Republished from Hartford Business Journal by Harriet Jones
Family-owned businesses are a huge part of the U.S. economy, by some measures representing between $10 trillion and $14 trillion in economic activity.
But a lot of data also suggests this mainstay of the economy is in the midst of a step change as an increasing number of family CEOs decide, rather than passing the reins to the next generation, they’ll sell up and relinquish control.
Estimates vary, but in at least one survey, among family firms expecting a transition within five years, only 41% plan to pass the business to the next generation, and fully 30% plan to sell to a third party.
“That was a tough decision, but it was one that we all took very seriously,” said Kevin Flanagan, the former vice president of Flanagan Industries, an aerospace supply chain company in Glastonbury. He, his siblings and his cousins sold control of the business to a competitor a decade ago after 70 years of family ownership.
Founded in 1946 by his father and uncle in their mother’s basement after returning from service in World War II, the company grew steadily over decades. By 2010, Flanagan Industries employed 150 people and generated about $18 million in revenue.
Each founding brother had four children, and when the second generation took over in the 1980s, eight owners were working side by side. Several members of a third generation had also joined the business.
“That made for interesting board meetings,” Flanagan said, “but we still were able to grow the business.”
Ultimately, however, the family decided to seek an outside buyer to transition another generational transition — a decision increasingly common as demographic trends reshape family enterprises.
Demographic turning point
Surveys show that about 78% of family companies expect to transition leadership in some form over the next decade, driven largely by aging baby boomer founders.
The trend has also been building since the pandemic, when many owners postponed succession decisions amid economic uncertainty.
“There’s a wave,” said Matthew Kerzner, founder of the North Haven-based New England Center for Family Business Excellence. Kerzner consults businesses on succession planning and other strategic needs and says he sees many companies that were on the brink of making a transition decision before COVID, only to hit the pause button.
Lots of circumstances may prompt an outside sale — or even closure — rather than a generational handoff, Kerzner said.
For some smaller companies — like corner retail or restaurants — succession was never necessarily the expectation.
“The children are being encouraged to use their brain, not their back,” Kerzner says. “They’re pushing their kids to be engineers, accountants, doctors, lawyers.”
In other cases, aging founders may doubt whether the next generation is ready to take over, or worry that forcing succession could fracture family relationships.
“It’s not worth ruining relationships in the family because they might not truly want it, or there’s going to be conflict with the siblings,” Kerzner said.
By the time family businesses transition to a third generation, a situation Kerzner calls the “cousins consortium,” governance may simply become too unwieldy to remain viable.
Hot market
Beyond family dynamics, swings in an industry’s fortunes can also greatly impact the succession planning process.
Bill Alderman, founding partner of M&A advisory firm Alderman and Co., says the middle market aerospace and defense companies he advises are in a period of prosperity he hasn’t seen in his 40-year career.
“It’s changed the succession planning discussion simply because people have more options because they’re more profitable,” he said.
But he cautioned that selling in a hot market isn’t simply about cashing in.
“Is now a great time to sell your business? Well, do you enjoy running your company?” he said. “If you love running your company, it’s a lousy time to sell your business because you’re having fun.”
For those who are at the point of deciding whether to pass an asset on to the next generation, the calculation is much more complex. Counter to the wider statistics on family businesses, Alderman says he is seeing more younger generations coming back to run companies in the aerospace and defense sector.
When that’s the case, he says the best outcomes usually come in families where the children have had successful careers outside the business before they take over.
“When they’ve earned independent citizenship of a large public company, then you invite them back, and they walk in the front door not as the owner’s kid,” he said. “If you just take your kid out of high school and put them in the business and hope it’s going to work, the statistics show it’s unlikely to work.”
Do your homework
Even in favorable markets, however, succession decisions can be constrained by the practical realities of running — and reinventing — a capital-intensive operation. Staying competitive often requires reinvestment levels that families are unwilling or unable to shoulder alone.
That was the case for the Flanagans.
By 2010, as global supply chains intensified competition, the family found it increasingly difficult to invest enough in equipment and infrastructure to stay ahead. Several members of a third generation had taken roles at the company, but the family ultimately chose to seek an outside buyer — a move that marked the start of a multi-year process, Kevin Flanagan said.
“If somebody thinks that they’re just going to put a sign on the front yard and sell it next week, that’s not the case, or at least not to get any type of return on it,” Flanagan said.
The family brought in outside consultants, who advised them to strengthen long-term contracts with jet-engine makers such as Pratt & Whitney and GE and make substantial capital investments.
“We spent literally $10 million to get us ready for the sale,” he said. “We leased a new building. We bought twelve new machine tools. We had to hire three people, knowing what the buyers are going to be looking for, this is all part of the process.”
Many family businesses underestimate preparation, said Michael Carter, founder and managing partner of Carter Morse & Goodrich, a Southport-based investment bank specializing in small-business merger and acquisitions.
“Preparation has become more critical as private equity firms and other strategic buyers aggressively pursue founder-owned companies,” Carter said.
“There’s five emails every day saying we’ll serve up small businesses for you — ‘sell,’” he said. “Private equity is being much more proactive, literally hiring people to be on the phone.”
That level of outreach can make a cold-call offer attractive on the right day — say, when a founder has a health scare or a bill comes due — but Carter said it’s smart for businesses considering an exit to do their own homework.
“Are you prepared to go into the Super Bowl of transactions?” Carter asks. “Most of the time they’re not, and they need preparation.”
That preparation often begins with determining what the company is worth. Many family businesses lack a clear valuation, which Carter says leaves them vulnerable to a lowball offer.
He frequently advises owners who receive an offer to consider running a broader auction process to generate competing bids for comparison.
Preparing for a sale can be a lengthy process in other ways. It requires getting financials in shape, improving the business model, minimizing external risks, and in some cases professionalizing the management structure.
Part of that process is also deciding what the family will look for in a buyer. For many closely held companies with long-standing employee relationships, cultural fit can carry as much weight as price.
In some cases, that leads to hybrid outcomes, with families retaining minority ownership while bringing in private equity capital.
No regrets
Figuring out what role family members will play after an outright sale can also figure into the negotiations. When Flanagan Industries was finally sold to a nearby competitor, EDAC Technologies, most of the second generation owners retired. But Kevin Flanagan stayed on.
He also stayed on as EDAC was then sold, in 2019, to Korean giant Hanwha. He’s now director of business development for the company’s International Engine Business Group.
The business he helped to build remains a standalone unit within the larger conglomerate.
“When we owned the business, I used to lie in bed at night worrying about making payroll, and now I lie in bed at night worrying about making charts and graphs,” he said.
And he has something not every family business achieves: no regrets.
“It’s interesting to think that a company that my father and uncle started in 1946 with probably $50 in the basement of their mother’s house now has its DNA in a $70 billion Korean conglomerate,” he said.