SUMMER 2016

FAMILYBUSINESSMassachusetts

Off ic ia l magaz ine of the

Inside: Why Background Screening is Important, Even in the Family Business

FROM START TO FINISH

WEBSTER SEMINAR OFFERS A TIMELINE FOR A HEALTHY FAMILY BUSINESS

Estate and Tax Planning | Professional Trustee Services

Trust and Estate Administration | Charitable Planning

Retirement Planning | Family Business | Family Office

For almost 150 years, generation after generation ofNew England’s family businesses have turned to

Hemenway & Barnes for trusted advice about complex estate, tax and

succession issues, charitable planning, and more.

Our clients turn to us to help protect and preserve theirassets, to ensure the well-being of their families and to

distribute assets in accordance with immediate andlong-term needs and goals.

Meeting the challenges of sustainable family prosperityand unity requires great thought, care and planning.

Whatever the challenge, families trust Hemenway & Barnesto help them find solutions.

Building Family Trust for Generations

Massachusetts Family Business

Official magazine of the CONTENTS

10

4 director’s corner Get The Most From Your FBA Membership

5 taking on tomorrow Business Advisor Offers Advice For Long-Term Planning

6 love and business What To Do When Marriage Meets Money

12 all in the family The Role Of Background Screening In A Family Business

8WEBSTER BANK’S FINANCE SEMINARA panel of experts gives an overview of best practices for managing a family business’ finances during a generational transfer.

Estate and Tax Planning | Professional Trustee Services

Trust and Estate Administration | Charitable Planning

Retirement Planning | Family Business | Family Office

For almost 150 years, generation after generation ofNew England’s family businesses have turned to

Hemenway & Barnes for trusted advice about complex estate, tax and

succession issues, charitable planning, and more.

Our clients turn to us to help protect and preserve theirassets, to ensure the well-being of their families and to

distribute assets in accordance with immediate andlong-term needs and goals.

Meeting the challenges of sustainable family prosperityand unity requires great thought, care and planning.

Whatever the challenge, families trust Hemenway & Barnesto help them find solutions.

Building Family Trust for Generations

REGISTER TO ATTENDMassachusetts Family Business magazine, the Family Business Association

and The Warren Group are dedicated to honoring and educating family

businesses throughout the region. On June 7-8, the New England Family

Business Conference will be an opportunity to meet face-to-face with

family business owners and managers who will gather to learn from their

peers, hear from experts, study a variety of best practices and network. The

program is designed for professional development and will feature high-end

keynote speakers and a selection of educational breakout sessions with

panels of family business owners sharing their knowledge.

WHEN: June 7- 8, 2016

WHERE: Omni Parker House, Boston

VISIT WWW.NEFBC.COM TODAY FOR THE LATEST UPDATES.

THAT’S WHY WE DESIGNED A CONFERENCE JUST FOR YOU!

RUNNING A SUCCESSFUL FAMILY BUSINESS

DOESN’T COME WITH AN INSTRUCTION MANUAL.

If It Did, It Would Be As Easy As...

1. Come Up With An Idea That You’ll Enjoy Doing For The Rest Of Your Life.

2.. Convince A Family Member To Come Work With You.

3 . Sit Back, Relax, And Watch The Money Start Rolling In.

4

The Family Business Association (FBA) since 2007 has shone the spotlight upon and honored

hundreds of successful family businesses. In doing so, the FBA not only addresses that part of its mission in which it seeks to award those specific family businesses and family businesses in general with the recognition and praise for which they are so deserving, it also addresses the sec-ond goal of its mission: to educate family businesses and their members.

While family businesses through the FBA’s efforts have gained valuable insights and information by meeting with, speak-ing to, and sometimes just reading about these award winning families and their businesses, this form of education is not enough.

Among the fundamental tenets of the FBA from the beginning has been:• To assist family businesses to under-

stand and appreciate the dynamics at play in the family business structure.

• To be comfortable with the issues they confront different from those in non-family businesses.

• To help them recognize and seize upon the variety of opportunities in-herent in the family business structure.

• To help them realize and find com-fort in knowing they are not alone in

dealing with the unique issues present in their families and business.

While honoring family businesses and presenting them as examples has been a consistent trademark of the FBA and has helped in delivering its educational mes-sage, over the years the FBA’s educational programing has continued to grow. No-where is this more evident than in the continuing regional programs that take place across the state throughout the year.

Malcom X once said, “Education is the passport for the future, for tomorrow be-longs to those who prepare for it today.” The failure to plan and prepare for the fu-ture can be fatal to any business, but even more so for family businesses as the fami-lies and their business grow and change and look to pass the fruits of their founder’s dreams and hard labor onto the next gener-ations. The failure to plan and prepare for the future is the number one reason family businesses are not successfully passed from one generation to the next.

This is why the FBA wants to help fam-ily businesses earn that passport. It will catapult them into a successful future, in-struct them about successful transitions, balance family concerns and business con-cerns, and understand and recognize the unique dynamics of the family business

that may appear to challenge the business but actually present opportunities un-matched in other businesses.

Toward that end, the FBA on May 4 presented a panel hosted by Webster Bank, discussed “Financing A Family Business Through Multiple Generations,” where over 100 attendees learned about this important and compelling subject. (See page 8 for more information.)

On June 7 and 8, the FBA will provide an opportunity for family businesses to stamp their “education passport” on mul-tiple pages at the New England Family Business Conference at the Omni Parker House in Boston.

Now in its third year, attendance at the conference continues to grow and the im-portant lessons continue to be learned by attending the various breakout sessions and, equally important, through meeting with, listening to, and engaging with other family businesses. The FBA, along with The Warren Group, is proud to be able to offer this opportunity and encourages all to take advantage of it. The future can and should be yours and your family’s; it is up to you to take control of it. We know you can do it, and we want to help! ■

AL DENAPOLI IS THE EXECUTIVE DIRECTOR OF THE FBA AND

A MEMBER OF THE FIRM AT TARLOW BREED HART & ROGERS.

FBA Offers Lifelong Lessons

Directors’ Corner

DIRECTORSJeffrey S. Davis, Mage, LLCAl DeNapoli, Tarlow, Breed, Hart & Rodgers, P.C.Brian Nagle, First Republic Private Wealth Management

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

FAMILYBUSINESSMassachusetts

Official magazine of the Family Business Association. Inc. Editorial | Advertising | Design

A Family-Owned Business Since 1872

280 Summer Street, Boston, MA 02210Phone 617-428-5100 Fax 617-428-5119

www.thewarrengroup.comPRESIDENTEdward D. Tarlow, Tarlow, Breed, Hart & Rodgers, P.C.

VICE PRESIDENTCatherine Watson, Tarlow, Breed, Hart & Rodgers, P.C.

TREASURERJeffery P. Foley, Gray, Gray & Gray, LLP

©2016 The Warren Group Inc. All rights reserved. The

Warren Group is a trademark of The Warren Group Inc. No

part of this publication may be reproduced in any form or by

any means, electronic or mechanical, including photocopying,

recording, or by any information storage and retrieval system,

without written permission from the publisher.

By Al DeNapoli

5

“The biggest challenge for your business today? Tomorrow.”

Transitioning ownership of your business will undoubtedly be one of the most significant events of your life. And one you may not be prepared to even think about right now. However, with careful planning at each stage, you’ll be ready for what’s ahead – and confident that you’ll preserve everything you’ve worked so hard to build. Growing your business. Your banker and insurance specialist will help determine which deposit, lending, cash management, and insurance solutions will best fuel the growth of your business. You’ll also want to ensure your will and other estate planning documents are in order, and that you’re taking advantage of tax-minimization strategies. Transitioning business capital to personal capital. As your business evolves, you may consider selling or transitioning to your son or daughter, or someone outside the family. We can help you explore exit strategies, secure the right buyer, and value your business. We’ll also help you determine how and where to invest your wealth, and how to manage your liquidity and cash flow needs.

Managing and transferring personal wealth. This is when all your hard work pays off. You’ll begin to implement trust and planning strategies to transfer wealth to the next generation. You may also have the freedom to donate resources to those organizations you find meaningful.

At Wilmington Trust, we can help create a plan for each stage of your business and your life. Founded by a family business leader more than a century ago, we have the experience to help guide you through times of growth and succession. Our approach focuses on both your business and personal financial needs, allowing us to make each transition in your journey a seamless one. For more insight on how to successfully prepare for what’s next, view our capital transitions video series at wilmingtontrust.com/capitaltransitions.

Portrait by renowned illustrator Joseph Adolphe.

R E N O W N E D I N S I G H T | B U S I N E S S S U C C E S S I O N

F I D U C I A R Y S E R V I C E S | W E A LT H P L A N N I N G | I N V E S T M E N T M A N A G E M E N T | P R I VA T E B A N K I N G

Donald P. DiCarlo Jr.

M.A., J.D., LL.M. (Tax)

National Director of

Business Advisory Services,

Senior Wealth Strategist

Don helps business owners develop and

implement successful business succession

strategies. He forges relationships

with clients while they are still actively

engaged in managing the business,

and offers key advice at each critical

stage. He is part of a seasoned team of

wealth advisory professionals who work

seamlessly to provide the full spectrum

of services required by clients. To learn

more about our collaborative and creative

approach to managing wealth, contact

Mark Andersen at 617.457.2056 or

mandersen@wilmingtontrust.com.

30%O F FA M I LY B U S I N E S S E S

S U RV I V E I N TO T H E S E CO N D G E N E R AT I O NSource: familybusinessinstitute.com

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This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of your professional advisor should be sought. Private Banking is the marketing name for a product and service offering.Investments: • Are NOT FDIC-Insured • Have NO Bank Guarantee • May Lose ValueWilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation (M&T). Investment management and fiduciary services are provided by Wilmington Trust Company, operating in Delaware only, and Wilmington Trust, N.A., a national bank. Loans, retail and business deposits, and other personal and business banking services and products are offered by M&T Bank, member FDIC.©2016 Wilmington Trust Corporation and its affiliates. All rights reserved.

6

Love and Business

Summer is upon us and that means wedding planning for many couples. This is a happy time for the couple,

but for a family with significant business holdings, it may bring up difficult con-versations regarding how best to protect the family’s wealth. In this article, we

will explore potential strategies and tools available to the busi-ness owner and family to protect their assets before marriage and in the event of a divorce. Not every tactic will be right for every fam-

ily, but each deserves careful consideration and a discussion with your advisor about how to use them effectively to protect your family’s wealth. For the purposes of this article, we will focus on asset protec-tion and marriage and not risk from other potential creditors.

A conversation regarding the family business, marriage and planning should start with this question: Is there a suc-cession plan in place? The answer to that question will help guide the business own-er in selecting strategies that will work best to accomplish goals regarding the fu-

ture of the business. In addition, having a long-term vision for the business provides a basis for understanding what needs to be protected, even if that vision includes the possibility of a sale to a third party.

Each family business is uniquely its own ecosystem, but all family businesses have one dominant characteristic in common with each other – the overlap of family issues and business issues. This overlap involves unclear boundaries between the family and the business, deeply rooted and shared traditions (both business and family), and wealth transfer, with a vision for both individuals and the company. The owner of a successful family business faces significant challenges when the time comes to either transition the business to other members of the family or sell to a third party. Often, the family business is the primary asset and makes up the major-ity of the family’s wealth. In other cases, there are assets outside of the business; therefore, any plan needs to take into ac-count the family’s total wealth.

Once the business owner decided where to go, it will be easier to determine the best route to use to get there. Below are some strategies available to a business owner and the family to consider when

determining how to protect the family business in the context of marriage and divorce.

Prenuptial AgreementsA prenuptial agreement is an agreement

made between prospective spouses and entered into prior to a marriage that sets forth a structure for the division of assets and financial support upon the subsequent divorce and/or death of the parties. Like many things in life, timing is important. The conversation between parent and child about what a prenuptial agreement is and why it is important for the family should happen as early as possible. Hope-fully, this is well before the child enters into a serious relationship. The goal is for any future spouse to understand early on that this is part of entering into the family and that it will not be a surprise a month before the wedding.

With respect to the business owner, the prenuptial agreement can direct that busi-ness assets stay within the family line and that other assets be used to satisfy any re-quirements under the agreement. This is an agreement between two parties, so they have flexibility in deciding the terms of the agreement. It is essential that the agree-ment is fair when entered into and that both parties are represented by indepen-dent counsel. A properly executed prenup-tial agreement can provide the business owner with the comfort that if the mar-riage does not work out, there is an agree-ment in place to protect the business and ensure that it stays within the family.

Limited Liability EntitiesFamily limited partnerships (FLPs) and

limited liability companies (LLCs) are entities created by a group of individuals, generally for the efficient management of the underlying assets. These entities can also provide asset protection, particularly if the business owner is not the sole mem-ber, partner or manager of the entity. The chief attraction of FLPs and LLCs is that creditors generally cannot satisfy a claim with assets in the entity or force a liquida-tion. The creditor must obtain a “charging

By Joshua S. Miller

Marriage and Asset Protection Planning for the Business Owner

JOSHUA S. MILLER

7

500 Cummings Center – Suite 4900Beverly, MA 01915

978-998-6896www.masspay.net

Helping small to mid-sized companies growHR, Payroll, Time & Attendance,

Insurance & More!

order” that attaches distributions that are made from the partnership and generally only has a right to the debtor’s distribu-tions up to the amount of the debt. The manager or general partner of the entity controls the distributions.

Many businesses are already structured as an LLP or LLC. The decision regarding how the business is structured may depend on numerous other factors including, but not limited to, income taxes, estate taxes, relationship of owners, characteristics of the assets and line of business. Holding a business within a corporate entity may not offer complete protection in the case of a divorce of a partner or shareholder.

Often, business assets are insulated with two layers if an FLP or an LLC interest is transferred to a trust by sale or gift. The first layer is the protection that the LLC provides with respect to the underlying assets. The trust does not own the asset; instead, it owns an interest in the LLC and the trust is not the manager of the LLC. Thus, the trust cannot force a distribu-tion from the LLC of the asset, nor can a creditor. The second layer is provided by the trust, which gives the trustee control over distributions and prevents the ben-eficiaries and their creditors from making claims on the assets. When considering a trust as an asset protection vehicle, be sure to discuss the provisions of the trust docu-ment with your legal advisor.

Irrevocable Trust Trusts are an excellent way to keep

money in the family, especially as children grow up and embark on lives – and enter relationships – of their own. Utilizing an irrevocable trust to hold and administer interests in a family business may provide protection in the case of a divorce. Simply put, the trust is created for the benefit of another, administered for the purpose and terms determined by the trust creator and carried out in the discretion of the trustee.

While it’s human nature for people to think of divorce as a low risk potential event in their family, it does happen. An irrevocable trust can be a good choice for business assets vulnerable to being lost in a divorce, certainly if there’s family senti-ment surrounding the assets. Any assets held in the trust can be protected from the claims of creditors as long as they remain in the trust and the beneficiary has no

right to withdraw them. Assets distributed to beneficiaries from the trust are subject to creditors’ claims. Proper administration of a discretionary trust is critical in achiev-ing its objectives.

Asset Protection TrustsA special type of trust known as a “self-

settled asset protection trust” is another option for protection. An asset protection trust is a trust created by an individual in a jurisdiction that allows that a trust over which a person retains a discretion-ary beneficial interest is exempt from the claims of the trust creator’s creditors. Del-aware was one of the first states to enact self-settled asset protection trust legisla-tion. Several states have since done the same.

Assets, including a business, held in the asset protection trust can be protected from the claims of creditors as long as they remain in the trust and the donor/beneficiary has no right to withdraw them. As mentioned above, assets distributed to beneficiaries are subject to creditors’ claims. Trusts should be established in jurisdictions that have enacted the appro-

priate legislation and should be properly administered.

ConclusionAsset protection follows the continuum

of life’s events, reflecting the changes that individuals, families, careers, businesses and wealth undergo. Sometimes wealth “events” occur suddenly – such as an ear-lier-than-expected inheritance – and other times they accumulate over time – as in the case of a business that grows and pros-pers, resulting in significant wealth and potentially significant exposure to risk.

For the business owner, a simple way of thinking about asset protection strategies is from lower risk and simpler tactics to higher risk and more complex and sophis-ticated tactics. In the context of protecting your business from damage that a divorce in the family could potentially cause, speak with your advisor about which strategy is most appropriate and effective to protect your family’s business and wealth. ■

JOSHUA S. MILLER IS A MANAGING DIRECTOR AND

SENIOR WEALTH STRATEGIST IN THE BOSTON OFFICE OF

ATLANTIC TRUST PRIVATE WEALTH MANAGEMENT.

88

On Wednesday, May 4, more than 160 family business owners and ad-visors gathered at Webster Bank’s

downtown Boston office go over a timeline tracking how a closely held business can ac-cess the financing necessary to grow and prosper. A panel of experts guided the tour from startup, along the growth and expan-sion phase, through a transition to the next generation and exit of the founder.

My colleague at Webster Bank, Ann Meade, served as moderator for the discus-sion, directing the flow of questions to four panelists: attorney Matt Henning of Mor-rison Mahoney LLP; Laura Moruzzi, man-aging director of MFA Capital Advisors; Kevin Dunn, co-founder of Dunn, Rush & Co. private investment bank; and myself.

Getting a Business Off the Ground

We started at the beginning, with the challenge of funding a startup business.

Matt Henning outlined the options avail-able to finance the launch of new compa-ny, citing “organic” funding sources such as credit cards, personal savings, or asking family and friends to help.

“Credit cards are helpful for budgeting and offer a payment plan, but also tend to have higher rates and a lower cap on credit,” he told the crowd. “And be sure to read the card agreement closely, as many of them hold the individual owner personally re-sponsible for the credit card debt.”

Financial support from friend and family members should be made as noncapital con-tributions, usually in the form of “informal” loans. Henning recommended that the loan carry at least a minimal interest rate, as the IRS has recently been viewing “loans” with no interest attached as “gifts” and subject-ing them the gift tax. To help ease the cash flow burden, informal loans may require interest-only payments for a set period of time, with a principal payment scheduled to

commence once the business is on its feet. It is also a good idea to generate a signed promissory note, even for an informal loan, as such documentation is important if the business seeks to borrow from more formal sources in the future.

One key question to ask when borrowing from a family member is, “What will the conversation be like around the Thanksgiv-ing table?” Set clear expectations up front about the role a family lender will play (if any) in business operations and decisions.

In some cases, an outside source of fi-nancing may be more appropriate, although not always readily available for a startup or emerging business. Options include an Small Business Administration (SBA) guar-anteed loan, or factoring, in which a busi-ness assigns ownership of its receivables in exchange for cash (at a discounted rate). Henning cautioned that factoring requires a great deal of paperwork, monitoring and reporting.

Webster Bank Hosts Family Business Finance Seminar

By Deb Drapalla

Financing a Family Business Through Multiple Generations

99

Shifting into Growth ModeAs a business becomes established and

begins to generate steady sales, its financ-ing needs also begin to mature. At this point, mezzanine debt may be a beneficial option to carry a business from its startup financing to the next stage. A mezzanine loan typically has three-year to five-year interest-only terms, with full repayment of the principal at the end of the term.

At this point the business is a going concern, with a financial track record, es-tablished customers – and growing needs for financing. For some companies an SBA loan may still fit the bill. But a company more than three years old may be ready to establish a relationship with a bank or other lender.

My recommendation is to search very carefully for the right bank – and the right banker. The relationship you develop with your banker will be one of the most im-portant business connections you will ever make. Look for a bank and banker who have experience with other companies in your industry, who are comfortable work-ing with a business the size of yours, and

who are willing to bring their experience and expertise to the table on your behalf.

One of the most important forms of fi-nancing for a business in growth mode is a working capital loan, the purpose of which is to finance the everyday operations of a company. Working capital is not used to purchase long-term assets or investments, but to pay accounts payable, purchase in-ventory, meet payroll, pay the rent and utilities, and other costs associated with keeping the doors open and business run-ning. The best time to acquire a working capital loan is before you need it, so that it will be available when you do require ad-ditional funds.

Other types of financing that may be beneficial for a growing company are an equipment loan, which typically can be arranged as interest only for up to a year before you need to start paying down the principal, and real estate loans, which can be used to purchase owner-occupied proper-ty. There are many incentives for a family- owned business to purchase real estate instead of renting. Unlike a corporation, the real estate asset can become part of the

family’s personal wealth.At this point, many growing businesses

will qualify for an asset-based loan. Typi-cally, these loans are for $3 million or more, and use a company’s receivable, in-ventory or equipment to secure the loan. Because companies are more leveraged for these type of loans, an asset-based loan may carry a higher interest rates than con-ventional working capital loans.

It is very helpful to understand what criteria banks use to lend money and why. One of the first items you’ll be asked to provide is a company financial statement. Depending on the amount of the loan you are seeking, the type of financial statement will vary. If you are looking for less than $500,000 many lenders will accept an in-ternally compiled financial statement with business tax returns. For a loan of $1 mil-lion to $5 million, a bank will likely require a financial statement that has been inde-pendently reviewed by a certified public accountant. If you are asking for $5 million or more, be prepared to pay for an audited financial statement, and perhaps even a

Continued on page 10

1010

formal business valuation.You can also expect to sign a covenant

agreement with the lender. Many business view covenants as onerous and limiting. But banks use covenants as a mechanism to monitor the performance of the com-pany to which they lend money. And there is usually a degree of flexibility built in. The business owner can also use the loan covenant as a “guardrail” to help remain focused on best business practices.

What about outside investors for a growing business? Henning pointed out that “there are a lot of speed bumps at this juncture” when it comes to seeking exter-nal investment, either through a venture capital fund or angel investor. Among the most prominent is the loss of control, as many outside investors will insist on hav-ing a say in business decisions. The process of obtaining the investment is also com-plex, requiring a formal valuation (often at a cost of $15,000 to $20,000 or more) and substantial negotiations and paperwork.

Generational TransferIf, as your family business matures,

you’ve managed to retain ownership and control, congratulations! Your next big challenge will be financing the transition in ownership from one generation to the next. Kevin Dunn of Dunn Rush & Co. has assisted with multiple business succes-sions, and cites several “unique challenges” facing a closely held company preparing to transition to the next generation.

Among the most critical is the need to satisfy the financial needs of multiple family members. A mature family busi-ness may have more than one shareholder, sometimes many, many more, stretching across multiple generations. Some may be directly involved in business operations, while others may be content simply to cash their annual dividend check. But a genera-tional transition opens the door for even the quietest of silent partners to reengage and make their wants and needs known.

Laura Moruzzi of MFA Capital Advisors

suggests opening the discussions on a tran-sition several years ahead of any potential target date, and to keep the channels open and transparent. She also strongly recom-mends that the business owner assemble a team of advisors who have direct experi-ence in business succession, usually includ-ing an attorney, accountant, banker and fi-nancial planner.

“You can never build a team of advisors early enough,” Moruzzi said. “Outside ad-visors who have been through numerous transactions bring a wealth of knowledge to the table.”

If your succession plan is to sell to a family member (or members), the chal-lenge is to secure the funding necessary to pay the cost of the purchase. Kevin Dunn says the first route to seek is internal fund-ing, if possible. This means taking cash out of the business to pay the founder, as well as other shareholders who wish to “cash in” during the transition. Keep in mind that the business must retain enough cash

Continued from page 9

Would You Like to Know More?The panelists will be at the New England Family Business Conference on June 7 and 8 for an encore presentation of

“Financing a Family Business Through Multiple Generations.” For more information about the conference and to register, visit www.nefbc.com.

11

to continue operations.If outside funding is necessary for the

transition to succeed, Dunn suggested seeking senior cap debt, mezzanine debt or, as a last resort, a minority equity inves-tor.

From my own experience in lending to family businesses at Webster Bank, we look closely at the individual or individuals who will be purchasing the company. Do they have the wherewithal to successfully run the business? Are they motivated? Do they have the proper education, training and experience? Can they handle the man-agement of the family dynamics that are part and parcel of a family business?

We also look at the plans of the outgo-ing owner. Will he or she continue to play a role in the business? Will they continue to draw a salary? Or will they simply take their equity and sail off into retirement? All of these questions impact the way for-ward for a family business, and thus affect the lending landscape.

Funding an Exit StrategyFor some family businesses a genera-

tional transition is not an option. Perhaps there are no children or family member ready – or willing – to take over manage-ment of the company. Or the business sim-ply does not have the cash to adequately fund the owner’s retirement.

In these situations, a business may be sold outright, or a private equity firm may be sought to take on a majority or minor-ity equity position, providing capital for growth or to buy out those shareholders who want to cash in their equity.

“A private equity firm brings tremen-dous financial discipline to a closely held company,” Dunn said. “Some family busi-nesses embrace this expertise, while other prefer to be left alone to run the company as they see fit.”

A minority investor typically assumes a 10 percent to 15 percent equity position in the business, but at a steep discount to help balance their risk. After all, they will have limited say in operations and deci-sions. In addition, most minority investors have a set time limit as to when they wish to get their money back.

On the other hand, a majority equity investor may take control of as much as 80 percent of the shares of a company. The family business owner in this situation

gives up a great deal of control. Yet it may be the best way, short of the sale of the business, to ensure a company continues to operate into the future.

One way to help ensure that a family business will be able to control its own future is by operating it to build value. Moruzzi pointed out that many fam-ily businesses are run to minimize taxes, while publicly held companies focus on building value. She recommends a family-owned company “stop using the business as a family piggy bank” and start focusing on streamlining operations. Moruzzi sug-gested that family business owners should focus on things that a private investor will be interested in to enhance value, such as recurring revenue, cash flow, strong financial controls, a realistic budget and elimination of nonperforming assets, such as the uncle who collects a paycheck but doesn’t do much work.

One way to help tighten up a family business is by creating an external adviso-ry board. Having experience and talented people with an outside perspective can bring additional expertise to the table, and also help hold company management ac-

countable for their actions and decisions.Whichever direction your family busi-

ness will take, is the time to assemble a team to address financing for the future of your company, your family and yourself is right now. The sooner you begin paying attention to the important details, with the guidance of experienced experts, the better off you’ll be when the time comes to transition your business and begin en-joying the rewards of your life’s work.

The FBA seminar at Webster Bank was very well received. Ed Tarlow, founder of the Family Business Association and president of Tarlow Breed Hart & Rod-gers, was very gracious in saying, “Web-ster Bank has been a terrific partner for the FBA, and has really helped to raise our profile.” Under Tarlow Breed Hart & Rodgers’s sponsorship, the seminar will be presented again at the fourth annual New England Family Business Confer-ence on June 7-8 at Omni Parker House in Boston. ■

DEB DRAPALLA IS A SENIOR VICE PRESIDENT IN THE

MIDDLE MARKET LENDING GROUP AT WEBSTER BANK. SHE

MAY BE REACHED AT DDRAPALLA@WEBSTERBANK.COM.

12

While procedures and proto-cols of family-owned busi-nesses are much the same as

any other enterprise, there is sometimes a disconnect when it comes to hiring prac-tices and associated background screen-ing.

Not to paint a broad stroke, but some family-owned businesses may tend to have a more ca-sual hiring system based on discussions within the family unit. Strong feelings among and between family members in leadership positions may lead to adding

someone to the employee roster whose background may not be exactly sterling. While no business can afford to hire someone whose unwholesome past ac-tions might be discovered or re-emerge, it could have an even greater impact on a family business that has worked hard to maintain its reputation not only as a mat-ter of pride, but also because the family name is on the door.

I recently had a conversation with the owner of the cleaning service we use in our offices. She inquired about back-ground checks as she is expanding her business and, for the first time,was con-sidering hiring someone she doesn’t al-ready know. Since these employees will

be sent into people’s homes and offices, her obligation to clients is to make sure her employees are trustworthy and don’t have a record of criminal activity in their past.

I explained that once she starts the background screening process, she should not differentiate between people she feels she knows well and someone she just met. One reason may be obvious; screening one applicant and not screening the next could lead to claims of discrimination.

Another reason – not as apparent – is that we want to believe we truly know someone who has been in our lives for years.

By David C. Sawyer

Why Background Screening is Important in the Family Business

ALL IN THE FAMILY

DAVID C. SAWYER

Continued on page 14

13

SO, YOU’RE IN THE FAMILY BUSINESS... SO ARE WE.Transition Consulting Group is one of the few family businesses that caters specifically to other family businesses. Led by the father-son team of Paul and David Karofsky, TCG is uniquely prepared to help business families address their challenges and opportunities.

Paul, David, and the TCG Team specialize in everything from communication strategies and conflict resolution to the succession of leadership and ownership. The success of Transition Consulting Group, like any enduring family business, is the result of a commitment to the highest standards and the talents of its people.

Personal business experience combined with a focus on teaching and counseling, enables TCG to assist family businesses to be proactive while also addressing difficult transitions. Through a variety of engaging methods, TCG helps clients work through family issues, which affect the business – and business issues, which affect the family. TCG’s decades of operational knowledge will help you achieve the results you are looking for.

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Communication is the secret sauce, the critical factor that dictates whether a family business thrives or flounders. Throughout this book, Paul and David address the challenge of good communication and share case studies and guidelines for creating a sustainable family enterprise.

Paul and David share a glimpse into some of the challenges and opportunities they’ve faced with clients and in their own family business. Each chapter of this book could be volume unto itself, which allows you to hone in on the key areas to sustain your family enterprise including:

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So You’re in the Family Business…

A Guide to Sustainability

AVA I L A B L E T H I S FA L L F RO M PAUL AND DAVID KAROFSKY

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Entry and Exit Criteria

Roles and Responsibilities

Decision Making

Family Meetings

Strategic Planning

Governance Structures

Succession of Ownership & Leadership

Communication Strategies

14

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TRUST AND PLANNINGINVESTMENT MANAGEMENT

PRIVATE BANKING FAMILY GOVERNANCE

Edward D. Tarlow, Esq.Chairman, Family Business Practice

etarlow@tbhr-law.com617.218.2000, x2011

Family Business

is Our Business.

We are attorneys who know how to address the challenges of generational differences and family member relationships.

To illustrate the point, let me share that I started my background screening/drug testing business much the same way as the aforementioned cleaning com-pany did. At first, we hired people we knew. In my case, it was primarily family. We’ve since grown enough to the point where many of our more recent hires are not family members; that said, for the most part, I’ve continued the practice of hiring people I’ve known prior to my becoming their employer.

Despite having knowledge of their character and work ethic, we, without exception, perform background checks for each new hire in exactly the same way. That includes my son and my wife. This may seem a bit overboard to some, but we hold everyone to the same stan-dard when evaluating the results of a background screening and making a hir-ing decision. I owe that to my clients, who trust us with the sensitive informa-tion we explore while doing background checks.

You may think you know someone well, but until the research is completed and the facts presented, you can’t be 100 percent certain you have all-inclusive knowledge of someone’s past. Most of-ten there will be no surprises, but if you do a thorough background check on ev-eryone you hire, family or not, I can al-most guarantee you will be surprised at some point by someone you thought you knew very well. Believe it or not, we even

see cases where the subject of the back-ground check is surprised by what we find. This usually involves the disposi-tion of the case. A prospective employee would certainly remember they were in hot water at one time but might honestly think their attorney made it “go away” and no record of the infraction exists.

Lawyers don’t always do a good job of making sure their client knows what transpired behind the scenes in a crimi-nal court case. And the client is often so relieved to hear they won’t be doing any jail time or paying a hefty fine that they don’t ask any questions. Making it “go away” may translate into entering a guilty plea in exchange for leniency. That conviction, however, is still there when it comes to a criminal background check report. Court records are pub-lic and arrests that were reported in a newspaper or other media could surface with a simple Google search. Family or not, you probably don’t want your cli-

ents thinking you’ve betrayed their trust should they discover one of your key employees is a thief or has a bad temper … or worse.

Working to protect the reputation of a family business can be challenging; the importance of performing a thor-ough background check on everyone in consideration for employment cannot be overstated. So, when your favorite nephew comes knocking on the door for a job because he just got fired for the second time this year, it would be wise to keep your sympathetic eyes at bay and hold him to the same scrutiny you would any other potential employee. In the long run it will serve all involved for the better. ■

DAVID C. SAWYER IS PRESIDENT OF SAFER PLACES

INC., WWW.SAFERPLACESINC.COM, A MIDDLEBORO-

BASED FIRM THAT PROVIDES EMPLOYEE SCREENING,

TENANT SCREENING AND SECURITY CONSULTATION.

HE MAY BE REACHED AT (508) 947-0600.

Continued from page 12

“You may think you know someone well, but until the research is completed and the facts presented, you can’t be 100 percent certain you have all-inclusive knowledge of

someone’s past.”

15

101 Huntington Ave., Boston617.218.2000 | tbhr-law.com

At Tarlow Breed Hart & Rodgers we celebrate the

differences that make family businesses special.

With guidance from our family business specialists,

your company could bear fruit for generations to

come. Isn’t it time you had a conversation with our

Family Business Practice Group? Call Ed Tarlow or

Al DeNapoli at (617) 218-2000.

Not all family members are alike.

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

At Wolf & Company, we pride ourselves

on insightful guidance and responsive

service. As a leading regional firm, our

dedicated professionals and tenured

leaders provide Assurance, Tax, Risk

Management and Business Consulting

services that help you achieve your goals.

Visit wolfandco.com to find out more.

RYAN GORMAN, CPAMEMBER OF THE FIRM

AUDIT & ADVISORY