Official magazine of the
Massachusetts
Second Quarter 2011
FamilyBusiness Friends Family and Farm
Klem’s Department Store Still A Spencer Landmark
Plus:
A Lawyer for the Family Business A Supplement to Banker & Tradesman
It takes skill to synchronize so many moving parts. Shouldn’t your portfolio be managed with the same precision?
fi d u Ci ary -t rust.Com 1 7 5 F e d e r al S tre e t BoSton, M a
investment management | trust services | estate and financial planning | family office services | estate settlement
Massachusetts Family Business Official magazine of the
Contents
12
Friends, Family, and Farm: Klem’s Department Store Still A Spencer Landmark Three-generation business holds its own against big-box retailers Cover: Jessica Bettencourt, president of Klem’s, with her father, Mike Klem, who turned the management reins over to her in December 2010.
4
board letter
12
Charting the growth of the FBA
8
as your (company’s) attorney, I advise you... The interests of the business vs. the individuals
16 all you need is love
18
(and a business assets antenuptial agreement)
18 phantom stock plans A growing compensation trend
20 hiring veterans How your company can benefit
22 planning for a disaster Keeping continuity is key 8
20
Massachusetts
from the board
From Seedling to Tree
FamilyBusiness Official magazine of the Family Business Association. Inc.
Official magazine of the
Massachusetts
G
rowth is a remarkable phenomenon to witness, even though extremely elusive. Very few of us humans – if any at all – have the capacity or attention span necessary to sit down and focus on noticing a living being grow. This is probably the reason I was always fascinated as a child by time-lapse videos of plants growing or flowers blooming. To see a little green seedling stemming out of the soil, growing leaves, and eventually developing bark and branches to ultimately become a tree that bears J effr ey S. D av i s fruit, all happening in 60 seconds thanks to time-lapse videos, is a spectacle most of us take for granted. We notice growth by stages, and this is especially true when talking about seeing nonliving entities grow, like the Family Business Association. With every year that passes, it’s gratifying to notice the increase in support, events and applications to our highly anticipated yearly FBA Awards program. All three provide reliable means to measure growth for the FBA. All three tell us that, in pursuing our mission to educate family businesses and to honor and promote their achievements, we are doing something right. This year alone has seen the addition of sponsors. Prime examples include John Leonard Employment Services, Inc.; MassPay, Inc.; Thomas D. Davidow and Associates; LitmanGerson Associates, LLP; Kahn, Litwin, Renza & Co., Ltd. and Consilium Partners. They have approached us thanks to the heightened visibility the association has reached due to its commitment to educate family businesses. These companies know that family-run companies power the economy, and, most importantly, our state’s economy. Therefore, in helping an association whose main purpose is to provide family businesses with the tools and resources to better manage their enterprises, so they can ultimately reach their goals and succeed, they are helping a business sector that generates substantial amounts of jobs and represents an overwhelming percentage of our country’s GDP. The events we organize along with our sponsors have increased not only in number
but also in attendance. In January, we partnered with the Small Business Association and hosted an event focused on starting, operating and transitioning a family business. Philanthropy Night, a February event organized and co-hosted by The Boston Foundation at that organization’s headquarters in Boston’s Back Bay, was very effective in bringing in family businesses and enriching their knowledge on the importance of community involvement. More recently, the breakfast we co-hosted with Fidelity Family Office Services at the Seaport Hotel on March 8 was successful in attracting family businesses interested in preserving their family legacy. And we will co-host our next event on April 21 with Suffolk University. We will focus on social networking and how it is changing the way we work and do business; Brian Nagle (bnagle@fbaedu.com) will be glad to provide any information on this event. Nevertheless, what I personally consider to be the best measure of the FBA’s growth is the actual family businesses that participate in our annual awards program. But there’s more to it than the ever-increasing amount of them that apply for the FBA Awards. Sure, the quantity of family businesses taking part in this event certainly shows growth and allows us to see how far we’ve come. But what I appreciate most is their excitement in being a part of this celebration. From the moment the applications start coming in – which starts happening earlier each year – to the actual night of the event, the amount of work they devote in order to compete in it can only be compared to the passion they put into their businesses. This is how I have noticed the growth of our tree. From the very first FBA Awards to the latest one in October of last year, the FBA has grown from a little green seedling on its way up from the ground to become a tree that continues to grow and bear fruit. We continue to educate, honor and recognize family businesses for their achievements, and we love doing it. Their efforts and the contributions they make to our economy deserve to be recognized, so help us in our mission and nominate that family business you know. It’s never too early, and you can never nominate too many. As the economy continues its push to get back on its feet, it’s family businesses that are providing the energy. n
JEFFREY DAVIS IS chairman and founder of mage, llc and a DIRECTOR OF THE FAMILY BUSINESS ASSOCIATION. 4
Second Quarter 2011
FamilyBusiness
By Jeffrey S. Davis 101 Huntington Ave., Suite 500 Boston, MA 02199 fbaedu.com
Friends Family and Farm
Klem’s Department Store Still A Spencer Landmark
Plus:
A Lawyer for the Family Business
A Supplement to Banker & Tradesman
President Edward D. Tarlow, Tarlow, Breed, Hart & Rodgers, P.C. Directors 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 Richard A. Hirschen, Gray, Gray & Gray, LLP
A Family-Owned Business Since 1872
Vincent Michael Valvo Group Publisher and Editor-in-Chief 280 Summer Street, Boston, MA 02210 Phone 617-428-5100 Fax 617-428-5119 www.thewarrengroup.com
Timothy M. Warren Chairman Timothy M. Warren Jr. CEO & Publisher David B. Lovins President Finance & Administration Jeffrey E. Lewis Controller / Director of Operations Editorial Services Christina P. O’Neill Custom Publications Editor
Creative Services John Bottini Creative Director Scott Ellison Senior Graphic Designer Ellie Aliabadi Graphic Designer Advertising & Circulation George Chateauneuf Publications Group Sales Manager Emily Torres Advertising, Marketing and Events Coordinator
Cassidy Norton Murphy Associate Editor
©2011 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.
The proud sponsors of the
Family Business Assocation Awards for Massachusetts 2011 GOLD Financial Network Wealth Management
SILVER
BRONZE
Media Supporters
Other Supporters
5
FAST By Tom Fleming
Myths About Business Networking Groups
B
usiness networking organizations are often misconstrued as a social group or club. The reality is that business networking groups can be a money-making machine for those who belong to an organization with a business versus social culture. A recent survey on business networking groups showed 43 percent of business professionals attend up to 20 networking events each year. While up to 55 percent were satisfied, most indicated it took a lot of time to attend multiple events each year, and 26 percent were unsure if attendance would bring qualified referrals. Business networking can be lucrative even in a poor economy if the group is run effectively. Here are five myths about business networking groups:
1.
Business networking groups are social groups or clubs.
Quality business networking groups should offer opportunities for superior business networking, personal development and educational advancement.
2.
Professional business networking organizations are a Chamber of Commerce.
A business networking group should ally with local chambers to promote memberships in their organizations and diversify their networks, but should remain autonomous.
3.
Business networking groups are a civic organization.
Unique business networking organizations are not the equivalent of a Rotary Club or a Lions Club. Instead, they foster business success by offering networking opportunities, educational programs, and personal development, while civic organizations are primarily focused on fundraising activities and giving back to the community.
4.
Business networking groups often don’t deliver what they promise.
While this may be partially true for some business networking organizations, this myth is debunked if you do your homework and find a quality group that delivers unique opportunities and has the statistics to back up its methods. Good questions to ask before joining include: Do members get more business? What are some of the opportunities that are offered? And of course, business networking is like anything else in life – you get out of it what you put into it.
5.
Business networking groups are for selling and telling your story.
The reality is that business networking groups are more about listening than talking. The number-one attribute of an excellent organization is communication. Take an interest in others and they will reciprocate and send referrals your way. When you join a business networking organization, the group you choose should be concerned about the well-being of its members and help them to achieve success through referral marketing. The facilitators and the members should be results-oriented, accountable and passionate about what they do. The group should offer high-end training sessions and unique opportunities in a onestop location, which are a step above the average professional business networking organization. n Tom Fleming is the executive director of Business Networking International and the director of training for the Referral Institute.
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Our 100 years means that wherever you are going, we can guide you there.
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8
s ‘ y n a p m o c As your attorney, I advise^ you… By Christina P. O’Neill
Interests of the Family Business vs. Family Members
T
he longer a family-owned business survives, the more likely it is to encounter a problem that requires separate legal counsel for the business and individual family members. We’re not talking here about representation on routine business matters. We’re talking about problems. Here’s a scenario: the founder of a family business dies and his widow takes over the business. The attorney representing the business had a long-term relationship with the founder. The business falls on hard times, and its bank wants the widow to sign a personal guaranty. It’s in the interest of the company that she sign, but not in her interest to do so. The widow signs, but the business fails, and the bank seeks repayment from her. The attorney for the business should have advised the widow to seek independent counsel. Or this scenario: a company decides to raise money by issuing stock. A family member wants to buy in. The lawyer for the business should recommend to this family member that he seek independent counsel. The counsel for the business must distinguish between the interests of the business and the interests of individual family members. When should a family-business
attorney and his client(s) start thinking about such things? Answer: Sooner than you think. The party you came in with “Lawyers make this mistake – they are introduced to [the business] by one of the partners,” says Robert McLaughlin Sr., managing and senior partner of Gilman, McLaughlin & Robert McLaughlin Hanrahan LLP. “As possible conflicts develop, as a lawyer, you have to remember that your obligation is to the business. You can’t be on the side of the person who brought you in.” And ultimately, the family lawyer has to know when to call a timeout and advise individuals in a dispute that they each need their own counsel. McLaughlin’s resume includes representing 3 independent directors in the aftermath of the Demoulas family’s legal battles, as well as dozens of other lesserknown but no less contentious cases. Not surprisingly, the issues of insiders versus outsiders, control and compensation are at the top of the list of casus belli. Continued on next page
9
As Your (Company’s) Attorney, I Advise You... Continued from page 9
How not to kick the hornet’s nest John Talvacchia, a corporate attorney at the Boston office of Eckert, Seamans, Cherin & Mellott LLC, says that while it’s possible to represent individual family members in matters John Talvacchia that do not conflict with the legal needs of the business, the line can easily get blurred. “You are trusted,” Talvacchia says. “They’re going to confide in you personal issues as well as business issues.” And some of William Ely those personal issues have the potential to negatively impact the business. “You have to be vigilant because
you can’t expect the client to be.” “The attorney cannot have divided loyalties,” concurs Attorney William Ely of Robinson & Cole LLP. “He/she can represent the parties so long as their interests are concurrent. However, if those interests become adverse, separate counsel will be required. That circumstance can in practice enhance communications and lead to better results.” Talvacchia recommends drafting an engagement letter outlining who the client is and the nature of the engagement. The letter should include a description of the nature of the legal service for both the company and individuals, and should recognize the potential for a conflict. It should include wording about what steps the attorney or firm will take in the event that conflict arises. Insiders, outsiders and exit plans A common problem in second-generation family businesses are conflicts between siblings who want to stay involved in the business and those who don’t. “Often, the second generation takes the credit for the founder’s efforts, and outside siblings think they share equally,” McLaughlin says.
Compensation and levels of involvement in the business are among the primary legal problems. “Generally, the most difficult issues involve either ownership and succession or management disagreements,” says Ely. “The business needs to define roles, focus on the business and its on-going value while avoiding feuds and petty disagreements.” Some nuts-and-bolts problems include financial concerns of pass-through businesses, in which partners incur tax liabilities whether they get distributions or not. The inside family members may want to keep the distribution in the company to grow the business. “You get this inherent conflict where those on the outside want their distribution, at least enough to pay the tax, and hopefully receive some ROI,” McLaughlin says. Additionally, in the course of estate planning, shares in the company given to grandchildren may push them into tax brackets that are unexpectedly high, he says. “The problem is, there isn’t a market for buying the grandchild’s stock.” He advises that it’s good to have a circuit breaker to provide a family member who no longer wants to be part of the business a way out. David Klebanoff of Gilman, McLaugh-
+ Fitting client to counsel Family businesses can be divided into two types, says Richard Narva, founder and senior advisor at Narva & Company. In the family-managed model, the owner-managers seek to transfer role and operations responsibility from the first generation to the second. While some of these businesses can be large, they also tend to be “lifestyle” companies – “You work hard, you work long hours, you try to do well, and at the end of every year, you decapitalize the company to finance [the family’s] lifestyle,” he says. “It’s not often a strategic decision, it’s simply an intuitive judgment made by the major breadwinner in the business to improve the family lifestyle.” Those family-managed businesses rarely use legal help in a proactive way; they use it only in a crisis. These companies are not an attractive market to an institutional law firm, he says – they are served by very small firms.
10
In contrast, the family-controlled enterprises vest control in a family shareholder group, which may or may not be involved in management, but which keep control through a number of mechanisms. A trust may hold the shares of individual members, and instead of decapitalizing every year, the family shareholder group attempts to grow the enterprise. This model more closely resembles any other non-family company, and is therefore a better fit with an institutional law firm, Narva says. The lawyer who represents a family business has to focus on the forest, not the trees. His or her firm has to be large enough to offer specialties needed by the client, according to Narva, but not so big that the client’s representation will be pigeonholed, with one specialty not knowing what the other specialty is recommending. The family-business lawyer has to be both sensitive enough to anticipate and recognize conflict, and objective enough to avoid conflict.
lin & Hanrahan LLP observes the challenge of annually setting a value on company stock (see related article, page 18). In businesses where everyone gets along, they see no need to update the value of the stock. “A safety agreement should be that unless value has been set within the last 24 months, the old value is void,” he says. One preventive measure is to have the option to sell the stock at a discount off of book value. Don’t take today’s harmony for granted McLaughlin advises that even businesses in which all partners are in accord should build into their legal planning the possibility that future partners might be at loggerheads some day. Say that two partners started a business, but now the second generation doesn’t get along. Having a buyout clause avoids the need to dissolve the business to get out. He warns, however, that valuing a business is not an exact science. A superstar performer, for example, should not have to pay a buyout premium to an underperformer who wants to exit. Things get more complicated when family members divorce in businesses in which marital assets are the majority of the busi-
ness, McLaughlin notes. A founder may not want a former in-law owning a big chunk of the business. Prenuptial agreements that exclude inherited family assets take the business out of consideration as a division of marital assets (see related article, page 16). Getting two disciplines into the room Richard Narva is founder and senior advisor at Narva & Company, founded in 2009. Before founding the company, he practiced corporate law with a mergers and acquisition specialty before succeeding his father as president of Morton Shoe Companies Inc., as the third-generation head of the company. He also has a long history of directorships in family-owned companies and has counseled family-run firms since 1986. Family-controlled firms have ownership issues, tax and estate planning issues that investor-owned companies do not. And, Narva says, it’s almost never true that the lawyers doing the tax and estate planning and the lawyers doing corporate financing speak to each other – even if they work in the same law firm. In fact, he says, when he visits a client, the attorney working on tax and insurance matters and the one advising
on a joint venture often have never been in the same room together. “Two weeks before the closing of the deal, they talk. Sorry, it’s too late,” he says. Not too late for the rudimentary things, but when the issues of control, money or power mixed with family dynamics are added on, “you can’t close the deal.” The type of lawyer who can avoid this situation is one with the skills to take on a leadership role – a skill that’s often learned outside of law school, Narva says. An attorney for the business can advise a client on whether to operate as an LLC model or as a corporation. The real issue is integrating tax and estate advice for the shareholder control group with the growth goals of the company. “Integrating that requires involvement at the highest levels; lawyers are fearful of jeopardizing their relationships,” he says. “Lawyers need to understand that in the same way that they’re not CPAs, they have to know when to call in an accountant,” Narva says. “They have to know when and [who] to call to deal with complex family issues being acted out in the business.” n Christina P. O’Neill is Editor of Massachusetts Family Business.
CUTE? SURE. BUT NEXT HE’LL WANT A COMPANY LEXUS. If you are managing a family-owned business you’ve got to make decisions today that will affect the future. Make sure you act on financial information that is timely, accurate and provides steady guidance for the road ahead. No matter what model you are driving. Call Richard Hirschen at (781) 407-0300 to see how much more you can get from an accounting firm.
CERTIFIED PUBLIC ACCOUNTANTS VISION • DIRECTION • SUCCESS Westwood, Massachusetts 781.407.0300 www.gggcpas.com
11
Klem’s
Department Store
THRIVES In Big-Box Era
Family Keeps Retail,
Farm Flourishing
F
By Keith Griffin
amily-owned Klem’s, located in Spencer, a small town of 11,000 just nine miles west of Worcester, is not just another department store. It might be tempting at first to underestimate the store — even the Salvation Army Thrift Store across Route 9 displays a more contemporary facade. But once inside, just past the enticing smell of fresh, hot popcorn, sits a store with a rich history and a diverse inventory of more than 140,000 items. Coming Full Circle Klem’s was started on this parcel of land at 117 West Main St. by John Klem in 1949. It began as a tractor dealership that John and his wife Bernice ran until their son Michael took over in 1979. Jessica Bettencourt, Michael’s daughter, is the third-generation family member in the business and recently became the store’s president. Judy Stone, Michael’s sister, is semi-retired from the business, but ran the greenhouse for several years. She still works a few hours a week. June Klem, Jessica’s mother and Michael’s wife, sits on the board of directors but has no active role in the day-to-day operations. At its peak Klem’s sold more than 100 tractors a year and serviced many more. “At the time that was a big business in Worcester County. Farming was it. Even late into the 1980s, there were over a thousand farms. I knew a lot of people who grew up on farms,” Bettencourt said. Farming is enjoying a resurgence of sorts in the central part of Massachusetts. “There are a lot of small market gardeners now. I think and hope it’s resurging. It’s not dairy farming, but it’s coming back in other ways,” she said. The demand for local-grown produce is helping the area’s growth. Continued on page 14 12
Jessica Bettencourt, president of Klem’s, says pet supplies and apparel have the largest shares of store business, at 10 and 15 percent, respectively. Its product diversity has helped the business weather many challenging economic times. Photos: Keith Griffin
13
KLEMS Continued from page 15
All In The Family Michael Klem said there are challenges to running a family business, especially in retail, with its long hours and weekends on the job. It’s tough not to talk business, even at family gatherings. “When it’s a family business you don’t get away from it,” said Jessica Bettencourt, who has worked in the family business since junior high when she hopped off the bus across the street after school. Bettencourt became the store’s president in December, and has truly done it all. She’s worked in receiving unloading trucks, managed various departments, was the office manager, and was general manager before becoming president. “I’ve had to do a little bit of everything. I needed that,” she said. She holds a bachelor’s degree in business administration from nearby Assumption College in Worcester. Michael Klem has a note of pride in his voice as he discusses his daughter running the family business now that he has pulled back at the age of 63. “You name it, she’s done it. She makes all the decisions,” he said. “I’ve gotten away from a lot of the decision-making process. They used to ask me. Now they don’t even ask me.” Eventually, he plans to work just weekends. (On the day he was interviewed, he was working the closing shift.) “I don’t feel I’m needed as much any more. I’m kind of happy about it,” he said. His daughter added: “Don’t let him kid you. He’s here five days a week.” At least that’s an improvement from his former schedule of seven days a week. Bumpy Roads Bettencourt said her family business has weathered the recent economic recession and other challenging times because Klem’s has a lot of different retail categories. On any given day you can buy a canoe, diaper balm and a goldfish. “We’re a bunch of specialty stores under one roof. When one area is down, something else is making up for it,” she said.
“I
f you go to a good store, we have an equivalent selection. We’re like the big box stores, but with a better selection. We can’t compete on price. We have to compete on quality. — Jessica Bettencourt
“
The company added Agway in 1979, just around the time Klem took over the business, to help smooth out the dips from being a farm supplier by selling items like dog food and bird feed among other wares. It helped provide revenue throughout the four seasons. “In winter we had nothing,” he said. “We needed something to keep the business going all year round.” The family has a conservative approach to its fiscal practices: pay off mortgages in good times; don’t rely on one product line predominantly. Bettencourt said there isn’t one area that dominates Klem’s sales. Pet supplies and apparel have the largest shares at 10 14
to 15 percent, respectively. “We’ve weathered [the recession], but all our insurance and heating costs have increased,” said Klem. It’s those increasing costs that are the store’s biggest challenge. “We’re trying to make a balance to cut costs and not hurt employees,” said Klem. Another challenge is that Klem’s is the size of a big box store, but without the advanced technological online support typically found at large retailers. The store runs its website in-house. “We do that to keep costs low. That’s the hardest thing in this business. Just because costs have gone up, you can’t increase prices,” Klem said. The store also watches margins to make sure items sell. “We’re not going to bring in poorer quality, because it doesn’t do as well,” Klem said. His daughter had to influence him in that area, Klem admitted. “Jessica has brought in better quality in shoes and clothing. Those things I would have never done here because I didn’t think we could bring in the clientele,” he said. “People want better quality.” Quality and variety keep Klem’s competitive. “If you go to a good store, we have an equivalent selection. We’re like the big box stores, but with a better selection,” Bettencourt said. “We can’t compete on price. We have to compete on quality. The customer who is going to buy Chippewa boots isn’t going to look at WalMart to buy boots. We fill the categories they don’t.” Interestingly, Wal-Mart actually served as a boon to Klem’s business when it first opened in Sturbridge in 1995. Klem said business improved 10 percent because of the interest and traffic the superstore created. “It works OK with Wal-Mart. I think we work together. Home Depot will tell their customers to come here if they don’t have something,” he said. Jon B. Hurst, president of the Retailers Association of Massachusetts, says Klem’s is on the right track when it comes to their big box competition. “You can’t compete on price. You can compete on differentiation, loyalty and service,” Hurst said. “A lot of towns and regions have their institutional retailers … as long as they don’t try to compete on price, they can separate themselves.” Hurst does caution, though, that price does need to be a consideration. “You can’t totally ignore price … but there is a sense of quality. Most consumers know you get what you paid for. They will pay for quality and durability at a fair price.” Ron Burdick of Charleston, Mass., says he comes to Klem’s regularly because of the quality. He admits to being a bargain hunter normally but likes that he can find so many things in so many different areas. “They have things you don’t see elsewhere. The variety is different,” he said. There’s a genuine twinkle in Mike Klem’s eyes when he talks about customer service. He related the story of an employee spending a half-hour with a customer to sell her the right $2.99 tap and two 20-cents screws. “A lot of stores, they don’t want to spend the time,” he said. “We will stand there and tell them, ‘Do not buy this. It’s not going to work.’ Customer service is a big part of our business.” Community service is another element. Klem is active in the local Lions Club and Bettencourt is involved with her daughter’s Girl Scout troop. The store maintains a two-acre lot next to its store that community groups use for cruise nights, farmers’ markets, and other events like flea markets. “All the community groups have used it at one time or another. These events can help make us a destination for shopping or a destination in the community,” Bettencourt said. “You can’t just be in a community. You need to be involved in the community.”
Jessica Bettencourt (left) and apparel department manager Amanda Olson with a happy “customer.” Klem’s is known for its pet-friendly policy. Photos: Keith Griffin
Klem’s is famous for being pet-friendly. It sells holistic pet supplies as well as more traditional products and has been doing so since the late 1970s. “It just seemed natural to tell people to bring their pets in. People thank us,” Bettencourt said, adding the store has pet-centric activities like a Halloween costume event, and pictures with Santa Claus and the Easter Bunny. Family Ties Klem keeps his hand in the farming business; he runs a farm where he raises cattle for beef and grows hay to sell at the store. It used to be a dairy farm. “It’s one more thing to bring people into the store,” he said. And “it’s relaxing” which prompted his daughter to laugh out loud, pointing out that the farm yields 10,000 bales of hay a year, and it’s a family effort to harvest it. Klem added, “It’s not very profitable, but it’s fun.” The farm operates as a separate entity from the store with no shared employees (at least not those without Klem lineage). It
even lacks a formal name. “We just never got around to naming it,” Klem said. Klem’s made the generational transition in leadership without outside consultants. Klem said ownership of the store will eventually pass through his and his wife’s estate, with everything eventually going to Bettencourt. She’s already created a possible fourth generation to run the family business: she has two daughters, ages 5 and 10. The elder one has gotten her hands dirty. “We’ve had her haying already,” Klem said with a laugh. Bettencourt added, “The five-year-old says, ‘I’m going to work at Klem’s,’ because at five, it’s fun.” Looking to the future, Bettencourt said the biggest challenge the store faces in the next decade is advertising, as she and other retailers struggle with social media and a decline in traditional outlets like newspapers. Loyalty marketing might be the next step for the store. n Keith Griffin is a Freelance writer. 15
Love All You Need Is
And A BUSINESS ASSETS Prenuptial Agreement
By Ronald P. Weiss and Ellen M. Randle
T
o a young couple engaged, their marriage will be a relationship of love and trust. With age and experience we learn that marriage is also very much an economic arrangement involving the immediate and, often, the extended families of the couple. We also learn that many marriages are not stable and end in divorce, and that any marriage can end with an unexpected early death. As much as you may like your child’s fiancé, you are probably a little nervous about what may happen if your child owns an interest in your business and your child’s marriage doesn’t work out or your child dies. As a business owner, it is natural for you to be concerned about who else owns an interest in your company. Whether your children own an interest in your business, or you plan to give or leave your business to your children, you certainly do not want a hostile stranger as an owner, and you may not want anyone other than immediate family to be an owner. If you mention your concerns to your lawyer, your lawyer may suggest that the couple enter into an antenuptial agreement. Mention an antenuptial agreement to your child, and your child may suggest that you are asking them to sign an antenuptial agreement. Your child’s concern is not without basis. Antenuptial agreements (also known as prenuptial agreements) have traditionally been used in the context of second marriages later in life, when one or both parties may have children from a prior marriage. They can be an effective means of protecting the potential inheritance of children from a prior marriage against claims that could be made by a parent’s new spouse. But it takes some life experience and perspective to understand the need for, and to be comfortable 16
with, the broad form of agreement used under such circumstances. Instead of the usual broad form of antenuptial agreement generally used for second marriages, for a first marriage we often recommend a much narrower form of agreement, which we refer to as a “business assets antenuptial agreement.” The acronym for this device probably will reflect your child’s initial reaction to the concept, but read on. There is a distinction between a normal, broad form antenuptial agreement and the more limited device we employ. To understand that difference, it may help to understand what an antenuptial agreement is and the extent to which it is enforceable. What is an antenuptial agreement? It is merely a written contract entered into by two people before they marry in which they determine the scope of the property rights each will have in the property of the other. Usually the agreement will contemplate two situations: death and divorce. Without the agreement, a surviving spouse’s rights will be determined by law, and divorced spouse’s rights will be determined both by law and by the discretion of a judge. In a divorce, the judge has broad discretion when applying the law to the circumstances of a marriage. Normally, an antenuptial agreement will deal with all of the property and rights to property of both parties. It will be enforced by the courts if (a) it is “fair and reasonable” when it is entered into, and (b) it is not “unconscionable” at the time a party attempts to enforce it. For an agreement to be considered fair and reasonable when it is entered into, the courts have imposed two main requirements. First, both parties must be represented by independent counsel. Second, each party must make a full and accurate disclosure to the other of his or her assets
and income. One major consideration that both parties and their families must bear in mind is that the agreement does not prevent either party from giving more to the other than the agreement or the law would otherwise require. The agreement, if enforceable, merely controls how much either party can get from the other without the written consent of the other. A business assets antenuptial agreement must meet all of the requirements for enforceability of any antenuptial agreement. The difference is that the only assets that the parties seek to protect are family business assets. Other assets are dealt with on death or divorce as if there were no agreement in place. When we draft these agreements, we are careful to cover not just present business assets of a party, but also to cover business assets that the party may later receive by gift or inheritance, and business assets that may grow out of any present business operations by the family. If the husband or wife starts a new, unrelated business or inherits or is given other assets not related to the family business, the agreement does not deal with those assets and they will pass by law and judicial discretion upon divorce, or by law at death absent a will or trust provision to the contrary. In order to comply with the full disclosures requirement, we ask our clients to supply not only the value of a family business interest that a child may already own, but also to supply a reasonable (not over- or understated) estimate of the present value of the family business interests that the child would be likely to receive through gift or in-
heritance. There is a risk with the business assets antenuptial agreement, as with any antenuptial agreement, that a court will refuse to enforce it when a couple divorces or one of them dies, but it is a very small risk. Where disclosure has been as full as possible and where both parties were represented by counsel with respect to the agreement, the Massachusetts courts will honor a broad form antenuptial agreement as long as it is not unconscionable – typically, meaning that enforcing the agreement would cause one of the parties to become destitute and at risk of becoming dependent on the taxpayers for support. A court should have even less trouble honoring an agreement that is narrowly tailored to protect only family business interests, whether currently owned or expected to be received in the future. If your child is already married, it may not be too late to take steps to address concerns you may have about your child’s spouse and your family business. Massachusetts recently recognized the validity of postnuptial agreements under certain circumstances. The requirements for creating a valid postnuptial agreement are similar to those for an antenuptial agreement – there must be full financial disclosure and separate legal representation before the agreement is signed; but there is a higher standard that must be met when it comes time for the postnuptial agreement to be enforced – namely, the court must find the postnuptial agreement to be “fair and reasonable” under the circumstances as they then exist. This higher standard means that a postnuptial agreement may be more vulnerable to attack than an antenuptial agreement when the time arrives to ask a court to enforce it. However, a postnuptial agreement limited to protecting family business interests, like a narrowly tailored antenuptial agreement, should raise fewer issues for a reviewing court than would a broad form agreement. We have found that it is far easier to persuade a young couple that they are not betraying the trust inherent in their relationship if they act merely to protect the family business. If you are nervous about what your child’s marriage may mean to the health and survival of your family business, you should seriously consider the use of a business assets antenuptial or postnuptial agreement. n Ronald P. Weiss and Ellen M. Randle are attorneys at springfield-based Bulkley Richardson and Gelinas, LLP, A corporate partner of the UMass Family Business Center (umassfbc.com).
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Phantom Stock Plans A Growing Compensation Trend For more information on phantom stock plans, view highlights from the March 23 FBA Webinar Wednesday entitled “Non-Qualified Plans for Family Businesses” at www.fbaedu.com.
By Kris Houghton
I
n today’s highly competitive labor market, the total compensation package that an employer offers to key personnel can make the difference in a company’s ability to attract and retain the type
of employees needed to run a successful business. Providing employees with cash salaries alone often just doesn’t do enough to enable an employer to choose from the best and brightest available employees. Employers must offer a full panoply of benefits to be able to recruit and retain employees. The hottest compensation trends include not only ESOPs and other stock plans, but also equity-like incentive compensation programs. This article will discuss the latest trend and tax issues involved in one such plan: phantom stock plans. The name “phantom stock plan” denotes that the employee participant does not receive actual stock, just phantom stock, which is a bookkeeping entry in an account kept for the employee under the plan. The employee, therefore, is not actually granted equity in the company. As a result, the employee does not attain the rights of a minority shareholder, such as the right to receive notice of shareholder meetings, the right to vote, and the right to inspect the books and records. Although the features of phantom stock plans vary, there are some features that are common to most of these plans. Generally, a company establishes a phantom stock account for the employee and credits the account with fictional shares as they are granted or purchased. Sometimes the plans credit employees with an amount of deferred compensation each year, which the plan converts into 18
an equivalent number of shares of phantom stock, which are credited to the employee’s account. The employee’s account avoids current taxation since it is merely a bookkeeping device. In some plans, at the end of the deferral period the employee is paid an amount equal to the market value at that time of the shares credited to his account. If the phantom stock plan is structured in this manner, then the value of each unit of phantom stock equals the appreciation in fair market value of the stock between the date the unit is granted and the date the unit is paid. Some plans credit to the employee’s account the value of dividends as they are declared, so that the position of the employee even more closely resembles that of a shareholder. In this case, the phantom dividends are taxable as ordinary income to the employees and are deductible to the company. These plans are provided primarily as a form of incentive compensation, because the amount of the employee’s deferred compensation increases with the value of the employer’s stock.
FBA 2011 Webinar Wednesdays Please mark your calendar for these upcoming FBA Webinars: April 6 Social Media: Is Facebook Right for Your Business? Kristin Sundin Brandt, Sundin Associates May 4 Employee Benefits: Healthcare and Qualified Retirement Plans Herbert Daroff & Jim Bianci, Baystate Financial June 6 Peace of Mind: Do Your Lifestyle Strategies Bring You Peace Of Mind? Dr. Stephen Franson, Bonfire Health Plan to participate from 2 p.m. – 3 p.m. on each Wednesday. To register or to view previously recorded webinars, please visit www.fbaedu.com.
Tax Treatment of Phantom Stock Plans Employees are taxed at ordinary income rates on the phantom stock awards at the time the awards are actually or constructively received in stock, cash or both. The employer is generally entitled to a deduction in the year that the employee reports income. The income is reported on the employees W-2 and is also subject to withholding requirements. Advantages and Disadvantages of Phantom Stock Plans For closely held companies that want to offer employees the ability to share in the company’s success without giving the employee an actual equity stake in the business, phantom stock plans provide ideal flexibility. The company can utilize creative measuring criteria and vesting schedules that act as golden handcuffs to retain valued key employees and to align the employees’ interests with those of the company. Furthermore, the company can offer economic compensation to its key employees without the burden of the obligations owned to actual shareholders. The potential negatives that exist with this type of plan are that the employee knows that they are not getting an actual ownership stake in the company, and that the compensation leads to ordinary income, whereas it could lead to capital gain if true stock options were provided. Finally, an agreement regarding actual shareholder compensation is generally desirable since the amount withdrawn as salary effects the income available for dividends or equity growth. n Kris Houghton, CPA, is a partner with Meyers Brothers Kalicka, P.C., based in Holyoke, a Corporate Partner of the UMass Family Business Center (UMassFBC.com).
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How Your Company Can Benefit By Elaine Dumler
T
here has been a lot of concern about new employees coming into companies lacking the loyalty, dedication and work ethic employers have come to expect from a generation earlier. True, times are changing. But there is an employee base returning to the workforce that comes with many of these values intact – our military veterans. In this time of economic turmoil, when jobs are scarce and many of our vets are returning from overseas conflicts, utilizing the armed services workforce can help an employer see cost savings in recruitment and training of good employees. What makes a veteran such a sought-after employee? This is what many military employers are finding: Individuals who live the military lifestyle have a background of commitment: to themselves, to each other and to an employer who treats them well. This commitment and loyalty fosters their need to go above and beyond when asked to complete a project. They are prompt, used to reporting for work on time and know the importance of a professional appearance and presence. Military employees know how to take responsibility for projects, tasks and personal actions. They are trained to see things through to
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their conclusion. They are trained not to leave their post until the job is done. How refreshing would it be to have employees who will stick with you as an employer? The military lifestyle is different, and it instills values that are vital to a thriving business. These include resiliency, respect, patience, trust and honesty, all of which translate into soft skills that are a valuable commodity to the personal nature of your business. Veterans arrive with the skills, personality and understanding to do a good job but often don’t know exactly where to put those skills to work. Caring companies, like yours, can help them refine and apply those skills. Military personnel have served in an environment where leadership skills, such as being highly motivated and displaying an attitude of dedication to an employer, are mandatory. They come to you with these skills already embedded into the way they conduct business. Many veterans are medically and physically fit and ready for work, which translates into less sick days. They have already been screened for drugs and were drug-free while in the service. Members of the military are trained to remain calm in the face of initial stressors and to analyze and evaluate a situation before reacting. This leads to levelheaded thinking when faced with a stressful work environment. Many veterans appreciate the opportunity to work outside
of the nine-to-five typical workday. If yours is a company that can offer employment opportunities outside of standard full-time employment, you might meet the needs of the veteran who is still reintegrating back into their life after deployment. Sometimes they just need part time, evening or contract work. Incentives for hiring Branches of the government are continually setting up programs that offer financial incentives to employers, especially for a wounded or disabled veteran. Veteran employees may qualify for job training grants and special employer incentives under these programs. To find incentives for your business, do a specific search at NationalResourceDirectory.gov or VA.gov. When you employ a member of the National Guard or National Reserve, it puts you in a unique position. You are eligible to sign a statement of support that sends a message to your employees that they don’t need to be concerned about their civilian job while serving. You may be nominated for award programs given by the Employer Support of the Guard and Reserve, designed to recognize employers for their military employee practices. These awards range from the Patriot Award, which is a certificate of appreciation, to the prestigious Freedom Awards, given by the Secretary of Defense for up to five of the nation’s most supportive employers during ceremonies held at the Pentagon. The media exposure and company awareness generated from such awards can work for your bottom line. Commitment If you are a family business with a large National Guard or National Reserve employee component, up to 20 percent of them could possibly be called out at any one time. That puts a huge burden on a company with a limited workforce. It takes strong company commitment and organization to be able to cover the projects and work that needs to be completed, while holding on to the deployed individual’s job until they return. That can be a lot to juggle! But the sacrifice just might be worth making. Most employers who make a commitment to hire veterans and those in the Guard and Reserve are creative in the ways they extend support. These employers will offer pay supplements that meet the difference between military and civilian pay, set up programs inhouse that send care packages to their deployed workers and organize collections for phone cards or gifts for families to recognize special events the serviceperson will be missing. For example, a Colorado police department had one of its officers deploy four times! That certainly created a hardship for the department, but it didn’t stop them from showing support. The serviceperson’s spouse was having trouble making the mortgage payments, so they took up a collection to fill the gap until he returned. They set up a schedule where a different employee would send a care package every two weeks. When he returned, he was welcomed back with a luncheon and was able to tell everyone how much that support meant to him and his family. This is an employer who has gone above and beyond. These companies, and many others, are sharing the advantages of putting our military veterans back to work! Why not join them? n Elaine Dumler is a consultant to military families.
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Planning for a disaster means planning for continuity
By Matthew J. Putvinski
T
he terrible events in Japan make us all aware that disaster can strike at any time and cause great chaos to people’s lives, businesses and the economy. For businesses, disasters cause an interruption in continuity that, if not corrected as quickly as possible, can cause long-lasting or irreparable harm. To be sure, disasters aren’t limited to severe events such as earthquakes and tsunamis, or, more regionally relevant, floods and hurricanes. A burst pipe or office fire can be a major disaster to a company. That’s why, no matter what the future may hold, every company must plan for the unexpected. Think of it less as “disaster planning” and more as “business continuity planning” – implementing best practices to ensure your business can survive nearly any type of interruption. While there are different approaches to developing a solid plan, here are some important components: Plan for your people. The confusion 22
following a business interruption can paralyze staff. Make sure key leaders and chains of command are established and communicated so everyone knows who has decisionmaking authority. Having an up-to-date call list with contact information for all personnel, clients or customers and key vendors is also invaluable. Ensure that the list is accessible under a variety of disaster scenarios. Back up critical records regularly. Organizations with the foresight to maintain current backup of data and systems are well ahead of the game when it comes to restoring key functions following an interruption. Back up financial data, key human resources files, custom software, contracts or other legal documents, databases, insurance files, customer contact information, and computer systems. And keep in mind that all of the critical data may not be maintained electronically. After determining which records are im-
portant, select one of these methods for protecting and/or reproducing the information: Automatic Backup – Your network should be backed up daily and regularly rotated to a data storage provider (either an offsite physical facility or an online provider). Onsite/Offsite Storage – Critical records that need to be accessed regularly can be housed onsite in fire-resistant safes or cabinets, with a duplicate copy (either a hard copy or scanned to a CD/DVD) secured with a record-storage company. Offsite Storage – Records that are critical but seldom used should be stored offsite in a safety deposit box or with a storage provider. Create a plan for resource retrieval. You will need more than just files and data to restart operations – remember laptops, hard drives, ledgers, checkbooks and work in process. Also consider that authorities may limit access to your business facility even after the crisis has passed. Create a list of key resources you would want to retrieve if granted limited time to access your space. On your retrieval list, include the name of the item(s), their location, and a ranking in order of their priority/importance. Build some reserves. Business interruption is expensive. Ideally, your organization has an operating reserve – a nest egg that will see you through a really “rainy day.” Establishing a reserve can be done by simply maintaining a separate cash account. But you may want to have your board approve a policy that specifies the size of the reserve to be maintained and rules for use of the reserve, including guidelines for replenishment. The Time Is Now When disaster strikes, companies that are able to reopen quickly and return to operations will be more financially stable later. If the disaster strikes a region, the faster companies recover, the faster they can contribute to rebuilding the economy. Take steps now to evaluate your disaster preparedness and business continuity plans. n Matthew Putvinski, CPA, CISA, CISSP Is the director of Information Technology Assurance Services for Wolf & Company, p.c.
family business association at the pops A special offer for the FBA* Receive 50% off Orchestra Seating Boston Pops Family Concert Keith Lockhart conductor Byron Stripling guest artist May 14, 2011 Complimentary Reception 1:30pm Concert 3pm
Bring the entire family to Symphony Hall for a celebration everyone will love. Attending a Pops concert is a delightful way for families to spend time together and introduce young people to a live concert experience with “America’s Orchestra.” The concert features music from some beloved kids’ films such as Beauty and the Beast, Star Wars, and Harry Potter and also includes a performance by the BSO Youth Concerto Competition winner and trumpeter Byron Stripling performing the music of great American musical icons Dizzy Gilespie, Cab Calloway, and Mahalia Jackson.
Orchestra Seating: $45.50 (regularly $91) For tickets please call 888-266-1200 or visit bostonpops.org/offers/fba *Available to family businesses and FBA sponsors
Lots of advisors suit up, show up and keep up. But how many know when to speak up?
Team McGladrey Golfer Zach Johnson and his caddie, Damon Green.
Power comes from being understood.
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A strong strategic partner should know you and your organization well enough to know when to step up with insights, suggestions and fresh ideas. And when you trust the advice you’re getting, you know your next move is the right move. This is the power of being understood. This is McGladrey. Experience the power. Go to zachisunderstood.com. Or contact Richard Caturano at richard.caturano@mcgladrey.com.
Š2011 McGladrey & Pullen, LLP Certified Public Accountants and RSM McGladrey, Inc. All rights reserved.