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October 9, 2017

As executives age, future of CT family-owned businesses under threat

Graphic | arka38,
Thomas DeVitto, Chief Marketing Officer, BlumShapiro
Peter Gioia, Vice President and economist, CBIA

Connecticut's family owned businesses face an uncertain future in the years ahead due to a confluence of factors, a reality that could have stark consequences on the state's economy, which has long depended on privately held, multigenerational companies.

The threats include aging owners ready to retire, and an increasing number of them planning to sell their firms through an asset sale rather than pass the company on to the next generation, according to a recent survey by the Connecticut Business & Industry Association and BlumShapiro.

Whether third-party buyers retain the businesses in-state, relocate them out of state, or reinvest in them is anybody's guess, but some analysts believe Connecticut's business climate doesn't favor retention or, if the businesses stay, expansion.

Increasing pressure from other states to relocate and difficulty finding skilled workers are also issues.

With family businesses comprising a significant portion of the state's economy, implications could include fewer companies, fewer jobs and less tax revenue — all problematic for a state bleeding residents and gasping for income, and managing a reputation tarnished by high-profile corporate headquarters exits.

“There's so many different issues that are kind of coming to a head all at once, none of which are really pointing to significant growth for Connecticut in the business community,” said Thomas DeVitto, chief marketing officer at BlumShapiro, the West Hartford-based regional accounting firm.

The recent CBIA/BlumShapiro survey, which was sent to about 6,400 top executives and drew responses from 440 — the largest share of them, 31 percent, family owned — found nearly 60 percent of family businesses plan to sell their firm through an asset sale compared with 9 percent through a family member transfer.

Asked if the data suggest the state's family business sector is threatened, DeVitto said, “I don't know that you can come to any other conclusion.”

Not everyone, however, agrees with that take.

Paul Sessions, director of the Center for Family Business at the University of New Haven, said the numbers are alarming, “but I wouldn't go so far as to say family business is under threat.”

That's not to say there aren't challenges in Connecticut. The one-two punch he often hears are the cost of doing business, followed closely by finding qualified help.

But the roughly 50 businesses that are members of the Center are in there to learn, he said. They tap the center's expert resources and each other, develop relationships, learn from others' mistakes and view themselves as stewards of their businesses.

“In a family business, there's the sense of, 'This is patient capital, we're not in it for quarter-to-quarter returns, we're in it for the long term,' the stewardship part,” he said.

The CBIA survey found that 18 percent of business owners plan to sell in five years, 5 percent plan to sell within a year and 17 percent are unsure. Of those planning to sell, 59 percent plan to sell their firm through an asset sale, 17 percent will do so through a stock sale, 9 percent through a family member transfer and 6 percent through an employee stock ownership plan, the survey found.

Aging business owners ready to retire are selling, “but traditionally, we had seen these businesses being passed on; there was more of a generation element to it and that's not happening,” DeVitto said.

The concern is what third-party buyers do with the company.

Buyers are likely to keep most of those businesses in-state if there is a full workforce because the challenge of finding qualified workers isn't just a Connecticut problem, said Peter Gioia, vice president and economist at CBIA.

“But if you really want the intellectual property and you have an existing business somewhere else, then the idea of buying the business,” and relocating it elsewhere is a real threat, he said.

While the survey doesn't portend a significant threat to family business in Connecticut, it highlights important issues, Gioia said.

The survey also noted 32 percent of businesses have been approached by other states to move and while 92 percent said they have no plans to relocate, 20 percent are considering moving significant production to another state within five years.

Motives to stay

Robin Ann Bienemann, entrepreneur in residence at the UConn Family Business Program at the School of Business, sees many family business owners with Connecticut family and roots who won't leave for that reason. Aging Baby Boomer owners also want to keep the jobs here when they transfer ownership, she said.

“Our role as a land grant university is to help support them in every way, shape and form that we can,” she said, including academically for next-generation owners who may not feel prepared to take over.

Family businesses are looking for resources and help so they can transition to the next owner or the next generation, she said, noting UConn's Family Business Program is starting a series of academic and community and research efforts to support family businesses in the region and connect them with education, each other and resources.

Michael Camerota, founder of Touchstone Advisors, a Connecticut mergers and acquisitions firm, said three trends are affecting family owned businesses nationally and in Connecticut: consolidation, or larger companies buying smaller ones, which makes it harder for smaller family businesses to compete; very large companies are putting small ones out of business; and family businesses whose owners' children became professionals, like doctors and lawyers, or work in larger companies and don't want the challenge or risk of operating the family business.

Those trends aren't exclusive to Connecticut, Camerota said.

“Connecticut's problem, I believe, is that it's not business friendly like other states,” he said.

That means even smaller businesses are less likely to start up in Connecticut and businesses that are here don't want to expand here, Camerota said.

He agreed with the notion that family businesses are threatened in the state.

If family businesses remain, “The question is, are they going to grow and thrive or are they just going to hang on? And to the extent that they're just hanging on, they're not going to produce more jobs. That's a real dilemma.”

Seeking solutions

So what's the answer?

First and foremost, create a better business climate overall, CBIA's Gioia said.

Second, ensure companies can find the workers they need because the more that companies have a fully functioning workforce, the less likely they are to move.

Gioia suggested, too, that instead of focusing on pursuing large out-of-state companies, Connecticut could communicate more with family businesses to find what they need to help them stay, which might produce a better return on investment.

“When you do that, ultimately your job numbers, including your number of taxpayers, will grow,” he said.

Connecticut has been talking about the need for a more business-friendly climate for years, but lawmakers haven't listened and the results are evident in people leaving the state, DeVitto said.

“You've got to create an environment where people want to be entrepreneurs,” he said.

Bienemann hears businesses' complaints about Connecticut, but says ones she works with want to remain in-state and grow.

While large companies make headlines for moving their corporate headquarters, it's harder for the $10 million to $50 million company to pick up and move — and there's the family component, she said.

They might say, “ 'My world is here. My employees are family, literally and figuratively.' It's a bigger decision,” she said.

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