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Family-owned manufacturers lacking succession plans; negative economic impact forecast

March 21, 2019
By: Jonathan Dworin

One of the most important economic development issues facing communities across the country, especially those reliant on family-owned manufacturing firms, may sometimes fly under the radar: succession planning. A robust study from the Great Cities Institute at the University of Illinois-Chicago combines qualitative (literature review, survey, and interviews) and quantitative analyses (economic impact report) to shed light on this issue, with a focus on the Chicago metropolitan area.

The report’s authors find that three-quarters of all family-owned manufacturing companies in the region are operated by someone older than the age of 55, and of these companies, roughly half do not have a succession plan. They estimate that if the family-owned firms that do not have a successor were to close, the economic impact on Chicago and its collar counties would be the loss of nearly 1,500 direct employees and more than $250 million in wages.  The authors also conduct an economic impact analysis, finding that the 363 family-owned manufacturers in the Chicagoland area directly employed 22,059 workers in 2017. These workers were paid roughly $890 million in wages and salaries (excluding benefits), and generated an economic output of more than $3 billion.

Notably, the report includes recommendations on the types of succession planning resources needed to ensure stability in manufacturing-oriented communities, as well as the types of new ownership structures, such as employee ownership or external investment strategies, that may provide firms flexibility in the face of uncertainty.

From an economic development standpoint, succession planning is extremely important, especially in exporting industries like manufacturing. “Having a succession plan may make the difference in whether a firm closes its doors, thus adding to the loss of manufacturing jobs and the missed opportunity to retain family owned firms in the region,” the authors note. Although the specific context of this quote is Chicagoland, one could easily see how this phenomenon would apply in urban and rural areas across the country, especially those with aging populations, a reliance on family-owned manufacturers as base industries, and challenges attracting skilled workers.

For example, Project Equity, a nonprofit focused on converting family-owned businesses to employee ownership, estimates that are more than 130,000 manufacturing firms across the country that are owned by baby boomers, employing approximately 2.7 million workers and recording more than $690 billion in sales. Their analysis also finds that a wide majority of boomer-owned businesses lack a plan for succession.

Intervening with Aging Owners to Save Industrial Jobs, commissioned by the Chicago-based nonprofit Manufacturing Renaissance and its Ownership Conversion Project, is an update to a similar report conducted nearly 30 years ago. In addition to reviewing relevant literature that had been released between the two studies, the report presents the findings of a survey of 363 family-owned manufacturing firms, supplemented by interviews with 89 companies.

The research presents a disconnect. Although succession planning is a concern among the report’s authors, and presumably the economic development community, it does not appear to be of immediate concern to company owners. The vast majority (91 percent) of family-owned businesses surveyed by UIC indicated that they were not interested in being contacted by a succession planning specialist, and were also uninterested in receiving additional information (68.7 percent) or attending a workshop (60 percent) about succession planning.

Due to the widespread nature of this challenge, perhaps the most valuable part of the report is in its review of potential policies and programs. The authors found that despite the prominence of family-owned businesses in local economies, very little has been done domestically to support them. In Europe however, there are numerous policies and programs that provide technical assistance to these types of firms. The authors also identify the importance of leveraging external investment to save jobs, especially in instances where companies may be susceptible to predatory buyouts.  Incorporating employee ownership strategies such as worker cooperatives and/or profit sharing into succession plans are also worthy of additional attention, the authors note. Importantly, the authors recommend that strategies and programs must be accessible through a variety of outlets to reach as many firms as possible.

One recommendation is to involve all relevant stakeholders in managing the transition in ownership of small, privately held, family-owned businesses. Early work in this regard is already in motion in Chicago, where The Ownership Conversion Project is seeking to identify at-risk companies and match them with qualified entrepreneurs, especially those in minority communities. As described in a recent Chicago Tribune article, the Ownership Conversion Project features a wide range of partners in addition to UIC and Manufacturing Renaissance.  World Business Chicago, the regional economic development corporation, and the Cook County Bureau of Economic Development both have a vested interest. On the capital side, the treasurer of Illinois is involved at the state level, while a locally rooted Community Development Financial Institution (CDFI) — LISC (Local Initiatives Support Corp) — will help finance acquisitions. The Chicago Federation of Labor will use its union and civic connections to identify at-risk companies. The Safer Foundation, a nonprofit that helps formerly incarcerated people prepare for the workforce, is also expected to identify and assist interested entrepreneurs.

Another resource that is not mentioned in the report, but has the potential to play a major role in supporting sustainable succession planning among family-owned manufacturers, are the centers affiliated with NIST Manufacturing Extension Partnership (MEP). Working mostly with small- and medium-sized manufacturers across every state in the country, these centers are uniquely positioned to identify at-risk firms, offer technical assistance, and foster relationships with potential partners that can keep these companies locally rooted and competitive.

Ultimately, in Chicago and around the country, the aging of family-owned manufacturers will continue to be a critical challenge facing economic development practitioners and policymakers. Although attention on this issue may fade away — the UIC report notes that several states had programs in place to address succession planning in the early 1990’s, but many of these have been disbanded — the problem itself will likely persist as baby boomers retire in waves. As a result, more research is needed on best practices to support succession planning for family-owned manufacturing firms, and more experimentation is needed to see how these actions play out in practice.

manufacturing, economic impact