businesses by illuminating the evolving roles of the legal adviser, and presenting some of the more specific ways in which advisers must adapt their approach when dealing with such 'special' clients.

The adviser: counsellor or solicitor?

Many business advisers are comfortable providing their service on a problem-solution basis, mostly initiated by the client. This situation also suits inherently wary and often financially limited families, who approach legal services only at the point where it is deemed absolutely necessary, i.e. time of crisis, irreparable dispute, and leadership succession. However, this traditional view of the legal service provider is challenged by many researchers, citing instead that a prolonged and consistent relationship is the best way to ensure business continuity. Images of Tom Hagen's life-long service to the Corleone family in The Godfather trilogy may be a caricature, but as with all well-developed fictional characters, this is rooted in the reality of a family business's needs.

The adviser needs to find a way of dealing with individual issues without causing heightened anxiety; compassion and understanding must play a key role in any dispute resolution. The adviser's professional qualifications become less important against a closeness of relationship and, ultimately, trust.

This means that advisers (legal or otherwise) are now challenged to recognise the unique elements of a family business and position themselves to provide holistic advice, often beyond the traditional parameters of their profession. However, a word of caution; dual-relationships can often emerge which test the boundaries of a professional relationship. Like the GP who finds it difficult to diagnose a

friend, so too a close legal adviser may find it difficult to present the realities of a situation to their often unrealistic clients.

Nonetheless, the benefits and opportunities presented by developing long-standing relationships with family business clients are clear. The legal adviser must become a multi-dimensional character, employing broader skills and undertaking longer relational contracts than short-term litigation-based advice. However, this positive view of the newly formed 'family business counsellor' comes with caveats. The main difficulty of the role is not in the professional development of the legal adviser, but in 'selling' this softer form of service to resource constrained family enterprises.

The role of litigation

The key notion from much of the 'new' approach to advising family businesses is an awareness and understanding of any emotional implications of the adviser's recommendations, in contrast to specific issue resolution. However, this pulls many in the legal profession out of their comfort zone. Pushed by their client for a quick turnaround, a lack of understanding of their client can mean that legal advisers reach for their default position of quick-fix litigation, without considering the deep-rooted disputes causing business problems, which litigation will only seek to worsen.

Consequently, legal service providers must be very careful in developing their roles and expectations within the family business. In particular, it is recommended that advisers should work to dispel the ‘myths’ of the litigation process and offer alternatives of greater benefit to businesses, while generating less emotional turmoil than expensive and stressful court proceedings. The table at the end of this article, adapted from Krasnow and Wolkoff’s Three proposals for interdisciplinary study, summarises some of these alternatives.

For instance, the existence of a prenuptial agreement may be glamorous and appealing, however in reality, this process can often involve painful negotiation and only limited protection. More appropriate for an already emotion-laden family may be written option agreements to buy stock at a fixed price, or a liquidity agreement whereby stock can be bought back from disgruntled shareholders at a price determined by a pre-existing formula, ensuring fair valuation. Such pre-set approaches can reduce suspicion from minority shareholders that the deal they are being offered is unfair. Also, this can provide a very quick remedy for disputes, or even in the scenario of uninterested offspring.

One further, and particularly stressful problem to the family business owner, is the issue of estate planning and succession. Here, again, quick-fix solutions have in the past led to an assumption of equality among offspring with controlling interests, often left to previously non-active spouses. This is a mistake, which overlooks the subtleties of family business dynamics.

The emotional turmoil which ensues from such inappropriate legal situations contributes greatly to the failure of most family businesses at the time of succession. Treating children equally does not necessarily mean leaving all of them an equal stake. Other forms of benefit can be passed down to non-active members, such as insurance or inheritance schemes; a desire for control should't be assumed.

The consideration of alternatives should highlight that there are more emotionally sensitive routes for families in dispute than financially driven litigation. Family businesses are more vulnerable to long-term relationship ruptures caused by drawn out court cases, leading to personal resentment and damaging cultures.
Such notions are the underlying premise of a heightened mediation role for the adviser. Solicitors and estate planners are at the intersection of the family and business systems, with such services attempting to create sustainable governance models which not only meet the demands of the business technicalities, but are also sensitive to the emotional and support needs of the family. The tools available to legal advisers vary, but the mediation role which is now assumed causes its own concern.

The role of mediation

Mediation is offered as a constructive alternative to destructive litigation, with the legal consul acting as an impartial middleman. In the 1990s, the late John Haynes of the Academy of Family Mediators set our four key principles by which potential mediators should live:

1. The earlier a dispute is resolved, the less damage it can cause - financially and emotionally.

2. Individuals involved in the dispute are the ones most capable of coming up with the best solution to their problems.

3. Family members can best preserve their future relationships if they can resolve their disputes without resorting to adversarial processes (litigation).

4. When family members are involved in a dispute, personal feelings impair their ability to communicate. The potential for 'give and take' is maximised when an objective third party is involved in the dispute.

Mediation then appears to be an underappreciated tool when dealing with family business clients. This is unfortunate, as it is suggested that 75 to 80 per cent of disputes can be resolved through mediation, with most cases resolved in less than a day. Although each mediator will act in different ways, typically the parties of the dispute will be separated, with each side telling their story and offering their own solutions.

The impartial mediator will then be critical toward each party's proposals, eventually uncovering an optimum conclusion to suit all. Designed to save time and money, many writers consider mediation to be the best form of legal counsel for family enterprises. This may be best sold to the client along the lines of 'attorney-mediator', thus legitimising the 'softer' sides of mediation with legal professionalism and creating lasting adviser-client relations. However, this approach is not without its critics.

As with every form of consultation, conflict resolution based on one
tool alone can be dangerous. More
staged approaches are forwarded as
an evolutionary and setting-sensitive form of approach. The role of the legal professional is required with post-negotiation mediation and arbitration.
It is vitally important that this appears early in the conflict. Only when mediation and arbitration fail should litigation be brought in as a solution,
so as to avoid physical violence - which unfortunately, does happen.

In providing a spectrum of options, the staged approach allows for those cases where family members may be too emotionally fragile to participate in the mediation process, at which point statute-led resolutions can be brought back into favour.

Another criticism of pure mediation is that legal professionals may be in no position to act as mediator, when the role is far greater suited to a qualified family therapist. The challenge for legal advisers is to balance the appropriateness of their service provision with the benefits of relational mediation. For this reason, much of the recent writings of family business advising tend to focus on 'how' mediation can be brought into the advice process, rather than assuming this of a legal adviser. The fashion of late is to form an advisory team with all the necessary components of the service offering present.

The role of the advisory team

The weaknesses of individual advisers are often contrasting and serve only to confuse and damage the client. Where legal advice may lack in emotional sensitivity, family therapists may suffer from a lack of administrative and statutory know-how. The ability to combine these elements in one advisory team provides greater sensitivity to the specific needs of each client, thus instilling a broader base of support than previously offered. Team advising reaffirms the move away from short-termism and problem-solution activities, to the development of long and continued relationships, also helping to break the 'entrenchment factor' evident in many family-influenced enterprises.

The key element here is trust, and many family enterprises have trust issues; trusting their own instincts over that of others, or even placing too much trust in professionally trained individuals whom they regard as guru figures. As family business research progresses, the latest round advocate the team approach to legal advice as an architect of trust; this is also found to be the case internationally.

Studies in cultures as diverse as Canada, Saudi Arabia, and Turkey have all noted the success of collaboration and multi-disciplinary teams in advising family businesses, with the legal adviser seen as the master conductor, applying both structure and support in equal measure. The lead in such development is, perhaps stereotypically, the United States, where a burgeoning family business consultation market has developed over the past ten years through both market need, and a more established recognition of the uniqueness of family influenced business.

Engagement with team advising requires the legal profession to venture out with their established boundaries, roles become ambiguous and task goals unclear; the ultimate success factor is the will of both advisers and clients to interact and build relationships on this unfamiliar territory. Success stories remain the exception. While there is optimism in the UK that this form of team advising will grow, current evidence suggests that family business legal advisers maintain the persistent mind set of task-based solutions and litigation instruction.

Perhaps the alignment of multi-disciplinary teams, riddled with competing philosophies and egos,
is out of reach for most legal service providers. Alternatively, the need for a living wage may constrain most family businesses to allocate resources on a singular needs-must basis, rendering the long-term demands of team consultation unaffordable. Either way, in its current state the emotive family business landscape continues to be ill-equipped for the inevitable turmoil that lies ahead.

Keep your friends close…

Family businesses need friends. They are incapable of viewing their business objectively and controlling the emotions which provide them with such distinction. When the business is functioning well, the world is a bright and rosy place, when it is functioning poorly, they are engulfed in inescapable anguish. Limited financial resources mean that they will often ask for legal advice only once the situation has become irreparable. At this stage the legal adviser resorts to their default position and brings in litigation-based solutions which, although effective at steadying the ship, can lead to painful attacks, deeper resentment, and disastrous consequences.

The challenge for legal advisers is to provide a broad and emotionally sensitive offering before it gets to this stage. Building long-term relationships will allow for an intimate understanding of the needs of the client. In turn, this will allow a clearer review of the alternatives for conflict resolution, or even conflict avoidance. The first hurdle is for the legal firm to ensure they have the breadth of capabilities needed to provide this service offering; the second is to sell it to the family business before it is too late.

Dr James Cunningham is a lecturer in management at Robert Gordon University