Survey: Family-Owned Businesses Not Prepared For the Future

If junior doesn't want to take over the business, what do you do?

Jeff Sammak

Jeff Sammak

Like many family-owned businesses, Dunmore, a manufacturing company based in Bristol, Pa., had a succession plan involving one of the oldest children taking the reigns from the previous generation. In 1993, Michael T. Sullivan was the vice president of manufacturing and was being groomed to take over for his father, Michael L. Sullivan, who founded the business in 1970. But Michael T. tragically died in a car accident that year. The loss had massive effects on the Dunmore family — not just personally, but professionally.

“You don’t plan for that. Most companies don’t plan for that,” said Matthew Sullivan, Michael T.’s younger brother and current president and CEO of Dunmore. “The company didn’t perform well over the next five years because of his loss.”

The loss of Dunmore’s heir forced the company to drastically change how the business is organized. It now runs similarly to a publicly owned company, even though it’s private. Dunmore has a board of directors, emergency succession plans, and a “top 10 priorities” list — frequently updated to answer questions about how the company would respond in case of a change of personnel. It also has plans in place for how Sullivan and the board will choose and groom his successor when he decides to step down.

In the world of family-owned businesses, this is pretty unique.

Kreischer Miller’s 2016 Family Business Survey found that 51 percent of Philly-area senior generation owners of family businesses do not have a succession plan in place. The survey also found that 65 percent do not have a clear retirement plan. Despite this, 62 percent of owners plan to transition their business within the next 10 years. Clearly there’s a divide.

Kreischer Miller believes that the best-case scenario would involve companies beginning the process of succession and retirement seven to 10 years in advance.

The stakes are high for these transitions. The success rates of the next generations of family businesses are extremely low: Only 30 percent of second-generation owners have success and only 12 percent of third-generation family owners are successful, according to the Family Business Institute. In the Kreischer Miller study, 22 percent of responders were first-generation owners and 40 percent were second-generation owners.

Jeff Sammak, president and founder of Strata Company, believes that part of the trouble is in trying to shoehorn family members into positions that they simply weren’t made for.

“You can’t really dictate what your children are either interested in or talented in. For me, that all has to fit together to make sense,” he said. “In some cases, I’ve seen businesses struggle because [the next generation of the family’s] talents don’t necessarily align with what’s needed to lead the company.”

As of now, neither of Sammak’s two sons have shown an interest in running Strata after he retires, so he’s anticipating selling the business to either a current employee or an outside purchaser.

Sammak has not made a concrete plan for succession and retirement yet, but instead has a general idea for how things will go. He thinks this is what most companies in his position are doing, and he feels that it’s a result of the current state of business.

“Change is happening at such a rapid pace that your company’s core business is really a moving target, you don’t really know when the next time you may have to reinvent the company to remain successful comes along,” he said. “This further erodes, in my mind, the traditional succession plan of grooming the next person to run the company. Running an existing business model is one thing, reinventing it is another.”

Sammak’s sentiment is reflected in the Kreischer Miller survey. Over 30 percent of respondents said that new or emerging technology significantly impacted their businesses, the highest of any of the potentially impacting factors examined.

Dunmore believes in a more organized plan for the future. Strata believes in simply keeping “one eye on the future.” Either way, Matthew Sullivan believes it’s an important, albeit unique thing, for any company to consider.

“A lot of the business owners I talk to are ingrained in the day-to-day. Working with customers and dealing with day-to-day battles and rising costs and hiring the right people. If you don’t take a step back, a lot of things fall through the cracks,” he said. I think everyone has to take a step back and work on his or her business, and not just in the business.”

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