Connecticut’s Family Businesses
Success and challenges in a tough economy
By Bill DeRosa
Family businesses: companies owned and/or run by two or more members of the same family: are a keystone of our economy, generating a significant share of Connecticut’s wealth and economic output, providing good jobs for people throughout the state, and contributing greatly to local communities and the state’s quality of life.*
Some of the oldest businesses in Connecticut are family-owned and -operated. Lyman Orchards in Middlefield, for example, started in 1741; Bevin Brothers Manufacturing in East Hampton, in 1832; Hubbard-Hall in Waterbury, in 1849; and Lux Bond & Green, in 1898.
Many family businesses, such as EBP Supply Solutions in Milford, the Siemon Company in Watertown, Laticrete International in Bethany, Santa Energy in Bridgeport, and Cooper-Atkins Corp. in Middlefield, have outgrown their small beginnings and now collectively employ thousands of Connecticut residents. Still others have not only grown but have become household names: for example, Munson’s Chocolate in Bolton and Bigelow Tea in Fairfield.
Family and Community: Ties That Bind
Family-owned enterprises represent a cross-section of the state’s business landscape. They include manufacturers; service providers; retailers; construction companies; finance, insurance, and real estate firms; and businesses engaged in communications, transportation, and wholesale trade.
The greatest share (40%) of companies responding to CBIA’s 2013 Survey of Family Businesses are second-generation family firms. Roughly one in five (21%) are third-generation businesses, and one in ten (11%) are fourth-generation or beyond. More than one in four are first-generation businesses.
Most companies surveyed (76%) have multiple generations involved in the family business, with the majority having two generations working side by side. Relatives most commonly employed in the family business are parents/children (68% of companies), siblings (44%), spouses (23%), cousins/aunts/uncles (23%), and in-laws (9%).
Connecticut’s family-owned businesses tend to have a special connection to their communities, with owners and employees often living and raising families in the same communities where their companies are located.
“We feel that what gets good people to our organization is making sure that we have a community that we are proud of and truly invested in,” says Andrew Skipp, president and CEO of chemical distributor and manufacturer Hubbard-Hall Inc. in Waterbury. Skipp’s uncle, Chuck Kellogg, is chairman and CFO of the company and a fifth-generation descendent of the firm’s founder. Kellogg’s daughter and Skipp’s cousin, Molly, is executive vice president. “This was instilled in me by my grandparents, my uncle’s parents, and on up the line. This is where we live, and we want to make sure we’re doing everything we can to be good citizens: not only in the way we operate our business, but in investing back into the community for the benefit of the people who work for us.”
Skipp serves on the board of Waterbury Hospital, is active in his church in Waterbury, and serves on the board of the Palace Theater. Among many other things, Kellogg serves on the board of Connecticut Junior Republic, a private nonprofit organization dedicated to helping at-risk and special-needs youth.
Active participation in community life is also a priority for John Green, president and CEO of Lux Bond & Green jewelers in West Hartford and seven other locations in Connecticut and Massachusetts. The company’s chairman, Robert Green, is John’s father, and brother Marc serves as vice chair.
“It’s part of our family heritage to be involved in our communities,” says Green, a fourth-generation family member. “Whether it’s serving on CBIA’s board, the chambers of commerce, or St. Francis Foundation, it’s always been about giving back to those who give to you.”
Green encourages all of the firm’s more than 100 employees to get involved in community causes.
“It doesn’t matter whether it’s supporting Little League, a cure for a disease, or something else”_we think there’s a lot of potential for self-growth in those kinds of activities. So it’s something that we continually encourage.”
Trust, Honesty, Integrity
Working side-by-side with family members has its ups and downs, but advantages usually outweigh disadvantages when it comes to being able to move a company forward, respond quickly to market changes, and grow and prosper as a business.
For Cindi Gondek, principal and CFO of office equipment firm ACT Group in Cromwell, trust makes all the difference. Gondek works with husband Greg, co-owner and president, their son Nick, the firm’s 3-D (printing) engineer, and daughter Lindsey Kossluk, office manager.
“For me, it’s having a partner who has the same agenda as I do,” says Gondek. “To have your husband be your partner and know that he doesn’t have any hidden agenda is very freeing for me to the extent that we can sit down and talk and know that we’re both on the same page. And I trust my kids more than anybody in the whole world, so it’s that level of trust that’s invaluable.”
With trust as the cornerstone of their relationship, the management team at ACT Group was well-positioned to venture into the new: and risky: world of 3-D printing to take their company to the next level.
“Two-and-a-half years ago, our director of I.T. came into my office and said, ‘You gotta see this.’ He showed me a YouTube video of 3-D printing, and I couldn’t believe what I was seeing and said, ‘We have to look into this,'” says Gondek. “So we signed up. We were one of the first ones, and it was a risk, but I thought it was a cool, new technology that fit our existing business model. We didn’t realize that in the next five years, it will overpower our office equipment business”_We’re bringing all the latest technology into Cromwell and helping small to midsize companies take advantage of it.”
For Green, the open, honest communication that comes with working with family members gives his firm an advantage when it comes to quick decision-making.
“Obviously with family, it’s easier to argue,” he admits, “but you kind of understand people when you’ve been with them your whole life. So there’s a certain level of honesty that comes into play when you’re trying to make business decisions. In corporate America, the communication process is different. I think we can make a faster decision; we can change direction and have much more agility in a family business than a non-family business.”
Skipp believes that the fact that Hubbard-Hall is a family firm (it now employs a seventh-generation family member) has helped the company maintain a high level of integrity over the years, which in turn has had a positive impact in attracting good employees, suppliers, and customers.
“Because we’re a family business, and it’s our family’s name and reputation supporting the business, I like to think that we have a very high level of integrity,” says Skipp. “Because we live, work, and raise our families in the community in which our business is operated, we are highly responsible and work to be very trustworthy and accountable for our actions. And that transfers down through the organization as far as our culture is concerned. It’s drawn a number of very good people to us, and it’s certainly drawn good customers to us, as well as suppliers that we’ve been able to develop [relationships with] over the years”_It’s how we’ve been able to last as long as we have.”
The culture of integrity cultivated by Hubbard-Hall’s leadership team has helped to get employee buy-in for the firm’s recent lean initiative, which Skipp regards as an important factor in keeping the firm on a growth trajectory.
“We consider it a growth strategy in the sense that it’s all about creating greater capacity in your organization, by being more efficient and thoughtful in the way that you operate,” says Skipp. “For us, it’s meant redesigning some of the manufacturing facilities that we have and driving all types of redundancy out of the business.”
Critical to the effort, he says, was getting input from employees and ensuring they understood that lean was not a path toward shedding jobs.
“What we found is that tapping into the knowledge and expertise that our employees have and making them feel valued for their insights”_it comes back to you tenfold. And the only way you get that is by making sure they trust that lean isn’t a way to eliminate jobs but to increase capacity. It’s been very empowering for employees and cost effective for us. The whole idea of helping to empower other individuals and creating a common dialog about the things you are looking to change can create a wonderful culture of trust and transparency, as well as efficiency and innovation.”
Barriers to Growth
Many of the challenges faced by family businesses in Connecticut are the same as those faced by any company trying to succeed here. When asked to identify their greatest external business challenge, respondents to CBIA’s 2013 Survey of Family Businesses cited, among other things, taxes and regulations (41% of respondents), competition (21%), Connecticut’s business climate (12%), and the overall economy (11%).
As the owner of a retail business, John Green says that Connecticut’s weak population growth** is his main challenge, something he attributes to a poor business climate.
“Our business is built on relationships,” he says, “but those relationships are moving away because we have a government that doesn’t encourage people to move here, which doesn’t bode well for our future. We need a change in attitude to have a more business-friendly climate.”
According to CBIA’s survey, Green is not alone. Fully 90% of respondents say that Connecticut is not a business-friendly state.
In the human resources area, family businesses also share many of the same concerns as their non-family- owned counterparts. For example, one-third of survey respondents cite skills/workforce shortages as their greatest challenge over the next five years. Others point to developing leadership within the business (16%), implementation of Obamacare (15%), and complying with labor laws and mandates (11%).
Some challenges are more typical of family-owned firms: for example, balancing family needs with business needs; resolving conflicts among family members; formalizing procedures, policies, and governance structures as a business grows and becomes more complex; and, perhaps most problematic of all, planning for the transfer of the business to the next generation.
According to CBIA’s survey, 40% of family businesses in Connecticut lack a succession plan. Although 58% of respondents intend to pass their business on to the next generation, only 7% say they are positioned to do that successfully.
“A lot of family business owners are reluctant to start that process,” says Bob Mul̩, chair of the Business Law Department at Reid and Riege P.C. “While typical business owners never want to think about the day they have to retire, it’s more difficult for a family business owner, because he or she is not just thinking about dealing with the business but also about dealing with family members, which opens up a whole Pandora’s box of issues.”
Another reason owners of family firms put off succession planning is that it can be time-consuming.
“It takes a long time to prepare for proper succession in a family business,” says John Turgeon, partner and director of human capital consulting at CohnReznick. “I was speaking with a family business owner just the other day, and it took them somewhere on the order of five years to develop a plan and begin to execute it. Some people think the time horizon is short, but there is so much to do around the emotions and economics of it all to ensure that you transfer the business at the right time at the right value to the right people. It’s just not something you can think up on a Friday and have done on a Monday.”
A key factor that often deters family business owners from starting the succession planning process is the need for an appraisal to determine the value of the company, says Bryon Harmon, partner in the Trusts and Estates Practice Group at Shipman & Goodwin LLP.
“It’s very important that family business owners have an appraisal made of the business,” he says. “That’s got to be the starting point, and it’s expensive, but I don’t think it’s necessarily the cost or complexity [that keeps people from doing it]. Many business owners don’t want an ‘outsider’ coming in and looking under the hood of their business. This is their baby. It’s very private, and they’re worried about competitors, so that often stops succession planning right in its tracks.”
Estate and Gift Taxes
The consequences of failing to develop a formal succession plan can be devastating, for two main reasons. First, family relationships can be irreparably damaged.
“I’ve seen cases where families have been torn apart over issues regarding the succession of their business,” says Chad Stewart, vice president of commercial lending at First Niagara Bank. “So without a clear plan, laid out well in advance, it can cause some significant turmoil.”
The second negative outcome is financial, says Stewart.
“The business is usually the single largest asset the family business owner has. So in that respect, failure to plan can lead to estate tax issues and other issues around the death of the owner. A family may be forced to sell the business if it doesn’t have significant reserves [to pay the taxes on] the transfer.”
Indeed, Connecticut’s gift and estate tax laws can affect a family business “tremendously,” says Cindi Gondek.
“It’s hard for me, because I didn’t realize my kids would come into my business, so it’s changed how I’m going to do things. Even now, I’m not sure how I’m going forward. I have a lot of things in trust and we gift things over to the children to protect the estate. It just brings a whole other set of challenges, because you have to be very careful in Connecticut when it comes to estate planning.”
“Estate and gift taxes are part of the transfer tax scheme,” says Harmon, “the tax on the privilege of passing your assets upon your death [estate tax] or in your life [gift tax]. There is a federal estate and gift tax, and there is a Connecticut estate and gift tax.”
In fact, Connecticut is one of a minority of states that impose their own estate tax and is the only state in the country with a gift tax.*** Some other states, however, bring gifts made within three years of the death into the estate, says Lyn Walker, partner in the Trusts and Estates Practice Group at Shipman & Goodwin. “So, in effect, they are taxing at least some gifts by way of their estate tax.”
The federal and state estate and gift taxes come with exemptions. On the federal side, the exemption is $5,340,000 for 2014. Anything in excess of that amount is now taxed at a rate of 40%, down from a historic high of 55%. The exemption for Connecticut’s tax is $2 million, with the tax applied to gifts or estates over that amount at graduated rates ranging from 7.2% to 12%, depending on the value of the gift or estate.****
The fact that Connecticut imposes its own gift and estate taxes hurts the state’s competitiveness and its place in national business climate rankings, says CBIA President and CEO John Rathgeber.
“Connecticut is out of step with many other states when it comes to the effect of gift and estate taxes on businesses,” he says. “Here, those taxes, which kick in at a much lower value than those at the federal level, can seriously constrain or even prevent a small or midsize firm from reinvesting in itself, creating new jobs, and developing new products or services: all essential ingredients for economic growth.”
Protecting Your Business
Planning for all the state and federal taxes can be a challenging part of succession planning, says Harmon.
“In a family business, or any business, you may need liquidity to pay the taxes: within nine months of death in the case of the federal estate tax and within six months for the state tax. So, theoretically, if 100% of your net worth [is the business] and you’re above the exemption amounts: which is not uncommon: then you would have to liquidate some or all of your firm to pay the tax. Fortunately, that doesn’t happen with good planning.”
Family business owners can limit their estate and gift tax liability through a number of planning strategies, including making incremental gifts during life.
“In addition to the exemptions, there is something called the annual exclusion against the gift tax, which is $14,000 per donee per year,” says Harmon. Spouses are each entitled to the annual exclusion amount, so together a married couple could give $28,000 to each donee per year without tax liability.
“So if you have a mom and dad and three kids involved in the business, over time you could move out a lot of money. So that’s one device we use to minimize or avoid the estate tax.”
Harmon also points out that the law provides an unlimited marital deduction, which allows someone to transfer an unrestricted amount of assets to his or her spouse without incurring gift or estate tax liability.
When it comes to gifting within a family business, however, Walker offers this caveat.
“We never advise making lifetime gifts in a vacuum,” she says. “It’s always in the context of the family situation and whether it’s appropriate for the next generation to receive them: for example, either because they’re not interested in the business, there are issues with their marriages, or you’re worried about in-laws”_There are all kinds of issues that have to be taken into account.”
In addition to gifting during life, other planning techniques to minimize the impact of taxes include valuation discounts: a way to lower the underlying value of a business during the appraisal process: and purchasing life insurance to provide liquidity for estate taxes upon the death of the owner.
“Also,” says Walker, “if a family business owner wants to pass the business along to his or her family, but only some of the children are interested in it, how do you make equal distributions if you have the company going to some of the kids but not others? That’s also where life insurance can play a role.”
Finally, says Harmon, the IRS allows payment of estate tax liability over as many as 13 or 14 years if the business meets certain criteria, but “it’s pretty complicated and not always available. When it is, however, it’s very helpful and even if someone hasn’t done a good job of planning, it can avoid the need to sell a portion or all of the business to pay the estate tax.”
‘A Very Rich Environment for People’
Despite the myriad tax and other challenges of operating a family business in Connecticut, there are reasons companies like Hubbard-Hall and Lux Bond & Green have remained here for more than a hundred years.
“The thing that’s been most helpful to us is that we have such a tremendous workforce here,” says Hubbard-Hall’s Andrew Skipp. “As we look to develop our business, the people we need must be well-educated and motivated, and we get all that here in Connecticut. We’ve been fortunate to be able to find tremendous people with a shared sense of culture, work ethic, and a shared interest in the things that Connecticut offers. Connecticut is a very rich environment for people, and at the end of the day, we find that to be critical to our business.”
John Green agrees.
“Honestly, it’s a wonderful place to live,” he says. “It has a great quality of life, and I would rather live here than in many other parts of the country. So I think there are certainly a lot of advantages of living, working, and operating a business in Connecticut, yet we shouldn’t have the challenges that we do. Other states make it easier for people to grow their businesses, when we’re being thrown roadblocks to growing ours.”
Eliminating those roadblocks is the goal of CT20x17, a multiyear campaign aimed at moving Connecticut into the top 20 states for business by 2017 as measured by independent national business climate rankings.
With the backing of more than 50 business and professional organizations, the campaign provides a framework of commonsense policies for helping the state maintain a strong talent pipeline, shore up its fiscal condition, improve its transportation infrastructure, reduce business costs, and lighten the regulatory burden on businesses.
For more information and to learn how you can get involved, click here.
Bill DeRosa is editor of CBIA News. Contact him at firstname.lastname@example.org.
* Although statistics on the specific impact of Connecticut’s family businesses on the state’s economy are not available, national data show that family-owned firms have a huge impact on the U.S. economy. Family firms represent as many as 90% of all businesses in North America, contributing 50% of all the U.S. gross domestic product, employing 60% of the nation’s workforce, and creating over three-quarters of new jobs.
**According to the U.S. Census Bureau, Connecticut’s population increased 0.6% from April 1, 2010, to July 1, 2013, compared with 2.4% for the nation as a whole.
***In 2012, the Governor’s Business Tax Policy Task Force, co-chaired by Department of Revenue Services Commissioner Kevin Sullivan and Department of Economic & Community Development Commissioner Catherine Smith, issued a report recommending a number of changes to Connecticut taxes affecting businesses, including eliminating the state gift tax. So far, however, the tax remains.
****The federal exemption is indexed to inflation and is a single exemption applied to both the estate and gift taxes. In other words, if you made gifts during your lifetime totaling $5,340,000, you would pay no federal gift tax, but the entire value of your estate would be subject to the federal estate tax upon your death. The $2 million Connecticut exemption on the state gift and estate tax, which is not indexed to inflation, works the same way.
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