The basics:

• The recent NJBIZ panel discussion covered the current thinking on the best governance structure for family businesses, how to balance professionalism with maintaining familial relationships and more.
• Key strategies to success include effective communication, clear role delineation, and separating family and business matters.
• Succession planning also includes honest communication to ensure smooth transitions across generations.

As part of NJBIZ’s latest virtual panel, participants discussed how family-run businesses can remain resilient and relevant across multiple generations.

Moderated by NJBIZ Editor Jeffrey Kanige, the July 16 panel featured: Kristin Calandra, vice president of Newark-based Calandra Enterprises, which owns and operates three bakeries, several hotels, restaurants and apartment buildings in North Jersey; Jay Levine, partner in advisory and accounting firm Prager Metis‘ Hackensack office; and Robert Mascia, CEO, founder and financial planner of Green Ridge Wealth Planning, a Montville-based financial planner.

During the 90-minute roundtable discussion, participants delved into the current thinking on the best governance structure, how to balance professionalism with maintaining familial relationships and the importance of succession planning.

According to the U.S. Chamber of Commerce, family-owned enterprises account for two-thirds of all businesses globally, including some of the most successful companies, like Walmart and Berkshire Hathaway.

While many companies begin as a family-owned enterprise, the majority do not remain as such.  According to the Smith Family Business Initiative at Cornell University, the average lifespan of a family business is about 24 years.

About 70% of these companies won’t make it to the second generation and will either fail or be sold off, the Harvard Business Review found. After that, roughly 10% are passed down to a third generation and only about 3% survive to a fourth generation or beyond.

Levine said, “I think there’s a few reasons for that. The first generation had no choice but to be successful and they were the driving force. They didn’t have the economic abundance. If the company is very successful, then the next generation grew up in a much more comfortable lifestyle and maybe didn’t have the work ethic or took some of the things for granted. Maybe they didn’t learn the business quite as well from the ground up because they didn’t need to survive or just saw how hard that dad worked and said, ‘I don’t want to be putting in 12-hour days, six days a week.’”

Mascia said, “I also think that some people fall in line because they think that is what they’re supposed to do in terms of next steps of life. But the reality of it is they have no interest and no passion. They may have the drive, but it’s a drive for something else … We see a lot of like, ‘oh yeah, my dad built this or my mom built this and I’m here and I’m doing it.’ And it becomes status quo.”

Replay: Family Business Panel Discussion

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In addition to navigating complex family dynamics in the short term, companies run by families have to set themselves up for success in the future. And, like all businesses, they need to stay competitive amid an ever-changing economic landscape.

When it comes to these unique challenges, panelists advocated the need for trusted advisors — particularly ones that have worked with multigenerational companies in the past.

Mascia said, “They’re really going to guide you away from the bad decisions and they might give you things that you’ve heard already before, but it’s always nice to get that tool of verification where you can click off that box and say, ‘You know what? I did my due diligence. I got the right people behind me that are going to help me make decisions along the way.’ Because at the end of the day, most business owners, whether they’re a single owner that grabs the bull by the horns and takes their shot at their opportunity, or it’s the third generation coming into a family business, having the right advisory team is going to help you to continue the success and the profitability of that.”

Beyond understanding the technical aspects, Levine said it’s crucial to find a team that understands “the emotional component.”

“And the people who really are successful in this and helping the clients and the family businesses tie into that and feel that emotional connection with them to help them get through that because that just smooths everything along for everybody else,” he said.

An entrepreneurial start

Individuals typically launch many of these businesses, who then tap family to help run the company after it achieves some level of success. For example, Calandra’s family business began in 1962, a few years after her grandfather, Luciano Calandra, emigrated from Italy.

“When he came here in 1958, he worked at his brother’s pizza shop and gained some familiarity of how to make pizza and bake some bread,” she said. “And then once he gained some knowledge and saved some money, he opened up the store on First Avenue in Newark and we became famous there for our breads and pizza. Then, we expanded to pastries and desserts.

“But he was a solo entrepreneur … He was the first one to come to America. So, he definitely took that big risk. He met his wife here, came here with no money. I feel like that’s usually what happens with the first generation. They don’t have a lot, but one way or another they made it happen. And then it’s the successions, the sons, the daughters, the grandchildren – sometimes the parent hands it off to them after they show hard work and interest,” she said.

As family members became more involved in the company, Calandra said there was a push to ensure they were qualified to be part of the business. “Qualified through book smarts but then also in terms of being on the ground with the staff, working on holidays, working the registers in our bakeries and not just sitting in the back office,” she said. “The practical work is equally, if not more important, because it’s about being there and learning the ins and outs of your specific company versus just what you’re learning in college.”

Levine said ensuring that a family member is qualified to work in the business can lead to “some tough discussions.”

“It’s a business, not a charity and not a hobby. If this is going to be a livelihood, then you need to operate like a business. And that means that if somebody’s not qualified, they can’t have a position because ultimately you’re hurting everybody,” Levine said.

Mascia noted that in some instances, a family member can “earn their stripes” someplace else and return with “a vast amount of knowledge and expertise” they can put into the business.

“I think this goes into a broader conversation of really communication and transparency, which is usually limited in family businesses, especially in the onset. When you talk about finding somebody, bringing them in as a family member but also treating them like the employee … more often than not nepotism becomes an issue,” he said.

It’s a business, not a charity and not a hobby. If this is going to be a livelihood, then you need to operate like a business.
– Jay Levine, Prager Metis

“But also it is communicating and clearly defining what their objectives are and what defines success in their role. And having those conversations early on of like, ‘Hey, listen, I’d love to give you a shot and an opportunity. Here’s what the role looks like, here’s what you’re going to be responsible for, here’s what the outcome needs to look like,’” Mascia said.

“There’s a difference between nurturing, developing and bringing them into the right spot. Just because you’re the next generation doesn’t mean you have to be the CEO. You may have another role in the company,” he said.

Building a legacy

At a family-run company, Levine said it’s essential to “clearly delineate” the roles and responsibilities. “Sometimes it becomes self-evident. A lot of times it doesn’t. And you need to be able to identify who really is going to be from the corporate structure and in the boardroom, even if they’re not in charge in the dining room. And that can be very difficult, especially when the most qualified person to take over and be the CEO is not the next senior member in line, not the oldest sibling, the older brother, but it’s the younger daughter that’s really more qualified,” he said.

Levine also said it’s smart to anticipate the emotional response such decisions will have and give family members an opportunity to express their feelings. “That’s critical as well to keep the family going. That’s the whole purpose of the family business. You don’t want to destroy the family,” he said, adding, “It’s very much a juggling act.”

That includes when the time comes to talk to a chief executive officer about retirement.

Levine said, “If they’re intent on staying on … and taking on everything themselves, it’s going to create some issues, especially as their capacity, their skills and their ability to get things done isn’t what it used to be. And the next generation stagnates and presents a problem.

“We’ve seen plenty of times where they’ve taken on a reduced role, they get out of the day to day and then go on to all the strategic decisions. And that usually works pretty well, because at some point people don’t want to be involved with the day-to-day unless they’re concerned they’ll have nothing to do. And then it’s a different conversation going – ‘you’re still valuable, we still want you around. We just let us run the day-to-day now and take that burden off of you.’ And it has – when it happens that way – works well. The success rate isn’t as high as you would like because sometimes people just hold on for a lot longer than they should. And then that becomes the reality and it can hurt the business significantly and set it back or destroy it.”

According to Mascia – who grew up in a family business – “It was a weird dynamic. There was jockeying for positions during Thanksgiving, side conversations and people getting left out. And one of the things that I’ve made a point in my own family business is we do not talk business when we are together as a family. But when we sit down and we make decisions, we make decisions as members of the business.

“This is one of the things that we coach a lot of clients on, is how do you, in essence, keep the business with the family. … And it’s just a matter of communication and transparency and making sure that you’re running it like a business because the emotion needs to be taken out because at home around the dinner table or the Thanksgiving table, you really can’t talk business,” he explained.

Calandra said that while her family tries to keep work and home separate from each other, it can be tough sometimes. “I completely see why some families and companies are business at work and then family at the dinner table. But sometimes it does intertwine … you really do want to try and keep it separate, but it’s easier said than done,” she said, adding, “You have to balance it. Respect and communication is big. What works for one family business doesn’t work for all and you have to figure out what works and run with it.

“We are very lucky – we really do value seniority in terms of not picking battles and respecting everybody,” Calandra said. “My father grew up respecting my grandfather and not picking battles and respecting his ultimate decision if they did disagree. If my father and my uncle disagreed, it was about respect and not stepping on each other’s toes.

“I grew up seeing that and that’s how I treat disagreements with my father. All business was still talking about business … So we’ve – knock on wood – really have never had an issue where there was a big blown out fight regarding a business decision where we had to get a third-party person to help us work it out, thank God. But I think I attribute that to luck and how my grandfather raised his kids and how I was brought up in the company where it’s just all about communication and respect,” Calandra said.

Getting organized

As for company structure, panelists say there’s no “one size fits all.”

Levine said, “What worked for one company might not work for another because the circumstances are different, the dynamics are different. What you trying to accomplish are different. You need to take a look at the facts and circumstances … who are the owners going to be? Who are your potential future owners? What are the goals? What kind of assets, what kind of liability issues might you have? So, there’s a myriad of things even though there’s not a ton of different options on the surface of it that you could just take into account and figure out what you should be.”

Mascia said, “I think it really depends on the business and what you’re looking to establish. And working with accountants to make sure it’s the right entity because at the end of the day that’s who’s going to be filing the tax returns. They’re the ones who are going to be really focused on the type of business, any sort of depreciation and amortization, any type of expenses and deductions that you have, assets that you’re purchasing … getting that advice upfront is always something that we recommend highly.”

When it comes to preparing for the next generation of the company, panelists stressed the importance of being respectful, honest and upfront with family members involved in the business.

“What we’re talking about is specifically with the family succession and transition planning,” Levine said. “The emotional parts of how we transition the roles, how we figure out who’s going to take over, how do we keep the business going and make it so that everybody here that’s working can have a rewarding career and we can take care of our families financially and yes, protect ourselves from some ‘what ifs’ or ‘God forbids.’”

Mascia said, “When we’re having conversations with business owners, it’s really about how do you get the business to the point where you’re not relevant anymore because that transition, that succession, that sale, everything happens a lot smoother when you extract yourself out and when you can just sit more on a board as an advisor and setting your business up for that is really setting your family up for success.”

For instance, succession planning is underway at Calandra between the first, second and third generations.

“My grandfather never had advisors and then even my father and my uncle, it wasn’t until the past five or 10 years they’ve been seeking advice with estate attorneys, accountants and lawyers,” Calandra said.

“They’ve always tried to do things themselves and not seek advice, but as they get older they’re realizing maybe the old way doesn’t work anymore and there’s different ways … So, it would be kind of stupid not to get advice from people that are experts in the field,” she said. “It was a struggle in the beginning to get my grandfather to sign papers to transfer his shares to the second and then the third generation because his ego is like ‘No, I am the owner, I started the company.’”

Her 94-year-old grandfather “still struggles with sitting home at the house,” she said. “Whether it’s me, my brother and his girlfriend, we take turns driving him to work so he can walk around.”

“I respect him and his seniority and I try not to pick battles with him … There’s definitely the emotional part of family members’ need in the first generation to instill you still have control even though maybe on paper you don’t,” she said.