HORSHAM, PA, January 27, 2016 —Owners of family businesses have faced numerous challenges the past several years and many are finally ready to exit their business. But how prepared are they, really? The answer may surprise you. A startling 65 percent of senior generation business owners lack a clear retirement plan, according to a new Family Business Survey conducted by Kreischer Miller, a leading independent accounting, tax, and business advisory firm serving the Greater Philadelphia area since 1975. More than half of those intending to retire have not established a succession plan.
The newly-released 2016 Family Business Survey, administered electronically over a three-month period, was comprised of survey data from approximately 100 privately-held businesses in the Greater Philadelphia region, including southern New Jersey and northern Delaware. The largest pool of respondents, 40 percent, identified their companies as second-generation family businesses. The majority of survey participants work in manufacturing, the service industry, distribution, and construction.
Companies generating revenues up to $50 million made up 67 percent of respondents. Those generating more than $50 million made up the remaining 33 percent of survey participants.
Eyes toward Retirement…and the Next Leader
After weathering years of economic and regulatory challenges, a resounding 62 percent of senior generation survey respondents are eyeing plans to retire within the next ten years. Survey data, however, points to the fact that wanting to retire and preparing to retire are not aligned.
- Fifty-one percent of senior generation respondents do not have a succession plan in place, saying that they were “still figuring it out” or “unsure of what to do.”
- Sixty-five percent reported that the senior generation business owner does not have a clear retirement plan.
- While 55 percent of respondents intend to transfer the business to a family member, only 37 percent have a plan in place to develop the skills of the next generation of leaders. For those who do, training has come primarily in the form of seminars and mentoring or peer group programs.
- Almost half of the respondents indicated they had no emergency plan in place in the event of unforeseen circumstances.
These figures are especially concerning because historical data on family business transitions point to hurdles. According to published findings from the Family Business Institute, only 30 percent of second generation businesses succeed following a family business transition. Third generation businesses have a success rate of a mere 12 percent.
“This data clearly demonstrates that there is an essential need for family businesses to plan ahead and navigate through plans and processes years before the senior generation business owner is ready to retire,” explains Steven Staugaitis, CPA, a Director of Audit & Accounting at Kreischer Miller and a family business specialist with the firm’s Center for Private Company Excellence. “However, our Family Business Survey shows this planning is not occurring.”
Keeping It in the Family
Data from Kreischer Miller’s Family Business Survey shows that family businesses generally prefer to keep ownership in the family, although they recognize the importance of finding other ways to attract and retain non-family executives.
- Seventy-seven percent of respondents indicated that only family members are permitted to have ownership interest in the company.
- There is an expectation among 56 percent of respondents that family members work in the business before they become an owner.
- The most common method cited to compensate non-family executives in addition to salary was bonuses (64 percent), followed by life insurance (36 percent).
Interestingly, survey respondents were more willing to look outside their family when building a Board of Directors. Survey respondents with an established board governance structure recognized that the best board composition is a mix of family and non-family members. In fact, 61 percent of respondents had a mix of family and non-family members providing board governance. Board committees primarily focused on auditing, strategy, and compensation, according to survey data.
Challenges of Family Business, Unique and Not
Just like public companies, privately-held family businesses have their share of external headaches. Emerging technologies, the threat of competition, and tax policies are those threats most frequently cited for significantly impacting these businesses.
Family businesses also grapple with a set of issues that non-family owned companies don’t face. Respondents ranked succession plan clarity and ensuring senior generation owners had enough to retire high on their list of concerns.
“These two areas of concern consistently kept showing up in the survey, and for a good reason: The majority of respondents just have not tackled these two critical topics, though they know they should,” stressed Staugaitis.
Strategies for Moving Succession Planning Forward
There is help for family businesses looking to transition. Kreischer Miller offers the following pointers for the current owner:
- Identify motives, desires, needs, and expectations for the transition.
- Be flexible in transfer strategies.
- Think about what life will look like – both financially and emotionally – after the transition.
- Seek good advisers to help ease the transition and offer insight from past experience.
Kreischer Miller also advises tackling this issue the sooner the better. “We encourage our clients to allow ample time to go through the process, in the range of 7-10 years. But if they have a shorter time horizon, we can still help them create a solid plan that will work for the departing owner and for the business,” Staugaitis said.
When transitioning, it is also important to focus on the distinct needs of the next generation. Kreischer Miller recommends that successors consider the following advice:
- Emulate – not imitate – the preceding owner. Be yourself and play to your own strengths.
- Don’t put too much weight on yourself as the new owner; invest in other people to try to fill the gaps left by the previous owner.
- Seek out educational opportunities that focus on the essential strengths needed to succeed in your new position.
- Identify experienced and accomplished individuals within the field to act as advisers and mentors.
- Establish a board to provide objective feedback, support, and guidance.
Three Family Businesses, Three Distinct Approaches to Succession Planning
Owner Grooms Son for Transition
These strategies worked well when Thomas Furia Sr., founder of Philadelphia’s Penn Jersey Paper Company, began to plan the transition of the company to Thomas Furia Jr., who now serves as president. “Dad had reached a point where he still wanted to be the respected founder, but knew it was the right time to let me take over the operations of the business,” said Furia Jr., 60, who joined the firm 37 years ago. According to Furia Jr., his dad, 90, still comes to work daily, but primarily for the pleasure of seeing his children and the company he has created. Furia Jr.’s sisters work in the family business and, like Furia Jr., are company stockholders.
The next generation of leadership is being carefully trained to continue the family business: Thomas Furia III, 37, serves as Director of Supply Chain Management, but his dad feels confident that he will someday be the president of Penn Jersey Paper Company. “I am committed to providing my son the leadership training and mentoring needed to ensure a smooth transition.”
Owner Looks Outside the Family for Next Leader
Strata Company President and Founder Jeff Sammak is weighing a different transition plan. With two sons in college, both of whom have professional interests outside of the Plymouth Meeting, Pennsylvania-based Strata Company, Sammak is sure that his exit strategy will involve selling his marketing company to current employees or an interested outside party. Sammak’s transition remains several years away. “I feel comfortable with the succession plan I have started to put in place, but recognize that I need to be flexible enough to change direction when needed,” he said. Having seen the stresses and strains that family businesses have placed on friends, Sammak has opted to lift this pressure from his own kids. “In the end, supporting my family really means supporting who they are and what they are drawn to professionally outside of Strata Company.”
A Public Company Model Ensures Smooth Succession within a Family Business
Dunmore President and CEO Matthew Sullivan is one of eight Sullivan siblings working in the family business and one of the twelve owners. He has supported the success of the 230-person company by running the Bristol, Pennsylvania-based private development and manufacturing films company as if it were a public company: An independent board of directors meets quarterly to develop and monitor the strategy for the company, to approve key plans and decisions, and even to assess the performance of CEO Sullivan himself, a rarity in many family businesses.
As an organization, Dunmore believes in the power of a formalized succession plan, and even a crisis plan. In 1993, Dunmore endured the automobile death of their Vice President of Manufacturing, and oldest brother, Michael T. Sullivan. Michael T. was a high performing leader of the business being developed and mentored to be the future president of Dunmore Corporation.
“We had not planned for the sudden loss of a key employee,” Matthew Sullivan said. “His death was a driving force for us to implement a process for succession planning so that we can assure the company and associates are well taken care of if any key member of the organization are not present. Today, our leadership team is so strong that I could announce tomorrow that I will be taking off for the next thirty days and our team would know exactly what to do.”
Company founder Michael L. Sullivan fathered 11 children, most of whom now have children of their own. But their employment at Dunmore is not a sure thing. In fact, Dunmore requires that family members work outside of the family business before being considered for employment. If they do join the company, family members are carefully assessed for leadership potential, and training is provided to strengthen their abilities. There are no guarantees of advancement. “Our core belief is that once a family member joins Dunmore, they are expected to be both a high-performer and to be a role model,” Matthew Sullivan says.
Learn more and download Kreischer Miller’s 2016 Family Business Survey at www.kmco.com.
Contact:
Melanie L. Vivian
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(215) 441-4600
About Kreischer Miller
Kreischer Miller is a leading independent accounting, tax, and advisory firm, serving the Greater Philadelphia area since 1975. The firm is built to respond to the unique needs of growth-oriented private companies, helping them smoothly transition through growth phases, business cycles, and ownership changes. Kreischer Miller offers a wide range of services, including Audit & Accounting, Tax Strategies, Business Advisory, Human Capital Resources, and Technology Solutions across an array of industries, including manufacturing, distribution, construction, real estate, not-for-profits, media, government contracting, professional services, family-owned businesses, and investment firms. The firm provides insight and creative services to organizations that need to be able to quickly adapt and respond to changing market opportunities and challenges. To learn more, call us at 215.441.4600 or visit www.kmco.com.