Massachusetts Family Business Summer 2013

Massachusetts

SUMMER 2013

FAMILYBUSINESS Official magazine of the

Inside:

Call for Nominations for FBA Awards

UNIVERSAL EXPERIENCES FIRST ANNUAL NEW ENGLAND FAMILY BUSINESS CONFERENCE UNCOVERS COMMON GROUND

A Supplement to Banker & Tradesman

Chase and J.P. Morgan are committed to supporting and empowering familyowned businesses.

Š 2013 JPMorgan Chase & Co. All rights reserved. Chase and J.P. Morgan are marketing names for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. PA_13_216

Massachusetts Family Business Official magazine of the

CONTENTS

8 SAME LOCATION, DIFFERENT JOURNEYS The first annual New England Family Business Conference provided networking and learning opportunities for all types of businesses – and many discovered they are more similar than different.

8

4

from the board

FBA Awards for Massachusetts 2013 Call for Nominations

6

family enterprise

Learning from European and Asian Family Business Models

11 after the merger

11

12

Avoiding Common Pitfalls and Disputes

12 the care and feeding of advisors

When the View from the Outside is Needed

6 3

Letter from the Board

FBA Awards for Massachusetts 2013 Call for Nominations

T

he August 16 deadline for nominations and applications for awards is fast approaching. Before we know it, family businesses from across the state will gather to honor the 2013 finalists and celebrate as the winners are announced on Oct. 24, 2013, at the Royal Sonesta Hotel in Cambridge.

The Family Business Association Awards for Massachusetts recognizes family businesses that have done an outstanding job, but both the application process and the Awards event provide value beyond recognition alone. The application is a platform for analysis of winning strategies to create and sustain a successful family business.

This is not to downplay the recognition factor. Consider the marketing and PR-related exposure that finalists and winners receive. For example, through the auspices of Comcast, three of the 2012 winners were featured in a series of public service announcements seen across a variety of prime networks over a three-month period.

The challenges of sustainability in a changing world are many. For familyowned businesses, add in the unique family business dynamics, and the challenges grow. Work-life balance takes on an extra dimension in a family-owned business, as does the task of mentoring the upcoming talent pool.

Then there are the stories. In years past, we’ve heard accounts of many bet-thecompany and save-the-company odysseys that rival anything on Wall Street – except that in a family-owned business, the consequences of risk-taking, good or bad, are felt on an extremely personal level. The tales of individual successes and failures – the latter of which award winners face and surmount – are a learning experience for all.

Eligible award nominees are all Massachusetts-based family businesses. Applicants will apply in one of the following award categories: Small business - fewer than 50 employees; Medium business between 50-150 employees; Large business - more than 150 employees. Eligible

businesses in these three categories must have successfully transitioned from one generation to the next. Finalists will also be selected in the category of First Generation Business. Applicants in this category have at least one family member who is an active equity owner and at least one other family member employed by the business.

From the pool of all Award applicants, the judges will also select a winner of the Community Excellence Award for philanthropic excellence, the Adversity Award for successfully overcoming a substantially adverse situation, and the Ed Tarlow Marketing Excellence Award for unique creativity and marketing.

Judging will be conducted by an independent panel of academic, business and management professionals, all experienced in the family business field. There is no fee to apply and no requirement to provide financial information. All information shared by applicants will only be used for Awards purposes.

See the ad on page 15 for more information about nominations and applications. ■

Massachusetts

FAMILYBUSINESS

Official magazine of the Family Business Association. Inc.

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4

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5

Diversifying Risk, Gaining Opportunities with a Family Enterprise Model

By Frederic J. Marx

F

amily businesses have a well-chronicled challenge, as they often struggle to maintain success through a number of generations. The adage of “shirtsleeves to shirtsleeves in three generations” has been proven out for decades (if not centuries); however, families can position themselves for greater success by expanding their business model to align with success stories from Europe and abroad.

In the U.S., a cultural focus on the individual emphasizes entrepreneurialism – a significant asset for the first generation business owner. That same disposition, however, can be restrictive when it comes to long term, multigenerational planning and ceding control to the next wave of the family.

Meanwhile, family businesses in Europe, Asia, and South America treat the business as an extension of the family, with every member of the tree playing a role.

This tends to result in legacies that unfold through the business and the family for many generations.

Families that bring these two strengths together can improve on a traditional foundation with diversified business interests. Using a holding company model, 6

they can spread their risk across different business lines and strategically populate affiliated ventures with members of the extended family. This approach presents more opportunities for succession, estate tax planning, and the ability to grow a sustainable model that can last for centuries.

Tapping the Benefits of the Family Enterprise While most owners and management teams will agree that spreading risk and opportunity across different initiatives is a fundamentally strong approach, making the leap as a family business can seem daunting.

The first fundamental shift comes with business and estate planning philosophy.

Families routinely build around current owners to facilitate the transfer of an existing company to the next generation. This linear thinking is too short-term, though, and limits the potential of the enterprise.

The solution lies in a much more comprehensive planning effort that should be led by advisory teams. Families should consider three crucial questions • Who is the family?

• What are the missions of the family and the business?

• What is the core business, and into which industries can it successfully diversify?

Gathering this information can be difficult, but it serves as a crucial guide for implementing a diversified model. The benefits are many in form and function, with gains to be found.

Making the Most of Family Participation Individuals generally welcome the opportunity to flourish, and a diversified platform opens more opportunities for family members to participate. Participation promotes enthusiasm, enthusiasm promotes growth, and growth keeps the family thriving from one generation to the next.

Holding companies can also help families avoid conflict by creating distance between relatives and managers. In single or centralized businesses, on the other hand, rifts in personal and corporate lives can appear when management manipulates family members or contradictory instructions from loved ones create confused allegiances.

Succession Planning The senior generation often has difficulty yielding control as its tenure comes to a close. Even when they are fully supportive of their heirs stepping into management, they hesitate to back away from their life’s work. Diversification allows elders to move from an operating company into legitimate, meaningful positions elsewhere in the holding company or another portfolio company, creating a pathway for the younger generation to take charge.

A holding company structure also enables leaders to migrate from a family managed company to a family owned and professionally managed company. Bringing in a layer of separation means the senior team can slowly separate themselves from day-to-day operations without forcing control onto a generation that is not yet equipped to lead.

Estate Planning There are myriad variations of estate planning strategies that can be put into play. Some of them apply to any family owned company, while some only come to light through the enterprise structure.

Early stage ownership is a prime example: when holding companies launch a new entity, the value at start-up is essentially zero. Ownership in worthless shares can be passed on to heirs, and value will accrue as the new company grows. When the shares appreciate over time, the next generation avoids estate tax on the accumulated value.

Executing exits as part of the estate plan is another challenge that becomes easier with the Enterprise model. A potential sale of the core family business generates tremendous discord, but a holding group presents a number of options to create liquidity through a sale of selected assets.

These events will not be approached as an endgame, but as a means to promote prosperity and, more importantly, keep the family united.

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Enterprising Opportunities Creating a family enterprise helps foster an inclusive environment for relatives, provides the most effective succession and estate planning opportunities, and solidifies the future of heirs. Along with the guidance of a skilled advisory team, investing energy and resources in a diversified model will enable families to blaze a trail for their legacies and for U.S. businesses as a whole.

■ FREDERIC J. MARX IS A PARTNER AT THE LAW FIRM OF HEMENWAY & BARNES, LLP. 7

Universal Experiences, Many Different Paths First Annual New England Family Business Conference Uncovers Common Ground

By Christina P. O’Neill and Nora Tooher

W

illiam J. Gilbane Jr. crunched some numbers to illustrate the expanding number of stakeholders at Gilbane Building Co. While he said his company’s next president will not be a Gilbane, the company’s long-term strategy includes having a Gilbane family member in each of its 60 “tight-knit” offices.

Edward Bond Jr., head of Bond Brothers Inc., said he keeps a calculated distance from his company’s management team by not carrying an iPhone or an iPad. “If it’s that quick that they need a decision, there’s a problem,” he said crisply – a problem that the management team should be solving on its own.

Welcome to the unique and tremendously productive world of family business.

The first annual New England Family Business Conference, held May 16 and 17 at MGM Grand at Foxwoods Casino in Ledyard, Conn., covered a lot of practical ground in very human terms. Almost 100 attendees took in the conference’s two general sessions and four breakout sessions. The overriding theme was change, whether due to shifts in leadership or market forces.

The Only Thing Constant is Change That was certainly true of “The State of Health Care,” the opening session on the federal Affordable Care Act. A panel of health insurance experts warned family business owners to brace for higher premiums and increased compliance issues when the federal Affordable Care Act (ACA) takes effect next year.

“There are a lot of changes coming,” said Ashley Hague, deputy director of strategic and external affairs at Mass Health Connector, a state agency that helps individuals and small businesses find affordable insurance.

David Shore, vice president of employee benefits practice leader at Methuen-based Borislow Insurance and president of the Massachusetts Association of Health Underwriters, said small-business owners can expect premium increases of 4 percent to 7 8

Catherine “Kitty” Gilbane (left) and her father, William Gilbane Jr.

percent on top of renewal costs next year.

And, although Massachusetts’ health insurance law is frequently cited as a model for national reform, businesses will face new employee notification requirements and other documentation rules.

“There are differences between what’s in force in Massachusetts and what’s coming from the federal regulations,” David Przesiek, senior vice president of sales and marketing at Fallon Community Health Plan said. “Find out what they are and make sure you understand them.”

Fallon and other health insurance carriers are expected to offer informational forums this summer for business owners on changes under the ACA. Transition Not Always Easy At the “Here Comes the Next Generation” session, several family business owners shared the challenges and rewards of their involvement in family businesses.

Steve Simon, who owns three National Jean Co. stores in Massachusetts along with his two daughters, Jill Simon and Stacy Gilman, said there have been very few conflicts.

“I’m happy,” he said. “I love working with my family.”

Al Rose, owner of Red Apple Farm in Phillipston, said he and his wife, Nancy, went through a stressful period when they

took over from Rose’s father several years ago. Although his father was happy to see his son take over the fourth-generation farm, they benefited from engaging a family business consultant to facilitate creating a “roadmap to transfer the property,” and Red Apple Farm has thrived under Al and Nancy’s management, Rose said.

Ownership transfers can be difficult. But Being able to discuss ownership and leadership issues – no matter how uncomfortable – is critical to the success of family businesses, noted moderator Thomas Davidow, a Massachusetts-based family business consultant.

“At the end of the day, it’s all about communication,” he said.

When the Next Generation is Not Willing or Ready In “The Benefits of Employee Ownership,” the session on employee ownership, Eric Zaiman, a senior vice president in Chase’s ESOP Advisory Group, explored the choices business owners face when there isn’t a clear succession plan in a family business. One option is a leveraged employee stock ownership plan (ESOP), said Zaiman.

“For a lot of family business owners, ESOPs are not only relevant, but may be the preferred mechanism of transferring ownership from the current owners to the next,” he said.

While leveraged ESOPs can be complex, the transactions can give family business owners cash toward retirement, while providing tax benefits and incentivizing employees at the same time, according to Zaiman.

Numerous questions came from one attendee at the ESOP session who disclosed that his seventh generation family business is considering an ESOP transaction to transfer a portion of the ownership of the family business to the employees.

Sometimes the next generation isn’t ready to take over top leadership posts when the time for transition comes along.

At least, not yet. At Gilbane Building Co., William Gilbane Jr. notes that the fifth generation isn’t yet ready for top leadership roles of CEO and COO. But his daughter Catherine “Kitty” Gilbane, who copresented with him, serves as inside sales manager and is very active in the business.

In the meantime, the company’s strategy is to identify non-family members currently employed to fill the CEO and COO roles when it’s time for the fourth generation to bow out.

Accountability is Key In the session “Growth and Change to Keep Your Business Moving Forward,”

Panelists David Shore, left, and Ashley Hague.

Carolyn Crowley Stimson, vice president of resort services at Wachusett Mountain Ski Area, and a member of the Crowley family that founded Worcester-based Polar Beverages, talked of business face-offs that have included tree-sitting protesters at Wachusett Mountain and a large competitor in the soft-drink business buying a quantity of Polar Beverages’ product and running over it with a tank at a company rally. She said that her father, whose third generation had experienced more than its share of internal discord running the company, had always taught her and her three brothers that the family is stronger as a unit. It would have to be – both Wachusett Mountain and Polar

From left: Steve Simon, founder and buyer, National Jean Co.; Jill Simon, co-owner, client relations, National Jean Co.; Al Rose, owner, Red Apple Farm; and Daniel Guglielmo, private wealth planner and founder, TrustDesign.

Beverages are woven tightly into the fabric of Central Massachusetts. Their constituencies have great expectations of the businesses’ roles as corporate citizens.

Jeff Crowley, president of the ski area and Carolyn’s brother, said it’s less important for advancing executives to make decisions than it is for them to have the right tools to make the decisions. He recalls his father, Ralph Crowley Sr., would sometimes walk out of the room from a family business meeting in mid-session, which Jeff interpreted as a symbolic communication to the next generation that he would not always be there.

Continued on page 10

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Eric Zaiman, senior vice president, Chase ESOP Advisory Group.

From left: Steve Snyder, entrepreneur-inresidence, Gesmer Updegrove; Blair Trippe, partner, Continuity Family Business Consulting: Edward Bond Jr., CEO, Bond Brothers Inc.; Jeff Crowley, president, Wachusett Mountain Ski Area; Catherine Crowly Stimpson, vice president, resort services, Wachusett Mountain Ski Area; and Lewis Segall, partner, Sullivan & Worcester.

From left: Margery Piercey, member of the firm, Wolf & Co.; Gordon McKinnon, vice president and general manager, Lockwood/McKinnon; and Carol Conway Bulman, president and CEO, Jack Conway & Company.

William Gilbane Jr., president and COO, Gilbane Building Co. (left), and Catherine “Kitty” Gilbane, inside sales manager, Gilbane Building Co. 10

Edward Bond Jr., LEED AP, CCM, and CEO of Bond Brothers Inc., a fourth-generation civil and utility construction firm, reinforced the need for everyone at every level to be accountable. Bond Brothers was established in 1907 during one of the nation’s many financial panics and during a time when construction firms did mostly manual labor. Bond Brothers now adopts five phases of construction: predesign, design, procurement, construction and postconstruction. This level of engagement is in response to client demand for a construction firm with ‘skin in the game’, and some of his comments on management style indicated that he expects the same from the company’s internal team. For example: whoever in management makes a hire must be the person who lets the hire go if that need arises.

When You’re Ready The session “Generational Transfers, Non-Family Ownership and Much More” delivered just that. Panelists Carol Conway Bulman, president and CEO of Jack Conway & Co., a real estate firm founded by her late father, and Gordon McKinnon, vice president and general manager of Lockwood/McKinnon, delivered their differing accounts of their transitional experiences.

Bulman said she had not been the heir apparent to running the business, but took to it so well that she was able to make critical contributions when the extended trough in the real estate market drove many familyowned real estate companies to sell to large franchises. In consideration of her passion for the business, she received ownership of the company shortly before her father’s death, while her two siblings received other assets of the estate.

McKinnon has a non-family minority ownership at Lockwood/McKinnon, which is a multi-unit restaurant Taco Bell franchisee. Adjusting to the transition from Roger Lockwood to his son David Lockwood was significant, due to two different management styles, and he took nothing for granted. David’s involvement in the business wasn’t a foregone conclusion, given that he had a successful career on the West Coast, where he and his wife had started a family. However, when David and his wife decided that raising their family on the East Coast was a priority, he joined the business.

His move coincided with a period of significant expansion of franchise holdings for the company. So there was capacity and a business need for David’s involvement. McKinnon noted, “David came along right at the right time.”

Do the Math Keynote speakers William Gilbane Jr. and his daughter Katherine “Kitty” Gilbane provided a clear and practical picture of what happens when a company does the generational math. Now in its fourth generation of leadership, Gilbane Building Co. is evaluating its future path as the number of family owners expands with each generation. There are currently 15 families in the fourth generation; there will be 35 families in the fifth. But projecting to the sixth generation under the current model, there will be 168 owners – 316 if spouses are counted.

Gilbane requires family members to work outside the company for three years before joining the firm. William mentors his cousin’s kids that are active in the business and his cousin Tom, nine years his senior, mentors his. The latter arrangement was established under the presumption that parents can be tougher on their own kids than they would be on someone else’s.

While Gilbane Building Co. strongly supports the concept of mentoring, William Gilbane said that the goal is to make the company the kind of business for which current employees would want their kids to work.

Gilbane Building Co. posts $3 billion in sales and ranks 131 on the Forbes list of largest private companies. It has placed considerable structure and policy around family business ownership and employment, and based on the company’s success, it’s working.

■ CHRISTINA P. O’NEILL IS EDITOR OF CUSTOM PUBLICATIONS FOR THE WARREN GROUP, PUBLISHER OF MASS. FAMILY BUSINESS, AND NORA TOOHER IS A FREELANCE WRITER.

The FBA Advisory Council held their semiannual meeting at the Conference site the afternoon before the event kicked off. Left to right, front row: Carolyn Crowley Stimpson, Phyllis Godwin, Donna Kelleher, and Jessica Bettencourt. Left to right, back row: Margery Piercey, Tim Warren Jr., Al Rose, Arthur Anton Jr., Brian Nagle, and Steve Aronson.

Due Diligence

Avoiding Expensive Litigation after the Deal is Done

By Sara Jane Shanahan

F

or family business owners contemplating a sale of their business or the purchase of another’s business, it is worth taking the time for an educate on the types of disputes that frequently follow merger transactions.

Litigators know, and business owners should too, that post-merger lawsuits tend to fall into three categories. First, there are disputes between the buyer and the seller, often arising from one party believing that the other misrepresented the value of the target company’s assets or the consideration paid. Second, disputes frequently arise with third-party finders or brokers who claim more compensation than the parties to the transaction expected to pay. Third, lawsuits with companies doing business with the acquired entity are common, especially when the new owner would like to change the terms of a pre-existing agreement or terminate the relationship with the third party altogether.

Consideration of these potential pitfalls before the closing can help avoid litigation after the deal is done, at a time when the seller would prefer to move on to new ventures, such as retirement, and the buyer would like to focus on integration issues rather than costly and timeconsuming litigation.

Suits Between the Buyer and Seller Disputes most commonly arise when the buyer believes that the target company’s assets or liabilities were misrepre-

sented or the seller finds that the consideration it received, such as stock in the acquiring company or an earn-out arrangement, is not as valuable as originally anticipated. The best way to avoid such disappointment is to conduct careful due diligence before closing the deal.

In a case tried earlier this year in federal court in Boston, the founders of a company specializing in speech recognition technology sought to blame their insufficient due diligence – which led to multi-million dollar losses – on their financial advisers. In a June 2000 transaction, the owners of Dragon Systems Inc. sold their company for stock in the acquiring company, Lernout & Hauspie Speech Products. Unfortunately, shortly after the transaction closed, rampant accounting fraud at Lernout & Hauspie was revealed, which rendered its stock worthless.

The sellers of Dragon Systems brought suit in 2008 against Goldman Sachs for negligence, misrepresentation, and breach of fiduciary duty, alleging that Goldman should have uncovered the accounting fraud during due diligence. Goldman, in turn, argued that they had advised the sellers to conduct additional due diligence, but that this advice was rejected.

The jury found in favor of Goldman in a January 2013 verdict, and claims under Massachusetts’

unfair trade practices statute remain under advisement with the judge. This saga presents a text-book example of how substantial losses might have been avoided if adequate due diligence was conducted before the closing of the transaction.

Business owners on both sides of a transaction will be well-served if they take the time to investigate the value of their deal before the closing.

Suits with Finders and Brokers A second type of litigation that might be avoided with better planning at Continued on page 14

11

Who Needs ‘Em!?

When to Establish a Group of Advisors

By Margery Piercey

Y

ou and your family have worked hard to build a successful business.

As thoughtful owners, you know that your current success is not the end of the story, but only the beginning. So, what will the next chapter look like? Pulling together the right group of advisors can help answer the question.

Family businesses are often faced with unique issues. Succession planning fraught with family dynamics and balancing the sometimes conflicting interests of family members working inside the business with those outside the business are just a couple such issues that can impact a family business’s ability to succeed. Drawing upon the external viewpoint and expertise of an advisory board can often mean the difference between failure, treading water, or burgeoning success.

It is likely that a successful management team already has a group of trusted advisors upon whom the leadership of a company relies and is stocked with information on an as-needed basis, but no formal structure is in place and no commitment on behalf of the advisors has been made. Establishing a board means pulling together the right group with the appropriate structure.

The Company’s Life Cycle In the life cycle of a business, there are several points at which a family-owned business might consider establishing a board.

• Consideration of a growth strategy: When a family owned business wants to grow, setting the strategy is one challenge; having all members of the family agree with the strategy can be another matter entirely. In addition to validating a strategy, drawing on personal experiences and expertise, members of a board can lend advice and resources.

• Succession planning: Succession planning can be a complex, and emotionally charged issue for a family-owned business. The advice and counsel of a group including non-family members can take the edge off these decisions and give family members the space they need 12

to think clearly and strategically about these important issues.

• Breaking through the status quo: As relatives in a family-owned business grow older, they may prefer to maintain the status quo, and become wary of change and risk. The business may have become the foundation of a certain lifestyle, and the required investment of time and resource to spur growth or other changes may threaten that lifestyle. A board can beak through this scenario and help the company become more strategically focused.

WhenYou Think You Are Ready In all board structures, a few principles are constant. First, it is crucial to have diversity of thought on your board. Broad representation (age, gender, professional discipline, for example) will assist you more than a group of like-minded thinkers.

Second, ensure that board members feel engaged and that their advice is considered thoughtfully. Without this engagement, members may feel as though their input is not valued which may impair their longterm commitment to the company.

Lastly, understand that implementing a board means shifting your stance. One of the many benefits to being a privately-held

family business is that there is no need to disclose that which makes your company unique; disclosing this information can be an anxious step for a family business. While you won’t need to share the secret recipe with your board, the existence of a board involves broadening the inner circle.

Once you have decided to establish a board, there are a couple structures to choose from: Advisory Board This structure is an excellent way of introducing the company to a more formal process of obtaining outside feedback.

While a convening advisory board does not have governance authority or fiduciary responsibility, it is more formal in terms of scheduled meetings and agendas than a non-convening advisory board. Convening an advisory board marks a new level of commitment; doing so can send a powerful message to your management, family members and all stakeholders and especially to the people who are asked to be on this board.

While this type of board does not have responsibility or authority over the operations of the organization, it is important for the ownership of the company to be committed to its advisors and mindful of the time and the resources that members expend on behalf of the company. If, as an

owner, you are not committed to this structure, board members’ interest may become diluted, resulting in lower levels of commitment and responsiveness.

Board of Directors As the most formal type of structure, this board has significant authority over much decision-making. This is a governing body.

A formal board requires careful consideration. First, what is its makeup? Does control of the board remain in the family? Are there specific areas of expertise for which you wish to recruit? For example, if your business strategy is dependent on sales growth, a person with marketing expertise would be of particular value. Or, if strategic acquisitions are critical to your strategy, someone with merger and acquisition experience could enhance your success.

In addition, the more formal structure of a board means that, you will spend resources maintaining, cultivating, and supporting this board. The recruitment process becomes more formal, and careful consideration must be given to the personality fit around the table. It is equally important to engage board members who will consider both the potential benefits and pitfalls of management’s proposed initiatives.

One potential business pitfall to implementing a formal board is a loss of nimbleness. Because the board must be alerted and bought into any significant moves that a company might make in response to crisis, opportunity, or a swiftly shifting competitive landscape, it is possible to miss a step and be hampered in your activities. Proactive thinking, time sensitive communications, and technology can solve this issue, in addition to ensuring your board is comprised of people who understand that time can be of the essence and are willing to convene quickly when needed.

Choosing if, when, and how to create board of external advisers is a major step in a company’s life cycle. The benefits to a robust exchange of information and the ability to glean from others how they have solved business challenges can significantly benefit a family business.

Deciding to turn to this new page in your company’s history can be an educational and thought-provoking process. With a careful analysis of where your needs lie, selecting the right structure and people for the board can help you write new, exciting chapters in the story of your family business’ success. ■

MARGERY L. PIERCEY, CPA, IS A MEMBER OF THE FIRM AT WOLF & COMPANY, P.C.

MAKE SURE THERE’S NO MONKEY BUSINESS IN YOUR FAMILY BUSINESS. Running a business and running a family are demanding responsibilities. When the two converge, complications often arise. At Tarlow Breed Hart & Rogers, PC we understand the unique challenges that family businesses face and the issues that arise when family members are in business together. Our attorneys provide legal advice that seeks to preserve the economic value of your business, while maintaining the bond of family and limiting any long-term conflicts. Call Ed Tarlow or Al DeNapoli today for help in keeping your family business intact.

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Avoiding Expensive Litigation Continued from page 11

the start of a transaction stems from disputes with finders and brokers – professionals who help identify and negotiate merger transactions. It is common for sellers or buyers of closely-held corporations to identify and pursue opportunities with the assistance of business brokers who know their industry, know potential partners for a deal, and can assist with the negotiation of such a transaction. Often, the broker is paid a commission that is a percentage of the value of the consideration for the transaction.

Disputes arise when the parties do not clearly document in a written engagement letter – and state law may require such agreements be in writing – the circumstances and terms on which the broker will be paid. Taking time to think through and document the details of the broker’s compensation can help avoid litigation at a later date, when the broker demands a fee that the buyer or seller did not intend to pay.

This type of dispute may frequently arise when the consideration for a trans-

action is not simply cash paid at the time of the closing, but instead includes earnout payments based on profits of the company going forward, employment or consulting contracts with senior managers, or lease payments for real estate or equipment that was not transferred in the transaction. These after-the-fact payments constitute an ongoing revenue stream for the seller, and therefore, could constitute a basis for further payments to the broker. All parties to the transaction are better served when the question of how to divide the spoils is negotiated at the beginning of the deal, instead of being left for discussion later in the process.

Suits with Third-Party Contractors A third category of disputes following merger transactions arises out of alleged breaches of agreements with the acquired company’s vendors and business partners. For example, the target company may have a contract to buy coffee for its break rooms at specific prices, for guaranteed volumes, for the remainder of the year. The acquiring company, however,

does not want to buy this coffee and refuses to do so. In such circumstances, the third party supplier may sue the acquired company, the individual sellers-owners under personal guarantees, or the acquiring company on a theory of successor liability.

Who, if anyone, will pay for the unwanted coffee will depend on the terms of the underlying supply contract and the terms and structure of the merger transaction. In order to avoid such litigation, the accompanying attorneys’ fees, and unexpected coffee bills, companies that may be acquired, that do business with acquisition targets, and that are in the market to buy other companies and competitors (that should be everyone), should review the terms of their contracts and include provisions that address what will happen when ownership interests are realigned. Assessment of these issues before signing a contract, rather than after, will better protect the business owner’s financial interests and peace of mind.

■ SARA JANE SHANAHAN IS A PARTNER IN THE BOSTON LAW FIRM OF SHERIN AND LODGEN LLP.

FBA Webinar Wednesdays June 19 Cyber Security Challenges Facing Your Family Business Security is an ever-increasing challenge for family business as IT takes on a bigger role within businesses of all sizes. Whether IT is significant to client or vendor interaction or whether it relates to the security of employee information or trade secrets, you will be sure to learn relevant guidance from IT security expert Rob Fitzgerald, president of The Lorenzi Group LLC. September 18 Engaging the Next Generation Through Philanthropy Philanthropy can play a valuable role in engaging the next generation in the family business - developing leadership, building skills and responsibilities, creating intergenerational common ground, and sharing values.

Deborah Iarussi brings first-hand perspective from her involvement in her family’s foundation and experts from The Boston Foundation and The Philanthropic Initiative share insights from their work with families, private foundations and family businesses.

To inquire about the webinar program, please contact Ashley Sullivan at (617) 261-8148 or Liz Pratt at (617) 218-2077 or lpratt@fbaedu.com.

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NOW ACCEPTING NOMINATIONS & APPLICATIONS FAMILY BUSINESS ASSOCIATION AWARDS FOR MASSACHUSETTS 2013 Awards Categories Small Business

Do you know a Massachusetts-based family business that has successfully dealt with family business issues and exhibits excellence in management, community involvement and business practices?

Medium Business

The Family Business Association Awards for Massachusetts 2013 is

Large Business

your chance to give them the recognition they deserve.

First Generation Business

This prestigious awards competition provides finalists and winners

Community Excellence

with recognition in the media and throughout the business

Overcoming Adversity

community. Anyone can nominate a family business, or family

Marketing Excellence

businesses are welcome to complete an application directly.

All applications must be submitted no later than 5 pm on Friday, August 16, 2013. The award ceremony will be held Thursday, October 24, 2013 at the Royal Sonesta Hotel in Cambridge.

Empowering Family Businesses

Visit www.fbaedu.com to download a nomination or application

www.fbaedu.com

form and to learn more about the FBA awards program, webinars and family business events. Or contact Liz Pratt at (617) 218-2077 or lpratt@fbaedu.com