Massachusetts Family Business Winter 2015

Massachusetts

Winter 2015

FamilyBusiness Official magazine of the

Family Businesses The 2015 FBA Awards

Inside: A Third Generation of the DeLano Family Joins Weiss Sheet Metal

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Massachusetts Family Business Official magazine of the

Contents

8

Recognizing excellence Family Businesses Honored At 2015 FBA Awards

4

letter from the president

The Year of the Family Business

6

business profile

8

A Third Generation of the DeLano Family Joins Weiss Sheet Metal

12 who’s next?

Planning a Successful Business Transition

14 playing fair

Employee Equity in a Family-Owned Business

6

14

12 3

Letter from the President

Let’s Make 2016 the ‘Year of the Family Business’

By Ed Tarlow

A

s we bid farewell to 2015 we have a great deal of which we can be proud.

Family businesses across Massachusetts continue to be an essential part of a growing and robust statewide economy, and the Family Business Association played an important role in supporting and recognizing the contributions of family-owned companies.

One need look no further than our 2015 Family Business Awards for Massachusetts to see the impact we are making together. The award winners – indeed, all of the finalists and nomiEd Tarlow nees – represent the very best in family businesses. The triumphs and trials experienced by each of these companies present compelling stories and great examples of why family businesses matter.

Now we are launching into a new year, confident and focused. The Family Business Association is prepared to do our part with a full slate of programs and services. We are planning to expand our offerings with several new initiatives. These include “next generation” peer-to-peer groups that will bring to-

gether future leaders to share ideas and inspiration, as well as a leadership program for women in family businesses.

Of course, the highlight of the year will once again be our Family Business Awards, which provides richly deserved recognition and visibility for family-owned companies. It is never too early to nominate your family’s business, or to place in nomination a family company you feel should be acknowledged.

As always, we owe a debt of gratitude to our sponsors, whose generosity in both spirit and financial support allows the Family Business Association to continue to provide the many services and programs that benefit families in business throughout the year. Thanks, also, to our executive directors, the essential core of volunteers who keep the gears turning and

the machine humming.

I cannot stress enough how important family businesses are to the past and future of the commonwealth of Massachusetts. Gigantic corporations and multibillion-dollar mergers may generate headlines, but the families who own and run businesses generate jobs and revenue that allow our communities to thrive.

Therefore, I herby declare 2016 to be the “Year of the Family Business.” Rest assured that the Family Business Association will be at the forefront of supporting and recognizing the contributions being made every day by hard working family members.

■ Ed Tarlow President Family Business Association

Massachusetts

FamilyBusiness

Official magazine of the Family Business Association. Inc.

Editorial | Advertising | Design A Family-Owned Business Since 1872

101 Huntington Ave., Suite 500 Boston, MA 02199 fbaedu.com

Directors Jeffrey S. Davis, Mage, LLC Al DeNapoli, Tarlow, Breed, Hart & Rodgers, P.C. Brian Nagle, First Republic Private Wealth Management

4

President Edward D. Tarlow, Tarlow, Breed, Hart & Rodgers, P.C.

Vice President Catherine Watson, Tarlow, Breed, Hart & Rodgers, P.C.

Treasurer Jeffery P. Foley, Gray, Gray & Gray, LLP

280 Summer Street, Boston, MA 02210 Phone 617-428-5100 Fax 617-428-5119 www.thewarrengroup.com ©2015 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.

Here Comes the Snow – Again Tips to Prep Your Business for New England’s Inevitable Storms

By Konrad Martin

L

et it snow, let it snow, let it snow!

That sentiment may be okay when it comes to singing a song, but snow in the Northeast can have big impacts on roads, schools and businesses.

In fact, in just over three months at the beginning of 2015 the New England area saw over 110 inches of snow; more than KONRAD MARTIN 400,000 people lost power in just the first storm of the season.

That is an astounding figure for one snowstorm; in early 2015, the Northeast experienced over 10 snowstorms.

While the idea that the upcoming winter could be as bad as last winter seems unlikely, even if the season was half as bad as last year considerable disruption would still occur. Road conditions and school closings usually get the bulk of media attention during a weather event, but businesses are also greatly impacted, whether due to employees with school-age children unable to get to work or due to long-lasting power outages that could have an impact on your servers or other office technology.

Here are six things you should consider when planning for snow storms and how they affect the overall uptime in your business.

A written business continuity plan. We rarely get a warning when a disaster is ready to strike. Even with large snowstorms there is no way to know exactly how it will affect your location and your business. Business continuity (BC) refers to maintaining business functions or getting those functions back up and running in the event of a major disruption, such as extended power loss due to snowstorms and many other events.

Data backup. This seems to be a nobrainer – of course we want our data backed

up. However, when is the last time you tested the backup? Have you recently tried to recover a file or a folder? Now is the time.

Testing your data backup should be done on a regular basis. When a snowstorm is approaching, ask your internal or external IT person or team to run a test and see if they can recover a file. It takes a little bit of planning but it is well worth it if you need to rely on the backed-up data.

Image backup. Today, most businessquality backup services actually take an image of your server(s). This allows your IT person or external IT team to use this image if a power surge or other unexpected event occurs and renders the servers useless. In order to have true BC this image should be stored on a network additional storage device, as well as in the cloud. This way if the servers are interrupted from working for an extended period of time your IT team can turn the servers on in the cloud and your company can continue to work from a remote location – as long as they have power and can get internet connectivity.

System shutdown. When storms are predicted by the weather service to take out power in your area, it is a good idea to consider shutting down the key components of your network. This is not a move that should be taken lightly, since the systems will have to be physically turned back on when the threat has passed. However, with key systems (servers, etc.) turned off, there

is a much lower chance of those systems taking an energy surge or being corrupted due do a “dirty” shutdown. No one will be able to access your servers while the servers are shut off.

Home systems. Your home systems are almost as important as your work systems and need to have a plan when snowstorms are looming. We recommend shutting down home systems when the potential for power loss is high for the same reasons listed above.

Cell phones and tablets. Making sure cell phones and tablets are fully charged will potentially allow you to stay connected to work as well as local and national news.

These devices can also be used to call clients, employees, family members and neighbors if you or they need help.

By having a BC plan you are allowing your company to stay competitive during an adverse event. It is essential to your company to have a plan that addresses what your company does during snowstorms and other unexpected disruptions. There is no better way to tell your clients that your company is there to stay than to be able to continue to operate during and immediately after a nor’easter!

■ Konrad Martin is co-founder and principal of Tech Advisors, a technology solution provider for small to mid-size businesses. He can be reached at konradm@tech-adv.com or 508-505-4696.

5

Business Profile

the

Carrying Family Legacy

A Third Generation of the DeLano Family Joins Weiss Sheet Metal

The company has never had to lay off any workers, “which is a legacy and core value that came from the original owners.” — Melissa DeLano 6

By Malea Ritz

F

or the DeLano family, the sheet metal business goes way back.

Cousins Wayne and Brian DeLano, president and vice president respectively, have grown up with their business, Weiss Sheet Metal in Avon, following in the footsteps of their fathers – George, who bought the business in 1965, and Ralph, who later joined him. The company traces its roots back to 1934, when Jack Weiss and Eli Tappan started the metal shop company. Their first product was a commercial dishwasher produced under the Weiss name.

The brothers felt it was important to keep the name Weiss had established in their previous concentration – the restaurant industry.

Since then, the company has moved shop several times, each time expanding the business to larger locations. Meanwhile, the fathers ran a second company on the weekends in George’s backyard, repairing lawn mowers to make ends meet.

“It was something that you don’t appreciate as a young child, or even a teenager, until you run a business yourself and you realize all that went into it for them to grow the business,” Wayne said.

Wayne has now been with the company for 36 years, Brian, for 40, and Wayne’s daughter Melissa recently joined as an administrator.

Melissa remembers wrapping gifts as a child in the company’s conference room during the holidays.

“Having my dad and cousins and my grandfather all involved with the family business just provides a huge sense of security for kids,” Melissa said.

“By the time I realized that there was only a window of opportunity left for this company

to grow and take on another generation … there was just no way I was going to give up the opportunity to see myself do it,” she said. “I’m the only woman here, [other than] a 75-year-old administrator who’s been here for 26 years, so she and I have a unique perspective … and a huge difference in age and experience.”

Riding Out The Recession The business has survived two major slow periods in the economy during the current owners’ lifetime. Wayne remembers difficult times and having to cut the employees’ hours and personally taking pay cuts to ride out the recession.

“We continued to run the business as our fathers did, in that you didn’t overspend on vehicles, you don’t overvalue yourself and how much money you take out … and you continue to reinvest in the company, and that’s typically with using machinery and keeping up with today’s computerized machines,” he said.

Melissa added that the company has never had to lay off any workers, “which is a legacy and core value that came from the original owners.”

Wayne explained that the company chose to cut hours, rather than letting people go during those hard times, because the company is invested in the progress and growth of its workers. As a custom shop, he said, every time a person is on the floor, he’s making something new.

As a result of their specialty in sheet metal and stainless steel, the company has its hand in a wide range of industries and projects, ranging from residential, hospital/laboratory and mill work to Yankee Stadium,

Photos by Malea Ritz

Continued on page 11 7

Continued from page 9

foot facility in Mansfield where five third-generation DiRico family members work.

Dover Rug & Home was named the First Generation Business of the Year. The company, which was founded by Mahmud Jafri in 1989, creates one-of-a-kind, hand-knotted rugs. Although Dover Rug & Home may be a young business, the Jafri family has been designing, weaving and exporting hand-knotted rugs and carpets from their home country, Pakistan, and around the world for three generations.

Ferns Country Store received the Community Excellence Award for its demonstration of philanthropic excellence. In 2003, husbandand-wife team Larry and Robin Bearfield purchased an old retail store in Carlisle village center to found Ferns Country Store. Today, that store has more than doubled in size and includes a wine and beer shop, deli, coffee bar, bakery, grocery and café. The Ferns County Store Charitable Giving Program donates a portion of its proceeds to 40 local schools and charities each year.

Dependable Cleaners won the Endurance Award, which recognizes a company that has overcome significant adversity. The cleaning service was founded in 1944 by Canadian immigrants Don and Marian Fawcett. Fawcett’s sons Don Jr. and Fred took over the business in 1982. Don Jr.’s daughter, Christa Hagearty, joined the company following Fred’s sudden death at age 39. Today Hagearty is president and CEO of Dependable Cleaners, and her children and other thirdgeneration family members have begun working at the business.

Q’s Nuts LLC took home the Marketing Excellence Award. Q’s Nuts founders, husband and wife Brian and Beth Quinn, began the business when their kids were young as a way to bring in some extra income. But following a major back surgery and then a layoff in the same year, the pair decided to use the company as their primary source of income. Today, Q’s Nuts sells wholesale to about 150 retailers in 10 states.

10

Phyllis Godwin, CEO of Granite City Electric Supply Co., received the Comcast Spotlight Hall of Fame Award, which honors a business for its longevity, excellence and achievement. The winner of this award is chosen by the FBA executive directors. Godwin was recognized for her mentoring and involvement with the Family Business Association Advisory Council. Her daughters Valia Marsden and Gigi Meehan accepted the award on her behalf.

The Worcester Business Journal won the Regional Family Business Advocacy Award; this award is also chosen by the executive directors. The Worcester Business Journal is a bi-weekly newspaper serving the central Massachusetts business community.

Giving Thanks The winners were eager to thank their family members when accepting their awards, but several also made a point to thank those outside of the family who have made their companies a success. Christa Hagearty of Dependable Cleaners recalled how her workers stepped up to help following a devastating fire at the company’s Quincy location in 2012. “The day after the fire, our employees all came in and they were there to help out in any way they could,” Hagearty said.

When Pakistani immigrant Mahmud Jafri of Dover Rug & Home accepted his award, he expressed his appreciation for his new home.

“Clearly, I did not [create this business] alone. I did it in a land of opportunity that allowed me to do it, a place where you can enforce contracts and have a banking system that works,” Jafri said.

In the videos shown before the awards were announced, nominees and winners shared their favorite memories and craziest moments as family businesses owners. From these clips, one theme emerged: Running a family business certainly comes with its own unique set of challenges, but in the end, it’s totally worth it.

Congratulations to all the Massachusetts Family Business Awards winners and nominees!

■

Continued from page 7

Foxwoods and a movie set for Paramount Pictures.

Bigger projects generally require more manpower and up to a six-month time commitment, which can sometimes be detrimental to other aspects of the business, Wayne said.

Although Wayne’s favorite project may have been Foxwoods, he enjoyed working on Yankee Stadium, too, as much as he hates to admit it as a Red Sox fan. He said the company took a tour of the stadium upon completion of their work.

“It was pretty cool to walk around and look at certain things that you had built that were actually going to be there forever in Yankee Stadium,” he said.

Other big projects included recreating Julia Child’s kitchen for the film “Julie & Julia;” custom countertops, which are shipped to different parts of the country; and display stands for a local business’s specialty sunglasses.

“For me, at the end of the day, it all makes it easy to come to work the next morning because sometimes that one phone call can change everything,” Wayne said.

Despite some big-name projects on its roster, the company prides itself on doing the smaller jobs in the hopes of gaining customer loyalty and contracts for larger jobs in the future.

“My dad said years ago, ‘You’re a stronger company by doing 10 small jobs, than you are by doing one large job,’” Wayne said.

He said clients have been referred to him knowing that while Weiss may not always be the cheapest in the business, they will do the best job. Wayne said the company works hard to make deadlines and that it is proud of what goes out the door.

“In a group of fabricators, that’s where I want to be,” he said.

However, he chalks up much of the company’s success to its employees, listing off a roster of workers that have been with the company for up to 39 years.

“The proof is in the years that someone is willing to spend working for our company,” he said.

A Legacy Lives On Wayne said his favorite day working for the company was the anniversary

party earlier this year celebrating 50 years of DeLano ownership. He said so many people came to say nice things, and that it meant a lot to him to talk about the legacy of the company.

“None of us would have been here without the fathers’ sacrifices early on, and there [were] a lot of them,” he said. “To continue running the business with their philosophies is extremely satisfying, to carry that on.”

“To know that Brian and I are still keeping that going, there’s a lot of pride in it,”

Wayne said. “It really keeps you getting up every day and putting in long days. Because you know it’s something that your father did, and your mother. Your mother did all the hard work at home, and your father did all the hard work at work. And it worked and it’s worked for the two of us; hopefully it’s going to work for the next generation.”

■ Malea Ritz is an associate editor with The Warren Group, publisher of Massachusetts Family Business.

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Who’s Next?

Planning a Successful Business Transition

By Joe Ciccarello

I

f you own a closely held business, the dream of a long and comfortable retirement could be threatened unless you plan a strategic withdrawal before heading out the door. In many cases the goal is to leave your company in capable hands so that it can continue to generate income for you long after you have ended day-to-day involvement.

JOe Ciccarello For a family business, the succession strategy often revolves around a new generation of family members gradually taking control of the company. Please notice the emphasis on the word “gradually.”

Leaving things to the end and simply 12

hoping they will work out is not the way to do it.

It may be your dream to leave a legacy by having a son or daughter take control of the family business, but fulfilling this vision depends on the ability and willingness of a child or children to learn the business, and your readiness to relinquish control over the company. Here are seven key benchmarks on the way to a winning succession plan: Start early. Don’t put the future of your company off until it is too late to have any positive effect on the outcome.

We advise clients to start focusing on exiting the business on the day they start it by choosing the right type of business entity. If that seems like a long-term vision, consider this: under current tax law, establishing your company as a C Corpo-

ration could result in your paying double the taxes when you eventually sell the business. An internal transition may have different consequences. It is important to know how each entity structure could affect your exit from the business, and make adjustments accordingly.

Put it in writing. A plan that is only in your head is nothing more than a pipedream. Write down the steps you want to take, who is responsible for each action, what the deadlines are and what resources will be necessary to carry out the plan.

The sooner you prepare this plan, the better. But be sure to revisit it on a regular basis to make adjustments to changes in the market, your family situation and as your business evolves over the years.

Make it public. There is no need to hide the fact that you may want to retire someday. Once you have created a workable succession document, let everybody in the family know that you have put together a plan and what role (if any) they are to play. Employees should also be kept in the loop to reassure them that the company will continue once you have stepped aside.

More than one child? If you have more than one child or other relatives involved in the family business, it is your responsibility as the owner to make some tough decisions. You should observe each over the years to see where their talents and skills lie – not necessarily what they like to do. Your job is to put each individual in a position to help the company succeed. You must put the business ahead of a family relationship in order to help sustain the company and protect the jobs of the people who depend on you, as well as to help ensure a better future for your children.

Turn over control gradually. I don’t care how smart, savvy or well educated your son or daughter may be, nobody is ready to jump in and run a business “cold.” Part of your long-term plan

should be to cede control over different aspects of company management to the next generation so that, when the time comes for you to retire, all you’ll need to do is step aside gently. This also gives the next generation time to learn the business more completely.

Let them make mistakes. Part of handing over control to your children must be to allow them to make their own mistakes. Don’t step in and “rescue” them at the first sign of trouble or they will never learn how to cope with challenges and overcome adversity. Mentor them, guide them and praise their successes, but let them fall and skin their knees on occasion.

When the time comes, leave. This may be the most difficult step of all. If you don’t have a timetable built into your succession plan it could result in the owner hanging around and suffocating the next generation. Nobody wants the former owner sitting in on staff meetings or nosing around the shop. You need to give the next generation the freedom to make the business their own and – hopefully – better and stronger than it was. Set a retirement date at least five years out and work

hard to make sure you are well and truly out of the business on that date.

How to Do It Right One of our clients (a fourth-generation family business) presents a textbook example of proper succession planning.

With the guidance of trusted outside advisors, the owner and his sons worked together to develop a written succession plan.

This involved holding retreats away from the distractions of the office to talk about what needed to happen and which son was best equipped to do each component of the owner’s job. Specific training was provided in all areas of business management and a timetable was set for the transition to take place. As I write this, the owner has already started to “dial back” on his involvement as his sons gradually (there’s that word again!) take on a larger management role.

fore you have set a retirement date. You should not travel the path alone. Assemble a team of advisors consisting of an attorney, accountant, financial planner and insurance agent who have experience in dealing with succession planning. They’ll be able to provide practical advice that has been proven to work for other business owners in similar situations.

Your team of advisors can provide important guidance on how to structure the monetary aspects of the transition. Will you gift ownership to the next generation? Sell the business to your children?

Or perhaps it will be some combination of the two. The deal needs to work for your children so they can afford to acquire the company, but it must also allow you to maintain the lifestyle to which you have become accustomed, so that you can truly enjoy your retirement years.

■ Joe Ciccarello is the managing partner at Gray, Gray & Gray Certified Public Accountants, Canton,

This is Not a DIY Project As you can see, the extensive planning that is required for an effective business succession is complex, and starts long be-

Massachusetts (www.gggcpas.com). Gray, Gray & Gray has served the accounting, tax and business advisory needs of companies in the oil heat and energy industry for more than 70 years.

If this is your family tree…

The attorneys of Tarlow, Breed, Hart & Rodgers have helped hundreds of family businesses to thrive and prosper.

Grandpa

Our experience and knowledge help

Mom

Dad

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Aunt Betty

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Uncle Charlie

to continue to grow from one generation to the next. For help in managing a successful future for your family’s business contact Ed

Brother Ted

Aunt Sue

Cousin Alice

Sister Sarah

We should be your law firm.

Tarlow, Chairman of our Family Business Practice Group, at (617) 218-2011, or via email at: etarlow@tbhr-law.

Family Business Practice 617.218.2000 www.tbhr-law.com 13

Employee Equity in a Family-Owned Business Bonus or Profits Payments versus Carried Equity

By Martin Pomeroy

F

amily-owned businesses often suffer from a generational lack of leadership. The first generation owner/ founder of the business built something from nothing, remains very hands on and typically devoted his or her entire adult life to making the business a success. Sons and daughters are often involved, but day-to-day Martin Pomeroy operations are often delegated to nonfamily executives. These executives are critical to the success of the business – their continued involvement cannot be overstated, and they are often dissatisfied with just a paycheck and no sharing in the “ups.”

Equity owners in family-owned businesses are usually relatives. The sweat equity earned by the founder creates an understandable reluctance to give some to someone who came on board when the startup risk is eliminated and who has no blood relation to the founder. How does he satisfy and retain key executives, which preserve the value of the business, while not diluting his own issue’s holdings?

A properly structured profits interest grant gives the executive the right to share in the ups, while retaining ownership of the equity wholly within the family. The executive does not own the equity, yet shares in the economic benefits of ownership.

When profits interests are preferred to key executives, the executive thinks he is getting something less and is disappointed. This is where the family’s tax and legal advisors can play a pivotal role in preserving the good will associated with the incentive package being preferred to the executive.

A profits interest grant has many advantages over an outright grant of equity.

The executive will not be saddled with phantom income, will have no obligation 14

to contribute capital if the business has an unexpected downturn and will avoid additional tax levies, such as self-employment taxes, that are often associated with equity interests. Equity grants may also preclude the employee from being able to take advantage of company’s contributions to health and welfare benefit plans, and in particular subsidized health insurance premiums. These issues are complex and time must be taken to carefully discuss them with the executive.

There are negatives regarding a profits interest, such as characterization of income. While family owned businesses cover all disciplines, many involve real estate companies. Real estate companies typically own several properties and dispose of some from time to time. If the executive owned equity, he would recognize capital gain. Gain from a profits interest is typically ordinary income. There

are two ways to soften this impact to the executive. One is to create a special class of interest, or carried interest. This may be similar to carried interests granted to promoters in syndicated real estate transactions. However, the characterization of carried interests faces increased scrutiny from Congress, and may soon be changed.

Other family concerns include the orderly return of the interest when the executive leaves the company’s employ. Properly structured profits interests should immediately revert to the company. Titled equity creates rights, obligations and fiduciary duties from one holder to another that are much higher than in an employer/ employee relationship, making recovery more prolonged and expensive. Likewise, concerns associated with an unwelcome party becoming the equity holder in the event of the executive’s death, divorce or bankruptcy are minimized.

The second and often preferred way to address the income tax issue is to increase the percentage paid to the executive. Instead of a 5 percent equity interest, he receives a 7 percent profits interest, negating the higher tax rate. The company will receive a deduction for payments made, partially offsetting the increased percentage.

Several other issues that owners must address include: formulas to determine profits; vesting schedules; and repayment terms in the event of the employee’s departure and repurchase of his interest.

Factors to be considered should include: percentages for cash flow vs. capital events; the founder receives a return on his invested capital; or payments to the executive be subordinate to the founder’s invested equity? These should be reflect-

ed in a written agreement, which is clear enough to allow two accountants to come to the same answer.

Vesting is always a difficult topic.

Vesting should take into account the executive’s age, term of service with the company and the minimum continued employment period sought to be preserved. Some plans will utilize “cliff vesting,” which is all or nothing once a trigger date is reached. Percentage vesting over time is more common.

Of utmost concern to the executive is what happens upon the occurrence of any of the following events: death; disability; retirement (on or after a certain age) and perhaps discharge of employment, specifically with or without cause.

Hypothetically, the employee might be paid an amount equal to a percentage of

his previous payments, multiplied by a factor of the number of years of service, obtaining a specified percentage for each year of service. Alternatively, a discounted fair market value could be used, often reflecting a discount of as much as 30 percent for the lack of voting rights and/or control.

What should be clear is that the issues are complex. Use of a profits interest grant, accompanied by thoughtful discussion with key executives, tax and legal advisors and, if appropriate, members of the founder’s immediate family, can help insure continuity and preservation of the business for many years to come.

■ Martin Pomeroy is a partner at Boston law firm Bernkopf Goodman. He can be reached at 617-790-3370 or at MPomeroy@bg-llp.com.

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