Family Business Fall 2013

Massachusetts

FALL 2013

BUSINESS

Official magazine of the

WHY TOO MUCH OF A GOOD THING IS BAD FOR BUSINESS

Inside:

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Massachusetts Family Business Official magazine of the

CONTENTS

8 SUPPLY & DEMAND Family businesses that supply commodities walk a fine line. To survive for future generations, they must manage marketshare and internal struggles. As the commodities industry changes, so must the family business.

8

4

6

from the board

Call for Members

respecting the rule

How Fast to Grow, and How Much to Pay in Dividends

10 caught in the act

Embezzlement in the Family Business

12

SPECIAL SECTION: SUCCESSION PLANNING

12 tax time

Nothing is Sure but Retirement and Succession

14 end of the line

Forewarned is Forearmed

10 3

Letter from the Board

Call for Members If we do not hang together, we shall surely hang separately. – Benjamin Franklin

T

he Family Business Association (FBA) is dedicated to helping family-owned businesses improve their prospects, whether they are just starting up or whether they are several generations old.

Our members learn from others’ experiences. The majority of FBA programming features family business owners and managers sharing their first-hand perspectives. In essence, our job is to support members in their respective business experiences, to say: Others have gone this way before.

The FBA offers strength in numbers.

By expanding your network of family business peers, it provides not only a network to promote family business-tobusiness relations – it also provides access to advisors specifically committed to and experienced in serving family businesses.

Throughout the year, the FBA presents educational programs relevant to family businesses in each economic region.

Recently held programs include “The Art of Family: Organizing Your Business Family for Effective Communication and Harmony, and “Growing Your Family

Business Through Technology and Communication.” The FBA and Cape & Plymouth Business held a Family Business Summit in September. This last event, coordinated by the FBA, is a partnership that strengthens the FBA’s reach on Cape Cod, a natural and traditional incubator for family-owned businesses.

The FBA and Banker & Tradesman hosted the First Annual New England Family Business Conference this past May at Foxwoods, and plans are being made for a second annual conference in 2014.

On Oct. 24, the FBA will hold its annual award ceremony, the FBA Awards for Massachusetts, to recognize successful family businesses, those who have demonstrated outstanding community involvement, overcome a significant obstacle, or achieved excellence in marketing. All Massachusetts based family businesses are eligible to participate and the winners will be announced at the 2013 award ceremony at the Royal Sonesta Hotel in Cambridge.

And soon the FBA will expand its offerings to include:

• Facilitated peer-to-peer dialog groups.

Family business owners meet to discuss topics of common interest.

• Advice on forming a board of advisors or independent board of directors.

• Advice on exit and other success-related planning strategies.

Finally, you can be assured that programming and service offerings are relevant, valuable and timely. The FBA staff, executive directors, and sponsors receive guidance regarding programming and other service offerings from the FBA Advisory Council made up of nine family business owners representative of the diversity of Massachusetts family businesses.

Don’t miss out on all the resources and benefits of FBA membership –take advantage of this free membership period. Joining is easy. Just contact Liz Pratt at (617) 218-2077 or lpratt@fbaedu.com.

■ ED TARLOW JEFFREY DAVIS AL DENAPOLI BRIAN NAGLE FBA EXECUTIVE DIRECTORS

Massachusetts

FAMILY

Editorial | Advertising | Design

Official magazine of the Family Business Association. Inc.

A Family-Owned Business Since 1872 DIRECTORS 101 Huntington Ave., Suite 500 Boston, MA 02199 fbaedu.com

Jeffrey S. Davis, Mage, LLC Al DeNapoli, Tarlow, Breed, Hart & Rodgers, P.C. Brian Nagle, BNY Mellon Wealth Management

VICE PRESIDENT Catherine Watson, Tarlow, Breed, Hart & Rodgers, P.C.

TREASURER PRESIDENT Edward D. Tarlow, Tarlow, Breed, Hart & Rodgers, P.C.

Richard A. Hirschen, Gray, Gray & Gray, LLP

EXECUTIVE COORDINATOR Liz Pratt

4

280 Summer Street, Boston, MA 02210 Phone 617-428-5100 Fax 617-428-5119 www.thewarrengroup.com ©2013 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

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5

They Grow up so Fast

Respecting

% 5Rule the

By Ari Axelrod

6

importantly, expecting to benefit from the family business, grows even faster, as is shown by the line in the exhibit.

How realistic is the assumption that family members will each have three children?

500 450 400

468

Exhibit 1 Bars: Number of family member in question Line: Number of “business contemporaries” Assumption: Each family member has 3 children

350 Number of people

O

f the many questions we hear from business families, perhaps the two most common are these: “How fast should our business grow?” and “How much should we pay in dividends?”

While these two questions would seem to have nothing in common, they are in fact inextricably linked. What’s more, the answers to these questions are rooted not only in business, ARI AXELROD but in something that, at first glance, appears to have very little to do with business strategy or corporate finance – family demographics.

Successful families grow, and grow fast.

Consider Exhibit 1. The bars in the exhibit illustrate the number of family members in each generation, assuming that the family members have, on average, three children each. This growth is staggering, even if we take into consideration only the number of people in each generation. Add to that the fact that generations overlap (assuming that two generations are “business contemporaries”), and the number of family members potentially participating in and, more

Isn’t this assumption too aggressive? The answer depends, of course, on the culture, on accepted norms, and family traditions.

In the U.S, the average number of children per family is just below two. In the EU it is 1.6. Given that about 50 percent of marriages end in divorce, effectively creating additional family members expecting to be supported, the three children assumption does not seem to be far off the mark even in the U.S. and Europe. This number is, of course, much larger in many developing countries.

The demographic pressure on family businesses is far from trivial. In order to provide the same per capita wealth for the family members over time, the business must grow at approximately a 5 percent real – i.e., adjusted for inflation – annual growth rate (assuming 25 years between generations). This number, of course, should not be seen as a precise target. It is affected by the number of children (and the number of divorces and remarriages) per family, and it is likely to vary from one generation to the next. Yet our analysis indicates that the range of variation is relatively small, within 1-1.5 percent percentage points. Thus, while we encourage every business family to know their “number,” the 5 percent rule is an important rule-of-thumb benchmark.

Achieving 5 percent real growth over decades (or about 7 percent nominal – i.e., after accounting for inflation – growth in the U.S. and the EU; 10-11 percent in Brazil) is not an easy task. There are many strategic and operational challenges, which we look at in other Banyan publications.

One implication, however, that we do con-

300

324

250 200 156

150 100

108 52

50 0

4 4

2

12 16

3

36

4

Generations

5

6

sider – because it is particularly important – has to do with payouts from the business to the family.

Fundamentally, there are only three ways that the cash generated by the business can be deployed: The earnings can be reinvested in the business (or in other businesses in the family’s portfolio); they can be used to pay off the debt; or, they can be paid out as dividends or other distributions.

Reinvestment is particularly important.

To remain competitive and to grow, the business needs capital – for new equipment, new facilities, and additional working capital. However, using funds for reinvestment limits the funds available for dividends.

So a critical question is: How much can the business “afford” to pay in dividends?

Provided that the capital structure (debtto-equity ratio) of the business remains unchanged, the dividend payout ratio and the growth rate are linked by a simple equation: Sustainable growth rate = (1-dividend payout ratio) * ROE This equation allows us to calculate the maximum dividend payout ratio (percentage of earnings distributed as dividends) based on the profitability of the business (ROE) and the targeted sustainable growth rate.

Table 1 below portrays the share of the profits the business can pay out to the owners while maintaining the desired growth rate.

What happens if too much capital is taken from the business? A prosperous business may survive for a couple of years without reinvestment. In fact, it is tempting to do so – particularly for family owners who are not working in the business. Yet over time – and not too long a time – a capitalconstrained business will start ceding market share. It will be forced to pass by attractive expansion opportunities and will lose its ability to attract and motivate talented employees. Eventually, and inevitably, the starved business will begin to wither.

Another slippery slope is resorting to borrowing to pay larger dividends. Financial leverage is a potent tool, which, if prudently deployed to take advantage of attractive growth opportunities, can be very effective. But using debt to support payouts is an extremely dangerous road to take.

Once the borrowing capacity is exhausted, the business becomes vulnerable. Its ability to match competitors’ investments in new technologies weakens, and its strength to weather even a temporary downturn diminishes.

In order to build a healthy, enduring foundation for the next generations, family owners and executives must balance the desire of near-term payouts against the need to grow the business in line with

the demographics of the family. We hope that the simple approach described in this publication will help inform this essential trade-off.

Recommendations Establish and periodically evaluate the target growth rate for your business portfolio, consistent with your family dynamics: • Stay aware of the growth of the family.

• Understand wealth expectations.

• Use the 5 percent rule as an initial rough estimate until you can generate more accurate numbers.

Manage capital distributions in a responsible, sustainable way, consistent with your business growth needs and its profitability.

Use the sustainable growth equation to establish the upper limit on distributions and/or implications to the capital structure of the business.

Be transparent in managing the family members’ expectations regarding dividends and other capital distributions by educating family members about the growth target and its implication for the dividend policy.

■ ARI AXLEROD IS A PARTNER WITH CAMBRIDGE-BASED BANYAN FAMILY BUSINESS ADVISORS.

Targeted Growth Rate

Table 1: Dividend Payout Ratio Return on Equity 5%

10%

15%

20%

6%

-20%

40%

60%

70%

8%

-60%

20%

47%

60%

10%

-100%

0%

33%

50%

12%

-140%

-20%

20%

40%

To take an example, with 10 percent ROE (a common level of return) and 8 percent desired rate of growth, the business cannot “afford” to pay out more than 20 percent of its net operating earnings in dividends. To pay out more would not leave enough cash in the business for it to grow at 8 percent unless debt is added.

7

AVOIDING THE

TRAP WHY TOO MUCH OF A GOOD THING IS BAD FOR BUSINESS

By Christina P. O’Neill

W

e see the cycles again and again.

Small Company Inc. develops a new idea for a product or service. It catches on, a new market is created, and Small Company reaps the benefit – until competition steps in.

The customer base and Small Company’s profit margins erode, and it’s faced with several choices: race to the bottom on price, find new markets, expand its distribution, offer related services, or completely reinvent the company to produce something else for which customers are willing to pay more.

Game Changers The Family Business Association’s member companies have dozens of stories of reinvention. A look at the FBA Award finalists from the past several years bears this out.

There’s Ryan & Wood Inc., Distilleries, based in Gloucester. Robert Ryan Jr. experienced the sale of his family’s seafood business as the result of the shrinkage of Gloucester’s fishing industry. He wanted to bring economic strength back to the town and help it reinvent itself, so he poured his 8

entreprenneurial spirit into Ryan & Wood.

Fall River-based John Matouk & Company, a manufacturer of fine linens, relocated from Manhattan to New England in 1985 in search of the region’s skilled textile craftspeople. The company’s innovation has allowed it to thrive when most of the domestic fine linens industry has left the United States.

Sager Electronics, now based in Middleborough, was founded in 1877 as a small shop selling speaker tubes in Boston’s Faneuil Hall. Joe Sager took ownership of it in 1921, and raised its profile by sponsoring radio shows on WEEI that provided dance and classical music. It also developed and sponsored the play-by-play format of Boston Bruins away games. In its fourth generation of family ownership, it now employs 275 and is one of the top 15 electronic component distributors in North America.

Predicting the Market Leonard Green says family businesses don’t fail so much because they run out of money or passion, but because they do

not reinvent themselves. “There is always somebody who can undercut a commodity company,” he says. Green is president and founder of The Green Group, based in Woodbridge, N.J., and also teaches a popular entrepreneurship class, the Ultimate Entrepreneurial Challenge, at Babson College.

Green has served on the boards of many companies and has provided advice to many more. In 1998, he became involved with the SouthBeach Beverage Company, a small maker of juice and tea drinks, which was struggling in a nascent but very competitive market. At that time, big soda makers were starting to look for ways to diversify to other market areas besides soda. A lively new marketing plan, including a name change to SoBe, raised the company’s profile, and in 2000, Pepsico bought a 90 percent stake in it for $370 million.

The Information Age For those who provide information and services, the Internet has served as an accelerant to commoditization and change.

Carol Bulman, now CEO of independent

P

Norwell-based real estate firm Jack Conway & Company Inc., says the days of real estate agents having full control over the contents of the Multiple Listing Services book disappeared when the Internet opened real estate listing information for all to share. Today, 95 percent of prospective homebuyers start their search online at sites such as Realtor. com, other brokerage sites, and her company’s website, www.jackconway.com. Once they are ready to focus on a property, they go to a real estate office or a particular agent.

The Internet has widened and flattened the control of information, to be sure, but it has also made prospective homebuyers better prepared. Additionally, it allows agents to work from home and to cut down on their travel time and expense. “As long as an agent has mobile technology, they can work where their customers need them,” she notes.

At a family business conference held last spring, Bulman told the audience of an interesting discovery she had made: Measuring the year 2012 against 1997, commission dollars stayed essentially the same, but ex-

penses shifted from print and postage to investment in online technologies, including a virtual private network for the company.

Decreases in travel were somewhat offset by higher gas prices. So despite the revolutionary nature of technology, its impact was mitigated by many exterior factors.

It’s not a wash for everyone. For those in transaction-based jobs, it can be a washout.

Barry Libert, CEO of technology advisement firm OpenMatters, notes in a recent article that the largest impact of technology is on jobs that are largely transactional in nature. He cited American Express’ announcement last January that it would reorganize its travel-service business strategy, cutting an announced 5,400 people because online and mobile-phone bookings had reduced the need for customer-facing staff. However, an innovator might regard the displaced workers as 5,400 opportunities to engage in something that will add more value.

digital age, it’s imperative to tease out the transactional components of your business from the relationship-driven components.

If one of your business components is in the process of becoming commoditized, is there a piece missing in the commoditization process that you could develop to retain value? And can your existing staff be freed up to help in this endeavor instead of being let go?

If you are going to add a business line, know who your competition will be, and how the new business will fit with how your customers perceive you.

Knowing your customer, or prospective customer, is the key to innovation success. As Green notes of the late founder of Apple, Steve Jobs, “he found what the customer would want but didn’t want yet.”

■ CHRISTINA

P.

O’NEILL

IS EDITOR OF CUSTOM

PUBLICATIONS FOR THE WARREN GROUP, PUBLISHER

Selling the Experience As transactions are commoditized in the

OF MASS. FAMILY BUSINESS. SHE CAN BE REACHED AT CONEILL@THEWARRENGROUP.COM.

If you have a small business, chances are you have big plans.

Our financial representatives can help you with your long-range business plans. By offering innovative solutions that include risk management, business succession, employee benefits and personal planning, we treat you like you’re anything but small.

David C Mc Avoy Managing Partner Boston (617) 742-6200 nmfn-thebostongroup.com

05-2838 © 2013 Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities) and its subsidiaries. Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser, and member of FINRA and SIPC. David Charles Mc Avoy, General Agent(s) of NM. Managing Partners are not in legal partnership with each other, NM or its affiliates. David Charles Mc Avoy, Registered Representative(s) and Investment Advisor Representative(s) of NMIS. 9

Hand in the Cookie Jar What Happens When Someone Embezzles from the Family Business?

By Lois Lang

H

earing about embezzlement in a public company rarely shocks anyone, but when it happens in a family business, people are often stunned.

“How could he steal from his own family?” “Doesn’t she know she’s hurting her siblings/parents?”

As tough and painful as embezzlement is, it’s not as uncommon as many of us would like to think. Sure, the kind of embezzlement that results in jail time is rare, but other levels of it happen daily.

How could this happen? Many factors lead to embezzlement, including chronic financial strain, a general sense of family entitlement, lack of internal company controls, and the reality or perception of being overworked and underpaid. To make matters worse, often the embezzler doesn’t even know that what he or she is doing is wrong.

Here’s an example of how embezzle-

10

ment can start small and quickly grow: Jim (the business owner’s son) fills up his gas tank once on a Friday and pays for it with the business account, knowing that the miles he drives will be primarily for personal, not business use. He tells himself it’s okay because he has filled the tank on his own some weekends and used “his gas” for business use on Monday and Tuesday. Then he takes a few vacation days and doesn’t record it as paid time off. He picks up gift cards for employee recognition and pockets a few for himself. He knows that Dad pays him less than local competitors, and this is the way he evens it out. He notices other family members treating the business the same way, so it simply becomes the “way we do things around here” – it is their company culture, not embezzlement.

The misuse of company assets, time, and money escalates. Soon, Jim adds a

non-working family member to payroll, petty cash disappears, one out of ten customer checks are rerouted to Jim’s personal account, and personal items are consistently charged to the business credit card. Eventually, an employee in accounting notices and agonizes about who and when to tell.

So while embezzlement starts small and often innocently in a family business, it can quickly escalate to something big that damages the business, hurts non-family employee morale, and breaks family trust.

Take Action What do you do when you realize a family member is embezzling from the business? Action is obviously required, and taking a cautious, thoughtful, respectful approach is wise. To begin, have a premeeting of key leaders, without the suspect family member present, to address the following questions: • Do we have clear, hard, verifiable facts before we assume fault and intent?

• Who will be at the meeting to lay the facts out?

• Are we going to involve the legal system?

• If we continue employment with this family member, do we need to change his/her job position?

• How or will we message this to the rest of the family? To other employees? To the board of directors?

• How or did the company contribute to this problem?

• If the company did, what steps will we take to prevent it in the future?

• How or did the family contribute to this problem?

• If the family did, what steps will we take, as a family, to prevent it in the future?

• Has this family member had chronic, known problems with finances?

• Generally, how can we protect the company from future misuse of company assets or embezzlement?

• How do we protect the whistleblower?

• Do we have a whistleblower program set-up internally? Are employees trained annually?

• Do we talk openly in Family Council about our responsibility to financially

protect and care for company assets?

• Do we give specific examples of what is and is not allowed?

• Do we have a solid non-compete clause in our employment contracts and/or employee handbook in case we have to release the family member from employment?

• Do we consistently run a professional background check on applicants?

• If I need to walk the family member out the door, how do I prepare? Computer security, locks, passwords, current company asset retrieval, bank account access protection, social media tracking, last paycheck, etc.

• Do we need to involve the corporate attorney, board of directors, outside legal attorney, CPA, business psychologist? If so, when and how?

happened. Really listen to what they say and how they say it. Remember, it’s common for family members not to realize that they are indeed embezzling. If this is a first offense, and if the embezzlement is not excessive, some education may be the best course of action. However, if you believe the family member knew what he or she was doing and did it anyway, or if the embezzlement is substantial, termination may be the only option.

During the meeting, you need to be vigilant in checking yourself by asking “What would I do if this wasn’t a family member?” and “Is this at a level where I will be able to trust them again?” Your answers to these two questions will reveal a lot about your best action plan.

controls that can spot any wrongdoing are the best ways to reduce your family business’ chances of falling victim to embezzlement. Acknowledging what could happen, along with some planning to prevent it, will keep your family and business strong, successful, and honest.

■ LOIS LANG IS A SPEAKER AND CONSULTANT WITH EVOLVE PARTNER GROUP, LLC. SHE CAN BE REACHED AT LOIS. LANG@EVOLVEPARTNERGROUP.COM OR (209) 952-1143.

Once you’re clear on these aspects, it’s Keep Your Family and time for the second meeting – this one Business Strong with the suspect family member. When Of course, education of all employyou begin the meeting, keep it at the level ees (family and non-family), strict poliBlumShapiro 7.5out x 5_Layout 8/19/2013 PM Page of discovery.Ad Lay the facts1and ask the 2:57cies about2 how the company’s assets family member their perception of what and resources can be used, and enforced

Comprehensive services for family-owned businesses.

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A key consideration is wealth preservation and planning. Most business owners only have one chance to create wealth, or to build upon the efforts of previous generations to enhance their wealth. Once the transition has been completed, that wealth must be preserved and protected, not only for the lives of the owner’s family, but for future generations as well.

Of course, an important element of wealth preservation is risk management.

Typically, business owners become increasingly risk-adverse after stepping aside. An investment strategy should incorporate the new risk limitation and deliver a sustainable cash-flow while protecting the capital with few surprises. After all, there’s no point to estate planning if there isn’t any estate to pass along.

By Jim Fitts and Marshall Rowe

Planning for Succession How Family Business Owners Can Protect Themselves and Their Families When Preparing for the Future

By Jim Fitts, John Weeks and Marshall Rowe

A

ccording to the old cliché, the only two things in life that are certain are death and taxes. Well, for owners of family businesses, there is another certainty: retirement and succession.

Every family business owner faces the eventuality of passing along the company to either the next generation of the family or to an outside party. Certainly, the business aspects of a transition must be carefully addressed, but personal transition planning is no less important to the business owner. How can owners prepare themselves for a new life that doesn’t include running the business? How can they assure that they have sufficient personal assets to enjoy rewarding lives for many more years? And how can they protect the financial interests of their children, grandchildren, and other loved ones?

All are vital questions and, they are all connected. For instance, business owners 12

want to maintain the most comfortable lifestyle, and, if possible, leave an inheritance for their children. Many company owners want to use some of the equity they’ve built over the years to benefit others who have been less fortunate. Regardless of what owners wish to do with their money, any strategy requires careful consideration and the development of sensible strategies.

Life After Transition If a transition from business ownership is well-planned, the business’ (now former) owner will have financial independence.

But that financial independence isn’t necessarily an end unto itself. It’s merely a step towards the next stage of transition: preparing for transfer of assets to a spouse, children, and other loved ones. Estate planning is an essential consideration for any business owner who is planning for business and personal transition.

Tax Management Tax management is also a key consideration for business owners. A thorough understanding of the owner’s tax position is necessary to maximize the sustainable value of his or her investments while managing when and at what rates taxes are paid. There are a number of decisions that can impact the level of annual tax liability, including the division of investments between taxable and tax-deferred accounts; the timing of portfolio reallocations; retirement plan distribution methods; beneficiary designations on retirement plans; source and selection of assets for charitable giving; lifetime gifting options to heirs; asset ownership; and trust structures used during life or in estate planning.

We now have relative permanency in our estate tax code so planning is easier.

The estate applicable JIM FITTS exclusion is set and indexed off a $5 million base ($5,250,000 for 2013) while the highest estate tax rate is 40 percent. This is a more favorable structure than many anticipated and leaves only a tiny JOHN WEEKS fraction of estates actually paying an estate tax (the last year estimates are available is 2011 when the exemption was $3,500,000: only 3,270 estates would pay an estate tax, according to the MARSHALL ROWE

Tax Policy Center). The current lifetime (non-charitable) individual gifting allowance is also tied to the estate applicable exclusion at $5 million, indexed for inflation.

Even with these relatively high thresholds, gifting during lifetime can still make sense as a way to defer estate tax by transferring asset appreciation from one generation to another. This works particularly well with closely held stock since the new law left discounting of its value available when being gifted.

With the increase/addition of Medicare taxes, the phase out of personal exemptions and limitations on itemized deductions, income tax planning is an even more important part of the lifetime gifting analysis.

Pushing income producing assets to those in lower brackets has both income tax and estate tax benefits.

As years pass, adjustments to the wealth transfer plan might be appropriate to achieve fairness. Typically, the family tree will undergo changes as there are marriages (or marriages end) and children come back to the fold or become estranged.

Business owners (and their advisors) must also be prepared to correct parts of the plan that might not have worked as expected. As with most things in life, flexibility often leads to better results down the road.

When it comes to meeting the needs of family business owners and their families, estate planning always requires careful consideration and planning to succeed.

However, with the tax changes that may take place next year, planning decisions made today could have even more momentous consequences than usual. Those who pay close attention to these issues can establish estate plans that will satisfy their personal goals and meet the financial needs of loved ones for years to come.

■ JAMES A. FITTS, CFP (JFITTS@HARVESTCAP.COM), IS DIRECTOR OF WEALTH COUNSELING; MARSHALL G. ROWE, CEXP (MROWE@HARVESTCAP.COM), IS PRESIDENT AND CIO; AND JOHN F. WEEKS (JWEEKS@HARVESTCAP.COM), IS DIRECTOR OF FAMILY WEALTH MANAGEMENT AT CONCORD, NH-BASED HARVEST CAPITAL.

Found the perfect commercial property?

Charitable Giving Another element of estate planning, which is closely tied to tax management, is charitable giving. Successful families often turn to philanthropy to further the family legacy, particularly when new capital is created through the sale of a company.

However, strategic philanthropy operates differently than check-book charity and requires careful planning. Typically, one of three approaches is pursued: • Creating an annual gifting budget, with contributions coming from general family assets, though structured for maximum tax benefit.

• Establishing a donor-advised fund with an initial irrevocable gift, and adding to the fund as resources allow.

• Creating a family foundation, which is also funded with seed capital and expanded as resources permit.

Opportunity doesn’t wait. Why should you?

These options are essentially lifetime giving opportunities, though charitable bequests upon death are another option for achieving philanthropic goals. Business owners and former owners have plenty of opportunity to select the right approaches to meet their goals, as well as those of their family as a whole.

Call 617-889-7722 or visit metrocu.org/commercial today.

The Wealth Transfer Plan Ultimately, each of these estate planning considerations will converge as they lead to a wealth transfer plan: the plan that establishes channels for the distribution of assets to family members, charities, and other recipients. It’s important to remember though that the wealth transfer plan is not a static formula for achieving the owner’s ends. The longer he or she lives, the more likely it is to change.

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13

Business Succession Planning Acting on the Best of Intentions

By David McAvoy

M

ost successful businesses start as an idea, and are nurtured into success with sacrifice, perseverance and hard work. But for one DAVID MCAVOY of these businesses to outlive its founder or current owner and thrive under new ownership, it takes careful and comprehensive planning.

Business succession planning is a dynamic process that involves preparing for the time when you, as the owner of a business, will be less involved in that business.

But it requires more than deciding how to transition out of your active role as the “manager” of the business and transferring ownership interest from you to someone else; it also involves maximizing your personal financial security.

One of the first steps is to identify the value of the business. This can be done through the professional assessment of an appraiser, using an adjusted book value taking into account assets and liabilities; evaluating future income potential; or simply by an owner’s estimate.

Succession planning is also the time to determine your family’s needs and interests, analyze the needs of the business, and balance the two. And, if you want your business plan to be coordinated with your estate plan, now represents a great opportunity to achieve that objective. If your intent is to keep your business within the family, this transition time represents a great opportunity for the next generation.

Who, among them, will participate in the business and in what capacity?

Clearly, putting the day-to-day decision making in the wrong hands can result in the failure of your business. Therefore, your business continuity plan should address management succession as well as ownership succession. The people you want to own your business may not be the best people to manage it successfully. Will your future income be dependent on how well your business functions when you are no longer in control? Your plan also needs to take into consideration the risk of the unthinkable happening to you or a business partner prior to the business “changing hands.”

In some circumstances there may be

competing interests among the surviving family members; some may want to “grow” the business; others may want to sell it and “cash in.” In other circumstances you may find yourself in the challenging position of being in business with a partner’s surviving spouse, or adult children. The right plan can help make any transition occur more smoothly with less stress, and with a more satisfactory outcome. Conversely, without appropriate planning, a business might need to be sold to generate the funds necessary to pay estate taxes. Businesses sold under these time constraints rarely are sold for their fair market value.

With so many things to consider it is tempting to throw up your hands in despair. Once you realize that doesn’t solve your problem, it’s time to call in a professional – someone who can not only pose all the questions you need to address, but also has the expertise and experience to know how other business owners, in a similar position to you, have addressed the challenges successfully.

■ DAVID MCAVOY IS MANAGING PARTNER AT THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY.

FBA Night at Holiday Pops Join this year’s FBA Awards for Massachusetts Finalists and the family business owners that serve as the FBA Advisory Council on December 5 for a pre-concert reception and an unforgettable holiday tradition - the 2013 Holiday Pops concert at Symphony Hall.

Tickets are $103 and are limited, so reserve your seats now.

Additional sponsorships are available; restrictions apply.

Contact Ashley Sullivan at (617) 261-8148 or asullivan@wolfandco.com.

Complimentary, private pre-concert reception Concert

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6:00 PM 8:00 PM

2013 COMP Reports

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617-896-5392 datasolutions@thewarrengroup.com

Our 100 years means that wherever you are going, we can guide you there.

RyAn GoRMAn, CPA PRinCiPAl AudiT & AssuRAnCe

At Wolf & Company, we pride ourselves on insightful guidance and responsive service. As a leading regional firm, our dedicated professionals and tenured leaders provide Assurance, Tax, Risk Management and Business Consulting services that help you achieve your goals.

Hear about our experiences working at family businesses.

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