How to Choose and Use Advisors
Getting the Best Professional Family Business Advice
By Craig E. Aronoff, John L. Ward
Palgrave Macmillan Copyright © 2011 Family Business Consulting Group
All rights reserved.
The Value of Good Advice
When Do Most Business Owners Need Help?
No man is wise enough by himself.
— Titus Maccius Plautus, 254–184 BC
Leading a family business can be one of the most complex jobs imaginable.
For its owner, the family business is a crucible for some of life's great challenges: growing a company, leading a family, nurturing loved ones—the same crucible in which the business owner's own life story and personal financial security are formed.
Every business owner needs help from time to time. Good advisors can assist by drawing on their experience with many family businesses. They can help solve problems and resolve conflicts. They can ease the isolation of running a business by showing that other business owners share similar problems. In that process, the advisor also protects business owners from the need to reinvent the wheel.
Yet many business owners don't get the advice they need and deserve. Many hesitate to seek the best advisors. Instead, they "underhire" out of modesty, loyalty to longtime advisors they have outgrown, or a sense of comfort with advisors who don't challenge them. Other business owners aren't sure when to call an advisor or what kind is best suited to help. Table 1 summarizes the services provided by various kinds of family business professionals. Table 2 shows what advisors can be most helpful as the family business passes through three common stages:
Table 1 What to Expect from Advisors
Accountant. Tax planning and preparation of returns. Organizing and interpreting financial statements. Improving financial management and reporting, sometimes by helping design new systems. Helping with business transfer, succession, estate, and family compensation planning. Providing informal financial and management advice and mentoring successors. General business advice.
Attorney. Helping negotiate contracts and other documents such as stock restriction and buy–sell agreements. Helping determine the form of business ownership and capital structure. Attending board meetings at the chairman's discretion and reviewing board-level transactions. Acting as a diplomatic "go-between" for a business owner and a mentor for successors. Resolving disputes through compromise or litigation. Preparing estate plans, wills, and trust documents and reviewing them every one to five years. Helping plan for payment of estate tax obligations or financing shareholder buyouts. Preparing prenuptial agreements and providing counsel regarding plans to bring new family members into the business. Helping establish business governance policies to enhance the likelihood of successful transfer of the business to younger generations—especially by helping set up an effective board of directors and policies for employment and promotion of family members.
Banker. Making loans and setting up lines of credit. Helping with pensions and 401(k) plans. Helping decide how to finance growth, succession, or shareholder demands for liquidity. Helping evaluate debt–equity ratios. Raising timely questions about succession and estate planning. Informally instructing successors in financial skills.
Executive search consultant. Identifying and recruiting key non-family managers and directors, including "bridge" managers between generations of family management. Helping reenergize the stagnant organization or professionalize management through key hires. Helping identify and fill gaps in management.
Family business consultant. Encouraging development and implementation of succession, estate, strategic, and personal financial plans. Helping develop successors. Helping plan family compensation and entry of new family members into the business. Helping plan shareholder liquidity or buyout programs. Helping revitalize the business. Setting up active outside boards. Fostering family unity and communication, organizing family meetings, and developing family statements of mission or purpose. Generally helping family businesses through transitions and helping perpetuate family ownership.
Financial advisor. Helping business owners identify and choose among various ways of addressing the liquidity needs of shareholders or the capital needs of the business. Anticipating capital and liquidity needs. Assisting in implementing capital or liquidity programs. Restructuring ownership to perpetuate family control or concentrate ownership in certain segments of the shareholder base. Informally helping educate successors about financial management. (Many financial advisors also provide the investment banking services described below.)
Insurance agent. Alerting the business owner to the need for insurance to protect against large, unpredictable demands for cash in the future. Specifically, helping select policies to pay estate taxes, finance shareholder buyouts, ensure survivors' financial security, incentivize key non-family executives, repay debt, or guard against the disability or loss of a key manager. Acting as a catalyst for estate planning. Educating the business owner about complex insurance alternatives, policy illustrations, and the differences among various policies and insurers. Providing annuities or life insurance to reward key employees.
Investment banker. Valuing assets and businesses. Identifying prospective buyers or sellers of assets or businesses and helping manage sales and acquisitions. Identifying potential investors and making public or private placements of stock or debt. Helping assess debt–equity ratios and dividend policy. Designing shareholder redemption programs.
Organizational development specialist. Helping build teamwork, cohesiveness, communication, and a sense of purpose within a business. Helping with successor development and selection, team building, or team transition among siblings or cousins. Designing career paths, compensation plans, and performance-appraisal systems for family and non-family managers. Helping revitalize stagnant organizations and professionalize management.
Psychologist. Diagnosing and helping heal psychological tensions, morale issues, and relationship problems in a business. Helping family members in transition. Helping resolve conflicts and build cohesiveness among family members. Helping business leaders make the transition to retirement. Helping successors develop their own identity. Improving family communication. Evaluating key managers. Resolving issues raised by bringing in key non-family managers.
Trust officer. Administering trusts and managing trust assets in beneficiaries' best interest. Increasingly, counselling business owners informally and providing referrals to experts on valuation, estate planning, estate and gift tax planning, investment management, and other services. If a business is controlled by a trust, reviewing business performance, helping identify candidates to fill management gaps, and serving as a director if needed.
Valuation expert. Valuing a business based on its management, assets, performance, outlook, and research into comparable companies with established market values. Using this information to help value estates, gifts of stock, divorce and litigation settlements, shareholder liquidity programs, fairness opinions, ESOPs, or executive stock plans. Helping plan transfer of ownership and management of estate taxes.
Why So Few Business Owners Get and Accept Good Advice
Advice is seldom welcome; and those who want it the most always like it the least.
— Philip Dormer Stanhope, Earl of Chesterfield
Few business owners use professional advisors wisely. Nearly one-third of family businesses have no trusted advisor outside the family, a recent survey by Massachusetts Mutual Life Insurance Co. shows. (Please see Table 3.)
Let's take a look at ten common attitudes that keep business owners from getting the advice they need:
1. "I can solve the problem myself." Many business owners are used to being in charge and having people look to them for answers. This pattern can be habit-forming, leading the business owner to feel he or she should have all the answers.
Although self-reliance is a virtue that has built some great businesses, it also can be an obstacle to solving complex family business problems efficiently. An advisor with experience in many businesses can protect a business owner from reinventing the wheel. He or she also can keep problems from mushrooming into crises.
2. "I don't want anyone throwing up roadblocks to my plans." Business owners are action-oriented doers and may not even think of calling an advisor until they have committed to a course of action. This tendency builds on itself. The more decisions a business owner has made before seeking advice, the more likely he or she is to be embarrassed by an advisor's reaction.
But however uncomfortable it may be to admit to people who admire you that you need to change your plans, it is sometimes necessary to avert bigger problems. As tensions rose within the Bingham family of Louisville Courier-Journal fame, Management Planning, Inc., a financial appraisal concern, advised the family leader, Barry Bingham Sr., to set aside his carefully laid estate plans long enough to buy out Sally Bingham, the family's chief dissenter, at the stock's publicly traded value.
Removing her from the trust might ease family tensions, even though it meant a one-time transaction at a price higher than the one already established, suggested a Management Planning advisor. But Mr. Bingham refused that counsel in fear of disrupting his estate plan, insisting, "I'm not buying her out at a penny more." What followed, as history shows, was an upheaval, led by Sally Bingham, that was far more destructive than any change in an estate plan might have been.
3. "Professional advisors should be used only as a last resort." This attitude, a corollary to No. 2, casts professional advisors as firefighters—a necessary evil or defensive weapon to avoid lawsuits, IRS audits, or other calamities.
It usually means business owners call advisors too late—"when the canoe is over the waterfall," says Henry C. Krasnow, a partner in Krasnow Sanberg & Cohen, a law firm. If a crisis erupts over succession, shareholder discord, or other unaddressed fundamentals, the business owner and advisor then face the impossible task of "paddling back upstream over the falls," he says. Calling an advisor early can help the owner learn where the edge of the waterfall is and avoid it, Mr. Krasnow says.
4. "An outsider could never understand my business." Some business owners believe "an advisor is someone who borrows your watch to tell you what time it is." They contend, "By the time I invest enough so that an advisor can understand my situation, I could have solved it myself."
This rationale is a handy excuse to keep the family business a closed system. All businesses are unique, but all share some characteristics as well. Otherwise there would be no business schools, no movement of executives between businesses, and no useful books on business. If an advisor is well chosen, as discussed later in this book, he or she will bring relevant experience to your business and will probably be a surprisingly quick study as well.
5. "High-powered experts wouldn't be interested in my business." Even successful entrepreneurs often are too humble, unassuming, or unsure of themselves to seek out the best advisors. Despite their success, these business owners often hesitate to apply to professional advisors the same high performance standards they impose on themselves and their employees.
This tendency begins early, often with a reluctance as a startup to seek out a commercial lender, says Linda Tubbs, a senior vice president and a commercial banking manager for First Interstate Bank of Oregon. Many business owners don't realize that advisors usually like to see prospective clients at any stage. "The process (of applying) could provide them with some free counseling," Ms. Tubbs says.
As the business grows, many owners tend to stick with longtime advisors whom they may have outgrown. But just as a business owner would not settle for a supplier who failed to meet his or her needs, he or she should not settle for an advisor who is less than challenging. No matter how formidable their expertise may seem at first, top-flight family business advisors should be approachable and communicative and should provide helpful referrals if they are unable to help a client themselves. If business owners demanded as much from their professional advisors as they do from their employees and themselves, running their businesses would likely be easier, more profitable, and less lonely.
6. "An advisor will raise a lot of issues I don't have time to bother with right now." Many business owners fear that confiding in an advisor will open a Pandora's box. Some believe advisors will raise questions they can't answer or that threaten their personal confidence or control. Others sense that an advisor's probing may thrust them into "the planning triangle"—the web of financial, estate, succession, and family issues that must be addressed for a family business to thrive through generations. Indeed, a good advisor often must understand a business owner's goals in all these areas to help solve problems in any one of them. The business owner may not want to take that leap, preferring to keep everything quiet.
Left unchecked, problems can worsen until a client reaches "a point of enormous pain," says Kathy Wiseman of Working Systems, a consultant specializing in family and organizational development. In families, adds Harry Levinson of the Levinson Institute, a psychologist, consultant, and noted author on succession and other management issues, the desire to preserve peace often leads to "perennial conflict and lack of resolution." Only by addressing issues head-on can these unhealthy symptoms be healed.
7. "I don't want to share any information with an outsider." Many business owners place such a high value on secrecy that they refuse to share any information with non-family people. In fact, confidentiality is a baseline requirement of professional advisors. The smallest doubt about an advisor's ability to respect business and family secrets is enough to disqualify that person.
This argument, a corollary to number 4, also misses the potential value to any business of using a "sounding board," an informed person with a fresh perspective and an ability to respond objectively. This can be crucial in helping the family business avoid growing stale or out of touch. One entrepreneur was mystified by the results of an employee survey. For years, the man had heard praise for his business as "a nice place to work," with generous salaries, perks, and paternalistic benefits. But now, surveyed employees were calling him authoritarian and overcontrolling. "He simply couldn't understand why on the one hand they were so appreciative, and on the other so critical," Dr. Levinson says. The advisor's role, he says, "was to help him understand that the world had changed, that people had different expectations than when he got started"—including a desire for more participation in decision making.
8. "Professional advisors cost too much." Nowhere is it more likely true that "you get what you pay for" than with professional advisors. Yet many business owners assume all advisors are overpriced. Many also fear they lack control over fees. In fact, advisory relationships can be managed for cost-effectiveness, as discussed later in this book.
And many business owners undervalue the financial importance of sound decision making. "To focus solely on [the] cost [of an advisor] is doing yourself a disservice," says Ross Nager, national director, family wealth planning, for Arthur Andersen & Co., a large accounting and management consulting firm. "The real cost of advice is not what you pay for it. It is either the cost that you incur when you take the advice and find out that it's wrong—which obviously can devastate the business. Or it's the opportunity cost of receiving the advice but not taking it because you don't trust your advisor."
Adds Michael Horvitz, a partner with Jones, Day, Reavis & Pogue, a major law firm, and director of privately owned business for the firm's tax group: "Any lawyer or advisor who really provides good service will over time pay for himself or herself."
9. "Our longtime attorney (or accountant or banker) is a family friend and knows us best. We don't need anyone else." Many business owners operate in closed systems with little affirmation except growth in sales or the loyalty of key employees. They may place such a premium on loyalty that they rely on old friends for advice, even after the business outgrows the friend's expertise.
Other business owners risk becoming too dependent on the advice of a single person. For instance, an owner may ask a long-time family attorney to prepare a will and trust documents rather than consulting an estate planner. While the documents may be excellent, the underlying planning may miss many of the complexities of passing on a family business, exposing the business and the family to major financial damage.
At the extreme, families may rely on a loyal advisor as a manager of last resort. That can be tragic; while advisors may know a lot about your business, they rarely know anything about running your business.
10. "I'm unsure of how relationships with professional advisors work." The idea of calling a professional advisor sometimes raises so many questions for business owners that they avoid it. How could an advisor help? What will he or she expect of me? How will I explain it to the family? What information will I have to disclose? Will he or she press for solutions that don't fit our business? How can an outsider understand our situation?
This book strives to answer those questions and more, empowering business owners to make the best choices for their businesses and their families. (Continues...)
Excerpted from How to Choose and Use Advisors by Craig E. Aronoff, John L. Ward. Copyright © 2011 Family Business Consulting Group. Excerpted by permission of Palgrave Macmillan.
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