|Oregon State Bar Bulletin — FEBRUARY/MARCH 2010|
For attorneys, advising a family-owned business is a different kettle of fish from other forms of law practice. It means working with a client whose company stakeholders bring into the boardroom their family history, relationships, grudges and secrets.
According to those who specialize in the field, to guide these clients effectively, attorneys must recognize and understand the family dynamics at play and how they may affect business decisions.
Lawyers from different parts of the state offered their perspectives on what is involved and how they often approach the many sticky questions that emerge in the business of families.
Generation to Generation
“Business in Oregon really is family business,” notes Kay Abramowitz, of Ater Wynne in Portland, who has specialized in advising family-owned businesses for a quarter of a century. She points to a survey that found that over 90 percent of all businesses in the state are closely held, over 80 percent of which are family-owned. “Nationally, Oregon is considered the state of family-owned businesses.”
Advising these clients is interesting but highly challenging, she says. Emotional issues imposed on technical issues are not always a good easy fit, she points out. A family business sometimes is referred to as having another child at the table.
“These are intense relationships, and made extraordinarily intense because of the connection to what the family is. Your whole life has been tied up emotionally in that business.”
Not surprisingly, most family businesses don’t make it over the long haul: At least in the United States, only one-third survive past the first generation, Abramowitz says.
First-generation owners may be an individual or a couple, and their children and their spouses may be employed by the business. Only one or two children may actually work in the business, while the others have gone off to pursue other ventures. However, the bulk of that family’s wealth, what the parents hope to leave their survivors, may be the business itself. So if the parents’ desire is to leave each child an equal share, the inherent problems are apparent.
The parents typically want to do what is fair, but that can be hard to determine. If two children run the business and want to reinvest in it with their inheritance, three remaining children may have no interest in the business but want to receive dividends from it. Lawsuits often result.
In addition, “It is not infrequent that a parent will put a child into a position beyond their ability,” Abramowitz relates. She had one client who created a job for a son to try to keep the son sober. Blackmail also happens. For example, the owner-father might be coerced by a child’s spouse, who tells him, “You will give my husband a position, or you won’t get to see your grandchildren.”
Abramowitz says the lawyer’s role is to sit down with a family and explore the design of the family corporation or estate plan, in order to try to minimize problems later. And also to remember that “we represent a client, not a family system.”
Plan for the Future
Sally Anderson-Hansell, with Anderson Hansell Temple in Hermiston, knows personally about the different variables that can arise in family-owned business: She married into the Hansell family, fourth-generation farm owners.
Anderson-Hansell says a lot of the problems and challenges of family-owned businesses have similarities, especially those involving succession planning, as well as the question of who does, or should do, the work of the business.
“Are you a charity, where everybody in the family gets a job regardless of qualifications?” she might ask a client. Clients would be better off if they faced the reality of “what the business is and what each child is capable of, hopefully before hiring the child.”
She uses a hypothetical example: A mother and father own a large farm and had five children. Two work for the farm; one child has a good head for business, the other doesn’t. The other three are married with children and have no interest in returning to the farm. The parents want to leave their assets to be equally divided among their five offspring.
“What do these parents do to plan for the future?” she asks. “Should one make more than the other, or should they have equal salaries? The issues can be devastating. Every family deals with it in a different way.
“There’s an emotional link that everyone has toward the business — good, bad or indifferent. Farming families have this ‘Gone with the Wind’ connection to the land itself and the lifestyle.” Many farms have had several generations farming small plots in Eastern Oregon, whereas the current trend is toward larger farms and fewer family farms, she says. “It’s difficult to leave your farm intact when it can support only two families rather than five.”
A lawyer familiar with those issues is useful to remind families of “the potential horrors down the road,” as well as to hold hard discussions with them about tax consequences, Anderson-Hansell says.
“It’s different for every person: the nature of the business, how it’s set up, who runs it, and who’s capable of running it; or whether it should be sold after death. These are not easy subjects.
“Usually what I do is find out as much about the family as I can, and the client’s long-term goal for the business, and what I see as options for them.”
Weigh the Family Dynamics
“For me, it’s interesting learning family dynamics,” says Gerry Gaydos, with Gaydos, Churnside & Balthrop in Eugene and immediate past-president of the Oregon State Bar. “Lots of issues crop up. Each family, like each person, is different.”
For example, you may find yourself dealing with a different bloodline. One client Gaydos had, the owner of a family business, had only one child, a daughter. She did not want to operate the business, but her husband did. That doesn’t mean, though, that the daughter didn’t offer opinions about how her father would have done certain things with the business, “much to her husband’s dismay,” Gaydos notes. “Each family has a little different culture: how they relate to each other and how they relate to gender differences. You have to figure out how to honor the culture while making sure the company is achieving its goals.”
For example, say an owner has two sons, one who can manage the business and another who does not have the right skills. Yet the father still wants both involved. The lawyer may recommend bringing in a consultant to try to present the situation objectively to the owner. Such a tactic doesn’t always work, but lawyers have to do the best they can to make sure the corporation is well-represented, he says.
“We can’t take sides,” he adds. And “as lawyers, we have to be aware of (legal considerations such as) the ADA and gender discrimination, and try to help (clients) understand their obligation under the law.” Above all, the lawyer must convince the owner or owners of the importance of making a succession plan.
“I’ve got several businesses where the founders are my age, and the sons are just entering into the business. The fun thing is to watch how that grows. One child took over and has done a good job, and (brought in) 10 times the gross revenue than (his) dad had.”
With issues such as estate planning and tax considerations, representing family-owned businesses is exciting, Gaydos says. “I find it to be a joy.”
One of the biggest challenges to representing family-owned businesses is “the ongoing, day-to-day balancing of family relationships with the business relationship — keeping those lines of relationships clear so that the decisions on the business side don’t negatively impact family relationships,” says Kathleen A. Evans, president of the OSB and a Salem attorney with Evans Batlan.
Another challenge is succession, identifying who would be best to take over successfully, and defining how the parents let go of the reins for the next generation to take over the business. And once they identify which offspring will assume control, the members of the founding generation also have to weigh how that will impact their other children. Achieving a balance between those who are active in the business and those who aren’t is crucially important with estate planning, she says.
“Every time, we focus on not what is equal, but what is fair,” Evans says. “Parents struggle with this, but I’ve seen it done successfully. A lot of it has to do with the personalities of the people involved, because that first generation may have a strong entrepreneurial spirit and be risk-takers and hard workers.” Their children may have grown up with more socioeconomic benefits and feel less committed to the business. “It’s unusual to find the second generation as dedicated.
“From my perspective, there’s a sense of entitlement that comes with some people. Most entrepreneurs don’t have that, and are able to make decisions quickly and be nimble. If you don’t have those characteristics, it’s very difficult to succeed in small businesses.”
Consider the Culture
A salient quality of families is that they grow, and one of the issues lawyers representing family-owned businesses must grapple with is when the point is reached where too many family members are supported by the original business. Carol DeHaven Skerjanec, a Vale lawyer who has represented small farming and ranching corporations for years, sees such a scenario often these days, in clients whose businesses started at the turn of the 20th century and have stayed in the family for several generations.
Skerjanec notes that this phenomenon is especially prevalent in Eastern Oregon, which she characterizes as a “very culturally diverse area,” with many prominent Japanese and Hispanic families who have lived there for generations. Distinctive features of these cultures can complicate sales and distribution of property, she says.
For example, a tradition among many Japanese families in the area is for the older brother to be in charge of the family business. Each family member may own stock, but “the oldest brother makes the decisions and run things,” she explains. So when the time comes to divide up the property, “it’s difficult for the younger members to assert their rights while continuing to acknowledge (the oldest brother’s) leadership.”
Such a situation puts both the lawyer and family in a quandary. That family may have come to the attorney’s office for years, and considers him or her as “their” lawyer. But once a transfer is indicated, the lawyer, who technically has represented the business all this time, must keep doing so, she says. “You continue to represent the corporation, but you send individual families members to get legal counsel to represent their best interests.”
“It can be a very upsetting thing for the client, who thinks, ‘I looked to you for guidance over the years.’ But they have to have their individual rights protected,” Skerjanec says. “And it’s impossible for you to do that and represent the business as a whole. It may be the easiest thing in the world for you to do, but you can’t take on that ethical dilemma.”
All this is especially hard in rural areas, where “you know all the generations of the families and the connections,” she adds. “You become very attached to the people.”
Working as a young associate for a partner, “I was very lucky out of law school to start representing some large family-owned businesses,” says Donald A. Gallagher Jr., with Arnold Gallagher in Eugene. He now has some business clients transferring to the third generation.
“Nobody could have predicted what it would be like from the second to the third (generation): what tax laws, interpersonal relationships, divorces that have an effect, how to deal with a spouse who is not a family member, how they get paid.”
A typical example of a multigenerational case he sees is where a family business is not transferred at the same level to every family member. A father transfers the business to one child but not to the other three. The challenge then is to find an equitable way to treat the other three fairly, Gallagher says. Another example would be where a father starts a business and wants all the children to go into the business, but only one or two do. “There are opportunities for conflicts between those active and not active,” he explains.
Such instances have to be treated on a case-by-case basis, but one solution can be to carve out assets, such as through real estate, where children not in the business lease to the company, a way for them to get some return.
“There is that possible inherent conflict between the needs and desires of the two parties,” Gallagher says. In whatever generation is operating the business, the lawyer will try to help the family as early as possible create a succession plan if the owners want to continue the business in the family.
“It’s a fluid process. There may be two or three actually in the business, but that may change before we get to the next generation. You want to give flexibility to allow for changes,” he says. “You just have to identify what peoples’ goals are.”
Family dynamics come into play in decision-making that you do not have in businesses where the parties choose to be together.
The goal of the attorney and other advisers is to help the business stay healthy, Gallagher concludes. “You can’t plan for every unknown that happens, but you have the framework in place that allows you to create a solution.”
Know Who is the Client
Sylvia Stevens, the OSB’s general counsel, says the first step in navigating ethical questions that arise in representing family businesses is “knowing who you represent, and for what,” so that the lawyer can do a proper conflict-of-interest analysis.
For instance, “If Mom and Dad are your clients, and the children don’t get what they want, that doesn’t mean it’s your responsibility,” she says. You might represent the business, or you might represent shareholders and not the business, but “don’t try to represent everybody” involved, she advises.
• The Family Firm Institute (www.ffi.org), founded in 1986 as a professional membership association, has grown to become an international body for advice and research in the family-business and family-wealth fields. FFI emphasizes the need for interdisciplinary collaboration. It hosts an annual conference; facilitates regional study groups and workshops to promote grassroots networking for the sharing of common problems and challenges; and publishes a journal.
• Attorneys for Family Held Enterprises (www.afhe.com) is an independent, nonprofit association of attorneys practicing in the areas of corporate, litigation, taxation and trusts and estates who provide multidisciplinary legal counsel and advice to privately held enterprises, their owner-managers and family members. It serves as a resource for individuals, business entities, trade associations, the business press and other groups seeking information concerning attorneys with the experience and qualifications to address privately held business issues.
• The Austin Family Business Program at Oregon State University (www.familybusinessonline.org) is a resource that works to help family businesses balance the well-being of the business, the family and individuals, as they address the challenges and opportunities that inevitably arise, day to day and during succession. A current project is to develop best practices in succession planning. A study group is inviting two or three family-owned businesses that have survived for 100 years “to come and talk with us about how they did it,” according to member Kay Abramowitz of Ater Wynne.
• The Family-Owned Business Blog (www.familyownedbusinessblog.com). The blog, produced by the family-owned business practice group of Ater Wynne, serves as a resource for stakeholders of family-owned businesses and their advisers. It aims to explore best practices for success at the intersection of family, management and ownership in these businesses.
— Cliff Collins
ABOUT THE AUTHOR
Cliff Collins is a Portland-area freelance writer and a frequent contributor to the Bulletin.
© 2010 Cliff Collins