Massachusetts Family Business Winter 2011 by The Warren Group

Massachusetts

Winter 2011

FAMILYBUSINESS Official magazine of the

FAMILY FARMERS FIND LOCAL NICHE Area Agriculture A Booming Business

Plus:

A Very Special Succession Section

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Massachusetts Family Business Official magazine of the

CONTENTS

BUYING LOCAL IS A FAMILY AFFAIR Agriculture is taking off again in New England, and these families are leading the charge. 4

from the board

Congrats to our winners and happy New Year!

award winners The 2011 FBA Awards for Massachusetts.

SPECIAL SECTION: SUCCESSION

life insurance now How your policy can do more for your business.

movers and shakers Learn how to develop the entreprenuers in your family business.

selling the business What you need to know before you sell.

a delicate balance How one father and son make it work in the family business.

healthy family, healthy business Businesses fail early and often: how to keep yours safe.

succession planning Sometimes itâ&#x20AC;&#x2122;s not all in the family.

6 3

Massachusetts

FAMILYBUSINESS

from the board

Celebrating the 2011 Family Business Awards, and a Happy New Year By Al DeNapoli

he beginning of a new year, as always, invites reflection as well as resolutions and excitement for the year to come. 2012 is no different. An anniversary was celebrated on Nov. 3 when the Family Business Association held its fifth annual FBA Awards for Massachusetts. The Royal Sonesta in Cambridge was filled with family businesses of all sizes and hailing from all corners of Massachusetts, friends of family businesses and FBA directors and sponsors. Success and succession were on everyone’s mind that night as the keynote speaker, Stephanie Sonnabend of Royal Sonesta Hotels, spoke eloquently about the creation and success of her family’s business and the succession which was announced in the press that very day. The family sold their business, leaving Stephanie and AL DE NAP O L I other family members in place under the new ownership to continue the brand’s course. Every year brings more award nominations and applications from family businesses across Massachusetts; this year was no exception. From these, and in the face of very strong competition, the independent judges chose the finalists and winners. Presenting the awards, and returning for his third year as master of ceremonies, WBZ-TV morning newsman David Wade kept things moving with his warm humor, his professionalism and charm. In the Small Business category, Woodman’s of Essex, a perennial favorite for their hospitality, their wonderful seafood, and their family story (including their invention of the fried clam) were applauded loudly when announced as this year’s recipient. The Midsize Business award went to Cape Medical Supply, Inc., owned by the Sheehan family, who erupted with both surprise and enthusiasm when called to accept their award. The Large Business award went to A.W. Chesterton Company, a family business of more than 100 years, which employs over 600

Massachusetts workers in its manufacturing and sales business. The First Generation award was given to China Blossom Restaurant, of North Andover, whose owners had just flown back from Beijing that morning to attend the awards event together with their next generation family members. The judges chose Agar Supply Company as the winner of this year’s Adversity Award, and Camp Thoreau, Inc., as the proud recipient this year of the Community Excellence Award for their exemplary service to their community. Two new awards were also presented. First, realizing that there are so many individuals and groups which support family businesses through the years but are not recognized for their efforts, an award was created to honor them. This year, this award went to Joseph Bevilacqua, president and CEO of The Merrimack Valley Chamber of Commerce, for all the support he and the chamber provide to family businesses and to the Family Business Association. Secondly, the “father” and a founder of the Family Business Association, Edward D. Tarlow, Esq., has throughout his career exhibited, among other things, an excellence in marketing and business development. To recognize this, the Ed Tarlow Marketing Excellence Award was created and, chosen by the judges, was awarded to the Lee family, who is in its fourth generation of ownership of the Horseshoe Grille in North Reading. Even then, after the awards event, the year was still not over for the Family Business Association as it continues in its mission of educating and honoring family businesses. On Nov. 29, the Family Business Association held another of its unique events among the beautiful poinsettias at the Cavicchio Greenhouses in Sudbury. There, family farm owners gathered to discuss “Continuity Planning for the Agricultural Industry.” With the Family Business Awards still visible in the rearview mirror, the FBA looks down the road setting its sights on more opportunities to educate and reach out to family Continued on page 22

AL DENAPOLI OF TARLOW, BREED, HART & RODGERS, IS A DIRECTOR OF THE FAMILY BUSINESS ASSOCIATION, INC. 4

Official magazine of the Family Business Association. Inc.

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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

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Family Business Association Awards for Massachusetts Thank you to the 2011 sponsors! If youâ&#x20AC;&#x2122;d like information about becoming

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FBA Awards for Massachusetts 2011 New Awards Debuted, Winners Honored By Christina P. O’Neill

ine award winners, chosen from a crowded field of 22 finalists, enjoyed the limelight at the fifth annual FBA Awards banquet on Nov. 3 at the Royal Sonesta Hotel in Cambridge. Stephanie Sonnabend, president and CEO of Sonesta, noted that when she agreed to be the keynote speaker, “never did I think that this would be the day” that the company would announce the sale of the 65-year-old family-owned firm for $174 million, or $31 per share in cash, to Sonesta Acquisition Corporation, an affiliate of Hospitality Properties Trust of Newton. Awards Host David Wade of WBZ-TV Channel 4 joked to the seated diners, “Eat your food fast, before the new company comes in and changes the menu!” However, Sonnabend said the current management team, including herself, will stay in place (she noted that the average tenure of corporate management at headquarters is 18.5 years). The sale gives family members inside and outside the company liquidity and gives the company an opportunity to grow. In her speech, Sonnabend, who has been

directly involved with Sonesta for more than 30 years, emphasized the importance of pursuing one’s passion, and sounded the call for 20/20 Women on Board, a national initiative she founded and chairs, the goal of which is to increase the number of women on corporate boards to 20 percent or greater by the year 2020. “Do it for your daughter, your granddaughter, employees and consumers,” she said. Sonnabend also advised family business leaders to “treat family like employees, and treat employees like family.” And finally, she urged family business owners to know when it’s time to hand the reins to the next generation, and to make plans early for bringing them in. Two new awards debuted this year: The Ed Tarlow Marketing Excellence Award, to a business that has demonstrated unique creative ability in its marketing program, and the Advocacy Award. Host David Wade likened the event to watching the Oscars – “People are surprised to have won when they see their competition, out of respect for the achievements [of others].” n

CHRISTINA P. O’NEILL IS EDITOR OF MASSACHUSETTS FAMILY BUSINESS. 6

THE 2011 WINNERS AND FINALISTS First Generation Category: China Blossom, a North Andover restaurant founded in 1960 by Richard and David Yee. (The senior Yees flew home from China to attend the awards.) Finalists were: Fern’s Country Store, Gentle Giant Moving Co., GraVoc Associates Inc., and Sidekim Foods.

Small Business Category: Woodmans of Essex, a fifth-generation restaurant and catering business. Finalists were: Camp Thoreau Inc., DiBurro’s Function Facility, Horseshoe Grille, Pets Gone Healthy, and Sapers & Wallack, Inc.

Large Business Category: A.W. Chesterton, a fourth-generation manufacturer of industrial specialty products. Finalists were: Agar Supply, Hub Folding Box Co., Inc., Jack Conway and Company Inc., Lafrance Hospitality, and Sager Electronics.

Community Excellence Award: Camp Thoreau, Inc.

Medium Business Category: Cape Medical Supply Inc., second-generation respiratory equipment and durable medical supply firm. Finalists were: American Alarm and Communications Inc., H.H. Snow & Sons Inc., Humboldt Storage and Moving, and Stavis Seafoods.

Adversity Award: Agar Supply

Ed Tarlow Marketing Excellence Award: Horseshoe Grille Advocacy Award: Joseph Bevilacqua, President and CEO, Merrimac Valley Chamber of Commerce Comcast Spotlight Hall of Fame Award: The Warren Group, publisher of Massachusetts Family Business

NOT SO FAST.

Passing on your family business to the next generation is not as simple as it once was. You need the help and guidance of a team of experts who can make the transition smooth and worry-free. Call Richard Hirschen at (781) 407-0300 to learn the “key” components of a successful business succession.

CERTIFIED PUBLIC ACCOUNTANTS VISION • DIRECTION • SUCCESS Westwood, Massachusetts 781.407.0300 www.gggcpas.com “Sharing in a vision and providing direction so our clients can achieve success.” 7

Time for a Life Insurance Check Up Why Your Life Insurance Policy Can Do More For Your Family Business Than You Thought By Michael A. Mingolelli Jr.

any individuals think of life insurance as a financial transaction, a necessary one-time event or a “set it and forget it” measure to provide a degree of security for their family. For family businesses, it can be a valuable tool, where you’ll find treating life insurance as a financial investment is a smarter and more responsible way to protect your family and ensure a smooth transition in ownership of the business you’ve worked so hard to grow when the time comes. Additionally, treating life insurance as an active financial asset can provide some surprising financial advantages from which your business can benefit – while you’re still alive and kicking. The Right Coverage Provides Clarity and Continuity Your business is your most valuable asset and, conversely, you are a valuable asset to your business. If you don’t have a well-defined, up-to-date succession plan, including liquidity plans, in place to weather financial strain on your family and/or business in the event of your death, both could suffer – ending up suddenly in debt, losing part of the business or generally compromising the vitality and reputation of the business itself. The good news is that these scenarios are almost entirely preventable. A properly structured and maintained life insurance policy can cost-effectively serve multiple purposes in providing financial clarity and security for your business, as well as for your family or heirs. Life insurance has several attributes that make it a dynamic tool for family businesses because of its tax preferences. In short, properly structured life insurance accumulates its cash value on a tax-deferred basis and death benefits are income tax-free. 8

ceive the full value they deserve for your business for only pennies on the dollar.

MICH AE L A . M I N GOLELLI JR.

These benefits are of significant value to closely-held businesses, as liquidity is an ever-present challenge. In the event of the loss of a key person or other circumstances, access to funds through life insurance addresses several common, yet critical, family business needs: Fund a buyout or “buy-sell agreement” – Let’s say a share of your business is valued at $2.5 million. Your partners and you have an agreement that upon your death, they or the business are legally obligated to pay the $2.5 million for your share of the business. Although many agreements have default buyout payment streams, most advisors and family business owners agree that funding some, if not all, of liability is prudent planning. Provide liquidity to pay estate taxes – Many families find themselves literally at a financial loss when a family business owner has passed away and they discover that what they planned to inherit is negatively impacted by significant estate taxes. In a worst case scenario, one is forced to borrow funds or sell interests in the business to raise funds necessary for the estate tax. Similar to a buyout situation, a life insurance policy ensures beneficiaries re-

Key person insurance – Key person insurance is a cost-effective way to ensure funds will be available to cover any costs the business may incur as a result of a specific owner or executive’s death. Key person insurance, however, does not specifically address continuity of ownership which is critical for any business to successfully weather the difficult transition of losing an owner or key executive. Fund executive benefits – Attracting top executive talent to your business means offering competitive benefits packages, including selective executive benefits. To help fund these efforts, a corporate-owned life insurance policy, serves as a useful active investment that offers several tax advantages to your business that include tax-deferred growth of the cash value of the policy, tax-free withdrawals and loans, and income tax-free death benefits to the company to help recover costs outlaid for the executive benefits themselves. Once you’ve identified the primary purposes your life insurance will serve, you can structure the policy accordingly. There are two top-level categories of life insurance with varying degrees of cost, risk and cash access: Term life insurance is a popular, basic form of personal life insurance because the premiums are relatively affordable. But as “term” would suggest, the policy is in force only for a finite number of years (anywhere from one to 30), the premium payments are fixed and there are no funds to access in the policy. The fixed nature

of term insurance is part of the reason why life insurance may be perceived as not needing regular review and more importantly, why permanent life insurance, as described below, is often overlooked as part of a broader financial strategy for family businesses. Permanent life insurance is a flexible financial tool that not only addresses the four primary family business uses of life insurance outlined above, but also serves as an investment diversification option for your business that has significant tax advantages. Unlike term, which is comprised of only an insurance component, permanent policies can have two: an insurance and an investment component. Unlike term insurance, permanent policies offer flexibility as well. For example, you can: • Change your premium payment amounts higher or lower to adjust to business conditions • Use growth on the policy’s cash value to pay future premiums on the insurance • Access cash value on a tax-favored basis Check Up Checklist Here are just a handful of examples of why you want to review and reassess your policy every two years to make sure you’re balancing risk and maximizing coverage optimally. • Does your buy-sell insurance still match appropriately the value of your business? • Do you have the right amount of insurance for estate tax liquidity, especially in light of the changing tax laws? • Have the declining interest rate environment or the volatile equity markets affected the projected performance of your life insurance? • Have your needs changed perhaps requiring a different type insurance solution? • If you have a term life insurance policy that is set to expire soon, have you planned for the next policy? • Does your insurance carrier still look like it will be around to stand behind the long-term contractual promises it is making in light of the recent economic times?

You don’t need to necessarily know the answers to these questions, but it is in your best interest to be aware of them so that you can be confident your policy is supporting your overall business goals. Family businesses can maximize their insurance portfolios by engaging in “active management” of their insurance, making sure to secure the best type of coverage, with the most cost-effective

benefits that align with your goals. Over time, your business will change, your objectives will change and the life insurance industry itself will change. With these three variables and more in flux, especially in these tumultuous economic times, giving your policy a thorough, regular review can positively impact your business’s bottom line in both the short and long-term. n

MICHAEL A. MINGOLELLI JR. IS CEO OF PINNACLE FINANCIAL GROUP AND LEADS THE FIRM’S PRIVATE CLIENT GROUP.

Helping family owned businesses succeed since 1901. We are an independently owned and operated group of highly trained professionals dedicated to helping family business owners, like you, achieve your financial goals.

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Herb Daroff, J.D. CFP® James Bianchi, CLU, ChFC James S. Wolfson, CFP®, CLU, ChFC ® Shaun Erickson, CFP Scott Falk, Timothy M. Duffany Managing Partner

Baystate Financial Services offices throughout New England: Massachusetts: Boston, Marshfield, Wakefield, Wellesley, & Worcester Rhode Island: East Providence ~ New Hampshire: Manchester, Nashua, & Exeter Maine: Falmouth & Portland ~ Vermont: Colchester & Montpelier

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Estate and Business Planning Specialist Baystate Financial Planning hdaroff@baystatefinancial.com 617-585-4502 Boston Common Partners, Baystate Financial Services and Baystate Financial Planning ( a registered investment advisor ) are separate non affiliated entities each of which are independently responsible for the products and services they offer. The family business advisory group aims to meet the needs of small business through the products and services they respectively offer. L0910131292 09/11 (MA, NH, ME, RI, VT)

Developing the NextGeneration Entrepreneur

By Doug Baumoel

an entrepreneurial behavior be taught? This question is of particular concern to family business leaders because so much depends on the skill and commitment of the next generation leader. The family business was born through the entrepreneurial spirit of the founder. It was carried on successfully through the generations by continued entrepreneurial leadership. So, how do current leaders ensure that this entrepreneurial tradition will continue in the next generation? Non-family business leaders have the luxury of choosing successors from a pool of professionals who have demonstrated their leadership and ability elsewhere. Prospective next generation family business leaders are typically first-time CEOs and more often than not, have had limited opportunity to show their entrepreneurial mettle. Entrepreneurism is especially relevant to family business stakeholders because current leaders are more likely to implement succession plans when they see a reflection of their own entrepreneurial spirit in a successor. Moreover, they know that their competition is likely to be led by a seasoned, experienced entrepreneur. Complicating matters, the next-generation leader may have: • been raised in a more affluent household, not knowing real need • had the privilege of professional education, never having had to learn by doing • identified more with professional, rather than entrepreneurial, values • inherited wealth and position that he or she is reluctant to put at risk • been living the prior generation’s vision, never having developed his or her own • had help, never having had the experience of figuring it out for themselves • not had the opportunity to develop selfconfidence and a leadership style • had greater opportunity to develop competing passions and avocations

D O U G B AUM OEL

These are the all-too-familiar challenges facing the next generation leader. The gap between one’s inherent qualities and those of the entrepreneurial leader may be large or small. Closing that gap requires identifying that it exists and finding the right developmental resources – coach, consultant, professor, mentor, psychologist – and being held to entrepreneurial behavioral standards. Just what are these standards? What makes a leader entrepreneurial? Much of the research regarding entrepreneurism in family business has focused on the need for entrepreneurial behavior. Academics have studied successful family businesses and, lo and behold, there is statistical evidence that their leaders typically exhibited entrepreneurial behavior. But little is written about what those behaviors are and how to develop them in leaders. Following are eight characteristics which, when in the right balance, provide a standard for developing and measuring successful entrepreneurial behavior. Innovative: The status quo isn’t good enough. Entrepreneurs always strive for competitive advantage. Leaders lacking this quality are simply caretakers of the business. Too much innovation, however, is also not entrepreneurial and leads to lack of follow through and tinkering. Visionary: Having a clear vision and the ability to inspire others to share it is a hallmark of the successful entrepreneur. Without vision, leaders become like a deer in the headlights when the unexpected

DOUG BAUMOEL IS PRESIDENT AND FOUNDER OF CONTINUITY FAMILY BUSINESS CONSULTING.. 10

happens. But vision must be balanced with accomplishment. Risk-taking: Entrepreneurs take calculated risks that may seem unreasonable to outsiders. They perceive risks as lower because they are betting on themselves and the teams they have built – i.e., they are “the house.” Questioning of authority: Asking forgiveness rather than approval, not listening to the experts who say “it can’t be done,” distinguishes the entrepreneur. They play by the rules – but by rules that may not have been written yet. Inquisitive: They understand that knowledge is power and are always striving to learn more to stay ahead of the competition. They are inquisitive and know that mere competence is fleeting. Passionate: Successful entrepreneurs are immersed in their product or service and develop strong connections to their industry. Vigilant: The true entrepreneur gets things done and makes sure they are done right. More than attention to detail and a strong work ethic, they take responsibility. The opposite is all too common in family business – entitlement – the killer of family business. Value creator: Entrepreneurs are motivated to create value beyond personal satisfaction. They are driven to make a difference – to the industry, the community, their family or the state-of-the-art. It’s more than about money, and this is what distinguishes the entrepreneur from the speculator or opportunist. These eight characteristics, when in balance, are the qualities that should be expected of next generation leaders – especially when planning for succession. They are the standards to which boards and senior stakeholders should hold their leaders accountable, and the behaviors that should serve as examples to future generations. n

Planning The Sale Of Your Business By George D. Shaw, CPA

hether the family business is first generation or fourth, selling a family business is an emotional decision that can be made easier with advance planning. The answers to the following questions will help define that planning: How much money do I need? This question is more complicated than it appears to be. Business owners typically have over invested time in building the business at the expense of pursuing other interests. Once they are no longer fully committed to the business, the cost of post-retirement activities needs to be considered. Start by analyzing lifestyle expenses and preparing a post-retirement wish list. A financial planner and tax advisor can help develop a model that takes after-tax proceeds of a transaction into account, along with future income and appreciation of the investment portfolio, to determine if your lifestyle goals can be achieved. Philanthropy and future-generation financial needs should also be considered. What do I want my legacy to be? Many business owners are more concerned with their legacy than they are with immediate financial gains. The current generation of owners needs to wrestle with the next generation’s competency in managing the business. An objective assessment of capabilities is required, as well as an understanding of the desire of the next generation to be involved with the business. The next generation sometimes feels an obligation to take over and is miserable running the business instead of pursuing personal goals. Should I sell now or later? The recession has added complexity to timing a sale. Many businesses are not back to pre-recession profitability. Business owners may want to delay a liquidity transaction until profitability returns to historical high water marks, but these levels may not be reached

for many years. Both internal and external factors should be considered for transaction timing. Internal financial analysis typically focuses on current sales and profitability, and growth forecasts. External factors are harder to assess, but owners need to consider the macroeconomic picture, as well as the competitive industry landscape. The economic downturn forced many companies to deal differently with vendors and the supply chain. Customers are demanding more goods and service, vendor consolidation and lower costs, which may put the business at a long-term competitive disadvantage. Another external factor business owners need to assess is the “what if” scenario of a merger or acquisition. Understanding the consequences of a potential or recently completed M&A transaction in an industry sector is critical to assessing the future financial prospects or your business. Industry consolidation can squeeze healthy businesses out of the market, as competitors become stronger through M&A synergies. A liquidity event can also take many forms, ranging from the sale of a minority interest, recapitalization or the sale of a majority interest. An experienced M&A advisor can help you understand these choices and how they impact legacy goals. How can I reduce taxes? “What if” scenarios should be considered in structuring the deal. The tax differences between an asset sale and a stock sale to both the buyer and seller are significant. An S Corporation or LLC (pass-through entities for taxation at the individual level) may increase M&A tax-structuring options, which may increase the purchase price. Future income tax rate increases may also impact tax payments and timing of the transaction. Many transaction structures include earn-outs or seller notes where the tax-

able gain can be deferred. Business owners should consider wealth transfer to future generations before selling. The economic downturn created an opportunity to gift business ownership to future generations at a low valuation and with lower gift taxes. How can I increase value? As when selling a home, making improvements before you sell will increase your odds of attracting buyers and commanding a higher price. Improvements take time, however, so begin making them two or three years before you’re ready to sell. When you consider that every $1 million increase in EBITDA could result in a $6 million increase in the purchase price, it is worth the time and effort. Look at your business from the buyer’s perspective. Assess its qualities and areas that need improvement. Understand what both financial buyers and strategic buyers are looking for, and do whatever you can to make your company more attractive. Buyers and investors are interested in: • An attractive growth story • Long-term relationships with highquality customers that provide attractive profit margins • A defensible industry position that creates sustainable revenue and profitability • Competitive advantages, such as lower costs, superior products, a well-known brand and a reputation for outstanding service • Leading technology • Above-average gross margins and EBITDA There are many other steps you can take to increase the value of your business, such as developing a growth strategy and strengthening your management team. Advance planning will help maximize value and improve the likelihood of a successful transaction. If you plan to sell your business in the future, now is the time to discuss and implement a strategy. n

GEORGE D. SHAW, CPA, IS A PARTNER IN CHARGE OF TRANSACTION ADVISORY SERVICES AT DICICCO, GULMAN & COMPANY LLP. 11

Buying Local is a Family Affair Agriculture is a Big Small Business in Massachusetts By Margaret LeRoux

uying local has become a rallying cry for advocates of a more self-sustaining regional economy, and there’s no industry that benefits from the “local” brand more than the state’s agricultural businesses. Scott J. Soares, commissioner of Massachusetts’ Department of Agricultural Resources, proudly touts the growing number of agricultural businesses in the state. The commissioner notes that Massachusetts ranks second in New England for direct sales of farm products to consumers and second in the nation in the value of average direct market sales, at $25,356 per farm. Farming is making a comeback in other parts of the country, as the value of agricultural land rises relative to land slated for development, lessening the economic pressure on family farms. Match that with the rise of the “locavore” movement – the initiative to eat food that is grown within one’s own region rather than trucked in from thousands of miles away – and you have an emerging market of customers motivated to buy local. Continued on next page 13

ABOVE: The herd of Hereford cows at Maple Heights Farm. BELOW: Syndey Hertel, 11, helps with farm chores by feeding the turkeys.

Buying Local Continued from page 13

These four family businesses have found their niche within the locavore movement and are winning over these motivated customers. The Hertels of Maple Heights Farm Andy Hertel had no intention of becoming a farmer like his father. Though he grew up on his family’s 202-acre dairy farm in Fitchburg and studied agriculture at the University of Massachusetts Stockbridge campus, Andy Hertel worked as a builder. “There isn’t much money in farming,” he said. Fate intervened during a hike with his wife, Kerrie, and their four children; they discovered a long-abandoned farm next to the Midstate Trail in Westminster. Located atop a hill, it offered scenic vistas even though the fields were overgrown. The farmhouse, built in 1822, was uninhabitable. A few months later, Kerrie learned that the farm was for sale. “Let’s just take a look,” she said to her husband. Now, almost six years later, the Hertels raise grass-fed beef, pastured pork, chickens and turkeys on land they named Maple Heights Farm. A herd of 18 Hereford cows grazes in the fields while 15 heritage breed pigs root in pastures. In the spring, summer and fall, chickens and turkeys range freely in movable pens. The bucolic tableau, however, is a struggle to maintain; the family hasn’t been able to move from their home in Westminster to the farm yet. The Hertels purchased the farm property with help from the state’s Agricultural Preservation Restriction (APR) program, which pays the difference between fair market value and agricultural value of farmland. In exchange, farmers agree to a permanent restriction preventing the land from being developed. Maple Heights Farm, named for the grove of maple trees that lines the driveway, will always be farmland. “Having a farm provides a very rich life experience for our children,” said Kerrie Hertel. “They learn and practice business skills while closely experiencing science, nature, math and ecology. The farm provides a great opportunity to be independent and self-sufficient.”

When she’s not baking the bread the family sells at a local farmers’ market, Kerrie Hertel of Maple Heights Farm can be found in the vegetable fields.

The Hertels are following a business plan. “We are working towards making the land more productive through natural fertilization from our animals,” said Kerrie. “In five years, we hope to have all our herds, flocks and rafters [turkey flock] certified organic. We also hope to have all the soils built up enough to sustain more animals and vegetables.” Running a business as a couple is “fulfilling, and we never run out of things to talk about,” Kerrie continued. “In each other we have dependable support for our business that we may not find in hired help. Andy is more hands-on working with the animals – and they like him better. I’m responsible for growing vegetables and together we work on the planning.” For now, The Hertels sell meat, eggs and Kerrie’s homemade breads at the Westminster Farmers Market and online through Mass Local Food (www.masslocalfood.org),

an online food co-op that Kerrie helped start. Maple Heights Farm is one of 29 Massachusetts farms that list their products monthly selling to more than 300 members of the online coop. For farmers like the Hertels, the biggest expense is the cost of processing (slaughtering) the animals, which has increased by 40 percent since they started farming. It costs about $1.50 per pound to have their cows and pigs processed at one of the few USDAcertified slaughterhouses in the state. Chickens are taken to Vermont, because currently there is no USDA-certified slaughterhouse for poultry in Massachusetts. In order for farmers to sell meat at farmers’ markets or through Mass Local Food, the animals have to be processed at a USDA-certified facility. The dearth of federally certified meat processors and the increasing demand for local meat have hit farm budgets hard. Continued on next page 15

Margot and Wade Holtzman make and market Apfel Eis, an apple ice wine, at Still River Winery, in partnership with their son, Leif Holtzman.

Buying Local Continued from page 15

Another problem is overcoming some customers’ reluctance to pay premium prices. “Considering that we care for our animals for two years, feeding them and keeping them healthy and the fields from which they graze healthy, we know it is just not possible to supply high quality meat for $2 per pound without serious cutbacks in the quality of the animals and feed,” Kerrie said. “We aren’t willing to do that.” The Holtzmans of Still River Winery The Holtzman family from Harvard, Mass., was inspired to start their winemaking business during a vacation in Quebec where they sampled ice cider, a wine made from frozen apples. Still River Winery was born soon after Wade and Margot Holtzman shared a bottle of the aperitif with their son Leif, an economics major at Harvard University. Little more than two years later the Holtzmans’ Apfel Eis won top honors in competitions throughout New England. Pretty impressive for a tiny operation whose principals include an educator, an experienced woodworker and a student who shared a beer brewing hobby with his dad. Wade is the winemaker and Margot, a learning specialist at the Friends School in Cambridge, keeps the books and conducts wine tastings with the help of friends and the winery’s sole employee. “All the creative energy in this enterprise comes from our son, Leif,” said Wade. Leif devised a marketing plan, designed the Apfel Eis label and created a website for the winery, which is housed in a small building next to the family home. For 30 years Wade restored antique furniture; he now focuses a similar meticulous attention to the details of apple ice wine winemaking. In eastern Canada, where the beverage originated, apples are allowed to freeze on the trees. Wade starts with a proprietary blend of several heirloom varieties grown and pressed at Box Mill Farm in Stow. He freezes the mixture, thaws it and lets the water drain off, repeating the process two or three times until only one gallon of concentrated apple juice – “must” in winemaking terminology – remains. Wade estimates that the highly concentrated mixture con-

Al Maykel III and his sister Celeste Maykel-Zack are partners in their family restaurant in Worcester, Evo, an outgrowth of their parents’ natural food store.

tains the juice of 80 apples per bottle. Apfel Eis’ dry, crisp finish has generated positive reactions from the very first tasting among friends of the family. “I didn’t really have high expectations, but their reaction surprised me,” says Leif Holtzman. “They really liked it.” The first year the Holtzmans sold 40 cases of Apfel Eis by driving around central Massachusetts, visiting wine stores and offering samples. Their efforts generated interest and sales, which increased the next year to 400 cases. A partnership agreement with Berkshire Brewing Company for distribution increased sales to 1,200 cases for the past two years. Until earlier this year, all the tastings were done in wine shops and liquor stores, but recent state legislation allows sales of locally produced wines at farmers’ markets. Throughout the summer, Margot and her helpers dispensed samples of Apfel Eis at markets throughout Boston and suburbs as well as Central Massachusetts and the North Shore.

Leif is currently studying for an MBA degree at Stanford University. Even though he’s 3,000 miles away, “most of my contributions are marketing and designrelated, which I work on from my home computer,” he said. “I don’t have to be physically present at the winery a lot, and we make many decisions on the phone or over email. I guess the biggest difference now that I’m living on the other side of the country is that I don’t have to wash as many [wine] bottles.” The future direction of the company will depend on Leif’s plans, say his parents, although the family remains united on their goal to remain a craft business. “Producing the highest-quality wine is what’s most important to us, so we’re extremely cautious about maintaining that quality as we grow,” said Leif. “Our apple ice wine is a craft product with a local niche. We rely on word of mouth from satisfied customers who tell others about our wine or give bottles of Apfel Eis to friends Continued on next page 17

LEFT: The dining room at Armsby Abbey in Worcester. RIGHT: Owners Alec Lopez and Sherri Sadowski with the pub’s Best New Restaurant award.

Buying Local Continued from page 17

as gifts and we hope to continue spreading the word that way.” The Maykels of Evo The Maykel family business was a locavore enterprise decades before the term was invented. Living Earth, Worcester’s oldest natural foods store, was founded by Al and Maggy Maykel in 1971. Their three children grew up working in the store, becoming familiar with all aspects of the business, which included a small, vegetarian café. “Growing up in the business was ‘normal’ for us because we didn’t know anything other than that,” said Celeste Maykel. “We started working in the back room packaging grains and bulk items, and it was a really fun time for us.” Maggy notes that her son, Al Jr., “always liked cooking with me. He had a knack for knowing how to work in the kitchen. When he told us he wanted to be a chef, I was pleased.” Al Jr. worked in 18

the café kitchen and went on to graduate from Johnson & Wales University with a degree in culinary arts. A few years ago, he and his sister, who had been working full time in the business since 2003, approached their parents with a plan to build an upscale restaurant to replace the café. “The concept was ‘dining evolved,’ hence the name, Evo,” explained Al Jr. “We wanted to evolve the new restaurant from the old with a more sophisticated style.” Evo serves a mix of cuisines, including egg rolls, quesadillas, pulled pork, pizza, Kobe beef burgers and Lebanese Port Said chicken. It has a full bar serving organic wines and craft beer. The new restaurant has struggled to overcome several major obstacles since it opened in December 2008, at the start of the recession. “It could not have been a worse economic climate,” said Al Jr. Many customers of Living Earth’s vegetarian café didn’t like the new restaurant’s style and menu. “People expected us to be vegetarian or vegan,” the chef explained. “We’re so much more than that. We were confident if we could get them in the door

they would like us.” Pricing has been another challenge. “The majority of our customers expect a lot and they don’t always understand all that goes into producing an item,” Al Jr. notes. “ A Kobe beef burger, for example, is $15. I’m not making a markup on it; I’m trying to give a good value for the money.” The chef explains that “when we first opened we offered a salad topped with panko-crusted, baked goat cheese. The number of steps involved in making that became too cost prohibitive. Now we serve a mixed green salad topped with crumbled goat cheese. It’s easier and less expensive for us to prepare and it’s healthier.” Evo’s links to its locavore heritage may not be as strong as its predecessor café, but there are some local ingredients on the menu. Beef comes from Adams farm in Athol, although the Kobe beef comes from Colorado. Some of the produce came from the Maykels’ own farm in Rutland in season; the chef also uses organic ingredients from Living Earth. True to its name, the restaurant and the

family business are evolving. Opening the new restaurant “was the best decision I ever made,” said Maggy. “It meant shrinking the size of Living Earth, which made running the business so much better. We went from 46 employees to 22; now it’s easier to manage. We carry the same stock, only a smaller inventory. Bigger isn’t always better.” “Working with family is always challenging, but also is really rewarding,” added Celeste. “We are all ultimately working for the goal of providing the community with a healthy place to eat and being proud of what we do.”

cream. The creative menu is the work of Alec’s team of six chefs, all with culinary school training. There is also a full-time baker and a waitstaff of 24. “Working together, we have very different personas than we do at home,” said Alec. “At the Abbey we exist as job titles. Sherri is the general manager and I’m the executive chef. Sometimes we butt heads

in those capacities, but we’re united in our mission. In the end we both have the best interests of the business in mind.” In the winter months, the Abbey’s commitment to serving local ingredients is challenged, Sherri and Alec concede, “but it’s a great opportunity to educate people. When they ask for tomatoes in winter we can explain why we don’t have them.” n

MARGARET LEROUX IS A FREELANCE WRITER.

Alec Lopez and Sherri Sadowski of Armsby Abbey Armsby Abbey, a gastro-pub on the north end of Worcester’s Main Street, is a successful locavore business, although that was not the original intent of its owners. In the three years since the Abbey opened, it has gained national recognition for an encyclopedic beer selection. The ambitious little 68-seat pub also developed a strong following for its locally sourced menu. Owners Sherri Sadowski and Alec Lopez set out to serve the best craft beers in the world, and food as good as the brews. “We expected that food would represent only 20 percent of the operation; it quickly became 50 percent,” said Sherri. The couple is passionate on the topic of local food; during the Abbey’s first months they spent hours driving to area farms scouting out fresh produce, meat and cheese. The relationships they developed paid off; now farmers contact them. When Overlook Farm in Rutland had an extra 40 pounds of carrots and garlic, Lopez gladly took it all. Dismas Farm in Oakham grew several varieties of heirloom tomatoes for the Abbey this past summer and an employee of Tougas Farm in Northborough frequently stopped by with peaches still warm from the afternoon sun. The Abbey serves cheese from Sterling and Westport, and the pork in the house-made rillettes comes from Adams Farm in Athol. Sandwiches include grassfed roast beef with local horseradish. Among a handful of desserts is a tart with apples from Tougas Farm, accompanied by homemade, beer-infused vanilla ice

Minding family businesses for 150 years. For generations, Hemenway & Barnes has helped family businesses plan for the future while staying strong and unified. Our continuity planning process helps families create a dynamic, flexible structure suited to a variety of ventures and needs, whether business-related or not. This Family Enterprise model has evolved as a way to accommodate today’s increasingly complex needs while staying firmly rooted in timeless values.

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A Delicate Balance David and Paul Karofsky of Transition Consulting Group

By Christina P. O’Neill

aul Karofsky, 68, loved working with his father, and he always wanted to work with one of his kids. When he was just a few years older than his son David is now, he felt he could easily relate to both younger and older generations. Now, David, 41, whom Paul says has a talent for bringing clarity to a complex situation, is in that sweet spot. “The differences between us and our parents were nowhere near as great as the difference between us and the younger generation today, in terms of values, style, communication patterns, and candor and openness,” Paul says. “It’s an entirely different world.” When Paul’s generation started work, you had to be in the office to be able to work. Technology has changed that, shrinking the world and expanding the work day beyond the traditional eight hours – but also giving the flexibility to attend to personal matters within the widened window. Additionally, David’s generation and younger generations didn’t switch careers as frequently as is done today. Paul had two: a family-based wall-covering business, which he sold, and now, Transition Consulting Group, a consultancy that advises family businesses on succession issues. In David’s 20-year work life, he has had four careers and multiple jobs, including two years counseling youth in juvenile prison for the Massachusetts Division of Youth Security; six years as a real estate broker; a year as a management consultant; returning to school at age 30 with a young child at home; eight years with a large datastorage company and two years with a software startup. “Twenty-five years ago, if I saw a resume like that, I’d say this guy is unstable, I don’t want him.” Paul says. “Today, if I don’t see a resume like that, I think the person lacks interest, drive and aggression.” Making it on the outside Both father and son stress the importance of having the younger generation work outside the business for a number of years when that’s possible, to ensure that the younger generation knows they can make it on their own and not be dependent on the family business. 20

PAU L AND D AVI D K A ROFS K Y

“That takes a lot of pressure off the senior generation,” David says. “If the father feels the son needs him to survive, there’s pressure on mom or dad to stay there, to make sure the business succeeds for the younger generation.” In a job market for new college graduates that’s so bad that many of them are moving back to their parents’ homes, that’s not always workable. The Karofskys have helped more than one family-business client devise an apprenticeship program for a member of the younger generation (see “Bringing More to the Table,” fourth quarter 2010) that structures the job-entry experience in a fair and equitable manner. Paul says he and David have incorporated the same set of best practices they encourage their clients to adopt, including a shareholder agreement. They address differences of opinion right away. “When you bring the family dynamic into the boardroom and bring the business dynamic to Thanksgiving dinner, communication is at the root of it,” David says. Ownership versus leadership Family businesses in generational transition must decide whether to bring in outside executive talent. David notes that the person who runs the business most often ends up running the family – sometimes, whether the executive is family or not. TCG advises such companies on the consequences of that level of involvement. Clients catch on – they may not change, but they are at least aware, Paul says. Then there’s stock transfer. What if the family decides to keep the business? Do they transfer stock only to family members who work in the business? If the business is several generations old and stock has been handed down, what if no family member has a controlling interest? “If all family members own

five percent and argue about what their five percent can do, they may have to come to the decision to prune the tree in the best interest of the business and the family,” David says. Alternatives are to sell the business, and from the proceeds, create a family foundation or investment fund. “We work with clients who say they don’t want to be the generation that ends the business.” As the business continues, that becomes a much tougher decision, and it weighs on the ‘last’ person most heavily, he says. How many family members are dependent on the business but who are not contributing to the growth of the company “is an increasingly complex issue,” says Paul. “For how many generations can a business support a family without the family supporting the business?” The relay race Will the younger generation be willing and able to take hold of the business at the same time the senior generation is ready to let go? “It’s the passing of the baton in a relay race,” David says. “At some point the person passing it has to give it and the person receiving it has to take it, and if it’s not done gracefully you drop the baton and lose the race.” However, with more generations working longer, transition of a family business today is more of an integration of the generations, not just a passing of the baton, he adds. “The younger generation needs the confidence to take hold and the senior generation needs confidence that younger generation will take hold,” Paul says. “If they don’t have that confidence they’re not going to let go. It was their business and they don’t want to see it fail, and they don’t want to see their kids losing their jobs [or themselves losing their retirement]. It’s also a reflection on themselves, a lot of members of senior generation who secretly, at a level of pre-consciousness, believe that the success or failure of sons and daughters is a direct reflection of their own success.” n

CHRISTINA P. O’NEILL IS EDITOR OF MASSACHUSETTS FAMILY BUSINESS.

Keeping Your Family Business Healthy

By Robert Katz

he statistics read like mortality tables from 14th-century Europe at the height of the Black Death – only 30 percent of family-owned businesses make it to the second generation and less than 10 percent survive past the third. Since family-owned firms account for 50 percent of U.S. gross domestic product and 78 percent of all new jobs, according to BusinessWeek, the high rate of failure among these privately held firms, both large and small, is a significant concern for an American economy struggling to regain its footing. There are many reasons family businesses fail, but problems with succession and finances top the list. Successful transitions can be marred by a talent gap as younger family members who many not be educated or experienced enough to run the family business insist on doing it anyway, and proceed to run the company into the ground. In addition to the next generation possibly not having the proper skill set to run the business, inevitably financial problems crop up during succession planning. The business must have the resources to both support older family members in their retirement and have the capacity to find or earn new capital for ongoing business operations. Because of the high cost of these transitions, some business experts even go so far as to advise their clients to plan on growing 20 percent beyond what is anticipated in order to cover the cost of succession without compromising the firm’s future profitability or sustainability. Successful family businesses are those able to regulate ownership. This is why most family business consultants advise clients that a shareholder agreement (or a “buy-sell” agreement), preferably one

negotiated early in the firm’s existence, is essential to long-term survival. Shareholder agreements can last for a generation or more and stipulate how shares of the company can be transferred, both within and outside the family. They might, for example, specify that upon the death of a shareholder the company would buy back the shares. Estate planning tools that help individuals pass along wealth to their heirs can also be useful in facilitating a smooth transition of family businesses undergoing stressful successions. Estate planning is rarely a simple undertaking, but it can become doubly complex when the assets being handed down from one generation to the next is not merely an inanimate stock or financial portfolio but a living, breathing business that must be able to survive and grow following a transfer of ownership. In family-owned businesses where there may be large quantities of privately held stock, owners who want to ensure the smoothest possible transition of business ownership might consider creating a grantor retained annuity trust (GRAT). The advantage of such an instrument is that it can provide the current business owner(s) with a second paycheck, remove future appreciation from their estate and help move assets to the next generation, free from the burdens of estate taxes. The best time to consider a GRAT is when two conditions exist: low asset valuations and low applicable federal rates (AFRs). In many cases, these two conditions exist today. The GRAT is created when individuals place certain assets into an irrevocable trust for a fixed period of time, while retaining the right to receive principal and interest in the form of annuity payments.

The assets can be shares of a business before it is sold or goes public, real estate, highly appreciated publicly traded stock, or private partnership shares. While the business owner moves assets down to the next generation in a tax advantageous way, he does not have to give up control over the business. The intra-family loan is another attractive option for larger family-owned firms as they approach that all-important hand-off to the successor generation. According to the IRS, a loan can be made to any friend or family member without being considered a taxable gift as long as the interest rate on that loan is equal to or greater than the AFR established by the IRS. In this period of economic uncertainty, many families have built up significant cash reserves and are waiting on the sidelines for positive momentum in the stock market before they invest. The good news for others with ready cash is that there is an attractive opportunity available with beneficial tax implications. An intra-family loan can be a tremendous advantage to the lender as well as the borrower. The loan may offer the family member (the lender) a higher return than some of their other investment options (such as cash or short term bonds) while providing a consistent stream of income without the borrower having to pay fees to a bank for a similarly structured investment. Family loans can be used for any purpose, including paying off high interest credit cards, starting a new business or buying stock in an existing family business – in other words, keeping it in the family! Whichever road the business owner chooses, the sooner they start planning for the future of the business, the smoother the transition will be when the reigns pass to the next generation. n

ROBERT KATZ, CFP, IS MANAGING DIRECTOR OF WEALTH STRATEGIES FOR BAINCO INTERNATIONAL INVESTORS. 21

Succession Planning Sometimes it’s Not all in the Family

By David Solomon

assing down a family-owned business to the next generation may be the best spouses, sons and daughters, nieces and nephpossible scenario for some, but if the ews – were on board with our successor terms. act is more obligatory than practical, the busiSo, while we were pleased that our decision ness you’re running today may not survive far was met with unanimous agreement, we were into tomorrow. also aware of resulting potential tax liabilities. Without question, running the day-to-day And since both my brother and I have been operations of a business – be it family-owned around long enough to recognize where our or otherwise – can be a daunting task, often strengths lie – and perhaps more importantly leaving little time to consider what lies ahead where they do not – we sat down with our on the immediate calendar, never mind over lawyer and accountant and let them handle the longer term. But in order to ensure that the “legalese.” a family-owned business lives on In fact, one of our primary in the way you envisioned, succesconcerns had to do with stock sion planning must be addressed transfer. The succession plan we openly and honestly. decided on will transfer stock to That’s the approach my brothour survivors; however, it will be er Roy and I took years ago after non-voting stock. opening our full-service insurAnd since insurance is what ance firm. Our first and foremost we know best, we also have “key agreed-upon succession goal was D AV ID SO LO MO N man” insurance in place; this to make certain that our spouses coverage protects a business in the case of an would be able to maintain their lifestyles in the untimely death of a business owner. Not to be event of our deaths, a very common objective confused with life insurance, key man insurof family business owners. ance is designed to protect the business, not And as important as it was to have peace the key employee. In the event of my brother’s of mind knowing they would be taken care or my death, the policy proceeds can be used of, it was equally imperative that neither our by Amity for any purpose. Typically, those spouses nor children would play a role in the funds are used to cover expenses associated eventual management of the business. with finding capable replacements. Before we go further, we should say that our Difficult as it may sometimes seem to get wives and offspring are all extremely compethe process in motion, in order for a familytent and talented individuals. But the “kids” owned business to exist into the future, suchave never been involved in our insurance cession planning must be addressed … openly, firm, instead selecting to follow their own honestly and often. career paths. We recognized the potential for For some, passing the family business on to issues to arise should one or more unwilling the next generation is the most natural course, family members take the helm. In other words, while for others – like Roy and me – it’s wise we didn’t want anyone who didn’t work in the to acknowledge that non-family staff members business to end up running it – a successor are better suited to carry on the firm. concern that is shared by many family busiOf course, it helps when your relatives agree ness owners. with that vision for the future. We’re fortunate What we opted for instead is to offer the to have wives and children who appreciate that firm’s employees/management team the opit takes more than the same last name to sucportunity to purchase Amity Insurance upon cessfully run a family business. n the death of the last active partner. Everyone –

DAVID SOLOMON IS PRESIDENT OF AMITY INSURANCE, BASED IN NORTH QUINCY. 22

From The Board Continued from page 4

businesses so they can share their unique business stories among themselves and the business community. This magazine is a prime example of the value provided by the FBA as it continues to print informative articles and stories spotlighting family businesses. Thanks to the support of the Warren Group, Massachusetts Family Business magazine continues to reach more and more family businesses and interested individuals every quarter. In recognition of the success of the Warren family and its contribution to family businesses and the FBA, the Warren family was also honored at this year’s awards event with the second annual Comcast Spotlight Hall of Fame Award. Tim Warren, a fourth-generation owner of the Warren Group, graciously accepted on behalf of his family. Moving forward, the FBA webinars are increasingly gaining listeners who recognize the enrichment they provide to family businesses. Seminars for 2012 are being planned with an eye toward the quality of last year’s, which saw the Family Business Association collaborate on programs with the Small Business Administration, the Boston Foundation concerning philanthropy, Fidelity Services on the importance of family history, and Suffolk University on social media. Also, in August, the FBA, in a panel presentation held at the Gloucester House, told the history of Cape Ann through stories of the business history of the region as recounted by family members of these businesses. The new Family Business Association website launched last year, providing more resources for family-owned businesses. If you have not yet checked out fbaedu.com, please do so. There, you can learn more about the FBA, its sponsors, its award winners, and view the archive of articles, webinars, videos and other programs provided as a resource for concerned family businesses. In closing, on behalf of the Family Business Association, we thank all those who have made 2011 such a success, all the nominated family businesses, applicants, finalists, award winners, our dedicated and loyal corporate and media sponsors, and those, who like this year’s winner of the Family Business Advocacy Award, the Merrimack Valley Chamber of Commerce, do so much within and for family businesses. Happy New Year to all. n

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