IN THE FOLLOWING SPECIAL REPORT, accountants and attorneys offer financial, legal and management best practices for New Jersey-based family businesses—keys to success for this generation and the next. The nuances and dynamics of steering a family business in the right direction can be best implemented early in the life cycle of the company, where short-term and long-term planning can map out the future—including a succession plan. Here is a roadmap of insights and advice for these unique enterprises for which success or failure is all or mostly “relative(s).”
BDO USA, LLP
By Charles A. Barragato, CPA, CFE, Office Managing Partner, Melville Tax Practice; NE Regional Leader, Private Client Services
To be successful, family businesses in New Jersey should establish a succession plan. On Jan. 1, 2018, the state’s estate tax was effectively phased out, which, coupled with recent changes to the federal tax code, has enhanced the ability to transfer wealth from generation to generation—reducing tax consequence and providing an opportunity for family businesses to preserve value and ensure a smooth transition. Additionally, privately held companies must act now to address new regulations and changes, including updated revenue recognition guidelines (ASC 606) effective Jan. 1, 2019; the SD v. Wayfair decision’s impact on taxation of products and services; and new pass-through guidance just released by the Treasury and IRS. It’s an ideal time for family businesses to ensure they understand their total tax liability and opportunities amid new regulations.
By Lisë Stewart, Director, EisnerAmper Center for Family Business Excellence
To ensure the long-term success of a family business, as well as build a healthy ROI for the owners, the most important ingredients are planning and the time to implement the plan. Many business owners wait until they experience a significant health event or some other precipitating crisis before undertaking some of the most important planning of their life. An effective and implantable succession or transition plan can take more than five years to fully implement, so starting early and sticking to the process can go a long way toward ensuring that business owners will reach both their personal and financial goals.
Ernst & Young LLP
By James Wood, Executive Director, Family Enterprise Business Services
Become highly focused on generating value from your enterprise. For most family owned businesses, the business represents the owners’ most significant source of wealth. Thus, do everything possible to protect and enhance that wealth—think of yourself as an investor, not an operator. It is easy for business-owning families to over-identify with their business because of the family legacy, status in the community or personal involvement with the business. However, an investor wants to make sure their investment is growing, and the value is increasing year after year. Know the top three financial value drivers of your business (such as Return on Equity, Return on Invested Capital, EBITDA growth) and build a process to monitor, align management and continuously improve those metrics.
Goldstein Lieberman & Company LLC
By Phillip E. Goldstein, CPA, Managing Partner
The advice I’d give any family business: “Assume nothing.” Don’t assume a family business will function like a family. It doesn’t, and it shouldn’t. Put everything in writing and make the rules clear. Go into detail about compensation, ownership shares, duties (yes, even specific job descriptions). Once it’s on paper, respect what it says. Don’t micromanage. Sweating every detail as a group will lead to bad feelings and bog down forward momentum. Seek outside advice for a reality check and to keep ideas fresh. Nothing helps avoid internal strife better than having external sources. Have a financially sound succession plan. Sort out details for how and when the younger generation takes over. Planning for tomorrow makes things more efficient today.
Klatzkin & Company LLP
By Frank G. Sweeney, CPA, Partner, Tax Dept.
Family businesses should consult with an attorney and a CPA to make sure the business structure is the best fit for their needs. They should make sure that they have signed, written agreements clearly outlining what each partner will be doing for the partnership, the ownership percentage and the amount being invested by each to start the business, as well as provisions for additional capital calls. A succession plan is vital—early planning provides more flexibility and will allow family members to continue working in whatever capacity they choose before and after a transition. Family business owners shouldn’t be afraid to ask their professional advisors questions. A phone call could save tax money down the road or keep an issue out of court.
Levine Jacobs & Co. LLC
By Michael H. Karu, CPA, CFF, CGMA, Member
A significant portion of our practice is with closely held, family businesses, most of which are New Jersey-based. The family dynamic can be extremely difficult, especially between generations. We remind everyone to keep their eyes on the prize; to look forward and to remain focused on the core business. We also insist on proper communication between the family members. Small issues quickly can grow out of proportion. While many family businesses may be small, they need to be run as if they are larger. Hold meetings, not just between the owners, but with key employees; look for industry trends; understand your competition and try to stay ahead of them; and, as the older generation nears retirement, recognize that proper succession planning is necessary.
Mazars USA LLP
By Paula Ferreira, CPA, Partner
First and foremost, the company should define key management positions and responsibilities so that roles are properly established, and personnel are held accountable. Secondly, the company will need to determine how the business will be financed considering cash flow needs and if subsequent lending will be necessary, as well as identifying the most advantageous source of financing. Finally, a successful family business should be proactive with their finances. This means having the right accounting system. Real-time access to financial information will allow regular reviews and comparisons between management expectations and actual results. It is also important to discuss these results with trusted advisors. Having a strategic and knowledgeable partner to assist and support management will be key to the company’s success.
Sobel & Co., LLC
By Michael LaForge, CPA, CGMA, Director, Family Business Practice
Good to Great was published almost 17 years ago and was hailed as the best management book ever. It’s overriding message was simple: Get the right people on the bus. The bus is your family business. The right people may or may not be members of your family. As much as you may want to have your daughter or son driving the bus, it is possible that the continued success of your family business depends on looking outside of the family for talent, innovation and ideas. Conversely, bringing family members into the business who may have other passions or professional goals may stunt the success of the family business. The success formula is this: Putting the right people, in the right seats, on family bus equals continued success.
Wilkin & Guttenplan P.C.
By William J. McDevitt, CPA, CVA, Shareholder
Clarity of expectations and roles is critical among family members who are running a business together. An agreed-upon vision is also vital to keep the business running in the right direction. Transparency and communication are also key to promote harmony and (hopefully) resolve conflict before it manifests itself as resentment. Conflicts, as long as they serve as a platform to improve the business, can be educational. Hiring or promoting family members because they are family rather than on their ability, will eventually cause conflict. Hire the best people that you can for the job, which may not always be a family member. Running any business is challenging. Running a family business is more difficult but, if done well, can be unifying and rewarding.
By Gianfranco A. Pietrafesa, Esq., Partner
Every family business should have a written agreement to resolve disputes. One dispute resolution procedure is to engage a third-party neutral, such as a mediator. A second is to create a board of advisors comprised of trusted people, such as an accountant, attorney, banker and other business owners. A third is to form a family council comprised of owners and non-owners, such as members of the next generation. Each of these mechanisms is intended to assist family members in resolving their dispute. However, if family members cannot resolve their dispute on their own, then other means are necessary. One mechanism is to submit the dispute to binding arbitration. Another, more drastic, mechanism is a buy-sell where one side buys and the other side sells their equity interest in the family business.
Cole Schotz, P.C.
By Jennifer L. Horowitz, Esq., Co-Chair, Corporate Department
Family businesses are often nurtured like a family member from creation and launch of the business, through developmental stages, to ultimately maturity or sale. Typically, there is the utmost care for products and services, culture, employees and community. Family businesses should also establish a legal entity for optimal tax treatment and protection from liability; a governance agreement to avoid disputes regarding management, compensation and succession; written agreed terms with key suppliers and customers to protect business arrangements and anticipate adverse events; policies or agreements with employees for effective operations; and protection of trademarks and proprietary information. Family businesses may not address these legal matters, but it is prudent to do so to avoid disputes, protect the business and prepare for possible sale, financing, expansion and other business life cycle events.
Fox Rothschild LLP
By Douglas J. Zeltt, Esq., Partner, Co-Chair, Corporate Department
The enduring maxim for real estate is location, location, location. For a family business, the adage should be plan, plan, plan. Plan for and document the proper governance of the business today. Plan for and document the orderly succession of management and ownership of the business tomorrow. Plan (in writing) for an unforeseen event. A family business is like an heirloom—it needs constant stewardship, upkeep and an appreciation for value. It is the role of today’s owners to balance the roles of family and non-family employees in the operation of the business, to instill in the next generation the values which enable the family and the business to succeed, and to plan for the eventual transition of ownership to allow the business to endure.
Harwood Lloyd, LLC
By Thomas Loikith, Esq., Partner, Corporate Department
The challenges of running a small business are magnified when the principals are family members. It’s important not to cut corners because “it’s just family.” Before starting the business, the principals should prepare a written business plan outlining their shared goals and expectations. They should consult with an attorney and an accountant to determine the appropriate type of business entity to form. They should then enter into a written agreement addressing issues such as capital contributions, management, and the transfer and buy-out of a member’s interest in case of retirement, disability or death. Without expectations and responsibilities being clearly spelled out, not only is the success of the business itself placed at risk, but unnecessary strains will be placed on the relationship of the family members involved.
McCarter & English, LLP
By Jeffrey Muller, Esq., Leader, Tax Group
Family business owners should formulate succession plans relative to ownership and management. It’s impossible to predict when illness, death or another emergency will require changes, and even routine retirement requires planning. Family members may lack the skills or desire to take over, in which case employees should be incentivized to continue the businesses’ success. Without planning, the value created by one generation can be quickly lost by the next. Maintaining and passing the wealth generated from the family business should be an integral part of owners’ estate plans. At times, the best way to protect wealth generated by the first or second generation of owners is to sell the business to employees, other owners, strategic buyers or financial buyers.
Norris McLaughlin, P.A., Attorneys at Law
By David C. Roberts, Esq., Co-Chair, Litigation Practice Group
Most disputes in family owned businesses result from miscommunication. Whether the owners are first or second generation, making sure everyone’s duties and responsibilities are clearly spelled out at the outset is critical. For example, a Shareholders Agreement can give a minority owner majority say in a specific designated area, such as sales. When one generation takes over from the last, it is difficult to imagine that documents created at the outset can cover the issues facing the new regime. Redrafting Shareholders Agreements can focus owners to make sure that everyone has the same goals and objectives. If one part of the family wants to maximize short-term money, while another faction wants to reinvest, deciding to part ways amicably now is significantly more palatable than a future, messy business divorce.
NPZ Law Group, P.C.
By David H. Nachman, Esq., U.S. Managing Attorney
An immigration and nationality law firm, we can help guide a family owned business through sensitive and complex issues related to corporate immigration matters. When two spouses jointly own a closely held corporation, certain factors affect either spouse’s immigration status. One spouse may have Intracompany Transferee, Specialty Occupation, or Investment visa status in the United States, while the other business owner spouse is permitted in the United States as the derivative beneficiary. If the couple were to divorce, the derivative beneficiary could lose his or her immigration status. NPZ can work to protect the derivative beneficiary to change his or her status to become a Temporary Business/Visitor, allowing the spouse to remain in the United States to litigate and/or to get status under his or her own qualifying work visa.
Sills Cummis & Gross P.C.
By Jason L. Sobel, Esq., Chair, Family Owned Real Estate Practice
Dealing with the real estate underneath the family business facility is key. Whether the business owns or long-term leases its real estate, there may be an opportunity to unlock its hidden value. This can be achieved in a number of ways: a sale/leaseback arrangement whereby the family sells the land on a tax-efficient basis (perhaps a 1031 tax-free exchange) and leases it back for as long as it expects to continue to operate its business; relocate the business to a less costly or more convenient location and either entitle and sell the land as a redevelopment site or retain ownership and contribute it into a joint venture with an experienced redeveloper; or engage a redeveloper for hire to redevelop the site and retain full ownership.
Wilentz, Goldman & Spitzer, P.A.
By Brett R. Harris, Esq., Shareholder
Good governance is critical. According to SCORE, a non- profit association that partners with the U.S. Small Business Administration to provide educational and mentoring resources for small businesses, 94 percent of family owned firms are controlled by supervisory or advisory boards. Those charged with management of family businesses need to realistically identify strengths and weaknesses of their family members and bring in outside advice and perspectives. The non-family members provide certain objectivity in decision-making which may otherwise be biased by family dynamics. Governance should be clearly documented in the company’s organizational documents. A formal succession plan should be adopted with guidance from business and estate planning counsel, seeking financial legacy for the family alongside continued viability of the business, whether still owned by the family or transitioned to professional, non-family management.