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August 17, 2015 Silver Tsunami

Silver Tsunami: CT biz unprepared for succession

PHOTO | Steve Laschever

Up to 85 percent of the small and medium-sized companies in Connecticut don't have solid succession plans, posing a significant threat to the economy as more business owners retire in the next 10 to 15 years.

The worst-case scenario: Business owners looking to cash out won't have any interested local buyers and must rely on out-of-state investors to take over control, which could lead to business closures, relocations and/or significant layoffs.

“In the case of exit planning, it is never a question of 'if', it is a question of 'when.' Sadly, too many owners just don't give it any thought,” said Michael Camerote, mergers and acquisitions adviser for Enfield M&A consultant Touchstone Advisors.

As Baby Boomers head into retirement, the concerns among succession planners and industry officials is that small and medium-sized businesses — particularly family-owned cmpanies — aren't adequately preparing the next generation to take over, leaving them unable to deal adequately with bankers, customers, suppliers and employees. That threatens the short- and long-term viability of the company.

For business owners to successfully transition to the next leader — whether it is a family member, high-ranking employee, employee-ownership group or an outside party — they need to plan for years in advance to ensure a smooth transition and prevent loss of customers, top-notch employees and financial backers, Camerote said.

Because most businesses in Connecticut aren't doing this, owners will have to resort to selling their businesses to a third party, said Thomas DeVitto, chief marketing officer for West Hartford accounting firm BlumShapiro, which conducted a global study on business succession planning.

Even for businesses that are preparing to be sold — by doing things that buyers like such as eliminating debt, raising revenue, diversifying the customer base — they will face a congested market because Connecticut's working population is aging at a fast clip, which means more businesses will be for sale, DeVitto said.

“If they end up being purchased by an out-of-state company, you don't know if they are going to close or relocate the business,” DeVitto said. “There is then a whole host of unknowns that will have a big impact on the Connecticut economy.”

Lack of planning

The BlumShapiro report “Succession Reset: Family Business Succession in the 21st Century” found that 80 percent of family-owned businesses globally haven't adequately prepared for an upcoming transition, which, in the case of businesses owned and operated by one person, could come at any time with an illness, death or retirement.

DeVitto said BlumShapiro has partnered with UConn to study the issue specifically among Connecticut companies and the initial raw data shows 80-85 percent of Nutmeg State businesses are unprepared.

Camerote said between 70-80 percent of the businesses he encounters — not just family-owned firms — haven't even thought about succession planning.

“When companies are transferred to someone who is not prepared to take over, your suppliers are more likely to leave you, your competition will go after your customers, the banks will pull their support and your employees will start to look elsewhere,” Camerote said.

A 2013 survey by the Connecticut Business & Industry Association of 209 family businesses, regardless of size, was slightly more optimistic, showing 50 percent of respondents had a formal succession plan in place.

Still, that leaves half of all businesses without a plan for who is going to take over leadership roles in the next 10-15 years, said CBIA economist Peter Gioia.

“One of the main reasons is everybody likes to think they are invincible, even 60- to 70-year-old executives, who think they will be there forever and always be healthy,” Gioia said. “People live longer, and they are healthier, but stuff still happens.”

How to plan

Transition planning starts with having the designated successor — be it a family member, top-ranking employee or group of employees — understand every facet of the business and build up the necessary relationships with the key players, Camerote said.

In the case of West Hartford's Ryan Marketing, company founder Pat Ryan realized about nine years ago that his daughter Lindsay Ryan Jensen was starting to display a passion for the future that no other would-be successors had.

“This is a young person's business with social media and everything being minute-by-minute,” Pat Ryan, 67, said. “It has totally passed me by, but Lindsay is just unbelievable at making it happen for us.”

Ryan Jensen, 33, and her father started planning for succession by coming up with a formal timeline when he would transition out of his day-to-day role. In about five years, he will move into a non-executive chairman role of the 10-employee agency — still chipping in with his network of contacts — while she takes over the regular leadership role.

“We never felt like we had our backs against the wall, and we were forced into a decision,” said Ryan Jensen, who is the firm's managing partner. “My father was never going to hand over the reins of the company unless I totally understood the vision that he had started.”

This planning and advanced training is the exception to the rule, said Ira Bryck, director of the UMass Amherst Family Business Center, which works with Connecticut companies.

Even when family business owners do have a designated successor in mind and that person wants to take over the role, most firms don't train those people adequately on all areas of the business, Bryck said. Instead of starting people in the proverbial mail room and having them slowly move up the ladder, would-be successors tend to be put in high-ranking positions right away.

“The result is they may be good at their job, but they more often than not are not getting the adequate leadership training,” Bryck said.

Untenable positions

For companies that don't have a successor, the outlook for selling to a third party is never great, as only 20 percent of companies that put themselves up for sale are successful at completing a deal, Bryck said.

This is largely due to concerns over the unknown: If one strong person founded the company and has been leading it for decades, buyers will be wary of what will happen once that person leaves, Bryck said.

“Some companies are not easily sellable because the company is based on the personality of the current owner,” Bryck said. “A lot of companies … end up being sold to companies that are not in the area. That is a big problem.”

For businesses that do have potential successors, the key is introducing that person to the company's lenders, Bryck said. Bankers will determine the credit worthiness of the next generation, which will be the foundation of a successful transition.

“Unfortunately, most business owners aren't that concerned about planning,” Bryck said. “Chasing down the next order is always more important.”

The good news is there has been a real uptick in the number of advisers capable of helping business owners do succession planning, Camerote said. As more business owners reach retirement, it is a growth area in financial planning.

However, even though the overall volume of companies looking for succession planning is increasing, they still represent only about 20 percent of the firms needing to do such planning, Camerote said.

“The people that are getting prepared is a very small portion of those that we deal with,” Camerote said.

Companion story: When succession planning is done well

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