2012 Survey of Family Businesses

CBIA is pleased to collaborate with the University of New Haven’s Center for Family Business in producing our fifth annual survey of family businesses, aimed at better understanding and responding to the needs of Connecticut’s family-owned and family-managed enterprises. Survey findings guide us in developing programs, services, and public policies that help Connecticut’s family businesses succeed.

Family businesses are vital to their communities and to the economy. They comprise 80%−90% of all businesses in North America, contributing 64% of the nation’s gross domestic product (GDP), employing 62% of the U.S. workforce, and outperforming nonfamily firms on measures such as operating return on assets.

CBIA has launched a new initiative designed to support and grow the state’s thousands of family businesses. Sponsored by CohnReznick, First Niagara Bank, and Reid and Riege PC, the program includes informational e-newsletters, webinars, and forums where business leaders can discuss solutions to issues ranging from family governance to succession planning.

To ensure that family businesses throughout the state can participate, meetings are held in Hartford, Fairfield, and New London counties. Planned discussion topics include:

• Financial management: building and preserving wealth
• Governance
• Leadership
• Banking strategies
• Succession planning
• Legislative issues affecting family businesses
• Compensation strategies
• Evaluating company and employee performance

Who Are Connecticut’s Family Businesses?

Family-owned companies represent a cross-section of the state’s business community. Participants in this year’s survey include manufacturers; service providers; utilities; retailers; construction companies; finance, insurance, and real estate firms; and businesses engaged in communications, transportation, and wholesale trade.

Most are first-generation (45%) or second-generation (32%) family companies, though some have been in business well over a century.

Among 60% of respondents, at least two generations of family members are currently employed by the firm. Most active in the business are parents, children, and spouses. Siblings also are part of the mix (in 33% of the businesses surveyed), as are cousins, aunts, or uncles (17%), and in-laws (9%).

Key Findings

• While 47% of family businesses surveyed identify Connecticut sales as their greatest source of growth, 42% trace the majority of their revenue to other U.S. states, and 11% to international sales. This represents a significant shift since 2009, when 59% said Connecticut was their largest customer base and only 2% reported international sales as their greatest source of revenue.
• Most family businesses (62%) project an increase in sales/revenue for 2013.
• About half (48%) expect their workforce to remain stable, and another 43% expect to add jobs.
• A sluggish economy is the single greatest challenge to family business growth today.
• Healthcare costs and new healthcare reform provisions also are a major constraint.
• From strategic plans to rules and conditions of employment, family businesses are largely lacking in clear, consistent, documented policies—though many of them agree that formalizing plans and procedures is necessary for business continuity.

Outlook for 2013: Better Times Ahead

Most family businesses expect conditions to improve in 2013, after a slow 2012.

Half of all respondents projected revenue increases for 2012, and 62% expect that to be the case in 2013. While two out of every 10 family businesses (21%) anticipate a decrease in revenue in 2012, only about one in eight (12%) expect a revenue decrease next year.

Employment also looks brighter in 2013: 43% of family businesses plan on hiring new employees in 2013 (compared to 30% in 2012), and 48% expect no change in their company size in 2013.

Only 9% expect a decrease in their workforce in 2013, compared with 13% in 2012.

In 2013, Connecticut family businesses plan to make significant investments—greater than in a typical year—in equipment (54% of respondents), IT systems (39%), facilities (39%), workforce (37%), and training (27%).

Only 31% of respondents, however, have a formal strategic plan. Of those who do, the majority have plans that look out three to five years, and most have been updated in the last three years.

Top Concerns: Slow Economy, Rising Costs

For many family businesses this year, the single greatest impediment to growth is a slow economy, identified by 29% of respondents.

The cost of doing business also is a significant factor. Respondents cited healthcare costs specifically (17%) and overall business costs (16%) as this year’s single greatest challenge to growth. Together with the costs associated with labor, taxes, and the regulatory burden, business costs are a major concern for 45% of respondents—far exceeding concerns about competition (6%).

Many respondents were unable to pinpoint a single obstacle to their growth, instead identifying multiple challenges—for example, “labor/healthcare” or “regulatory cost and taxes.” Several indicated “all of the above.”

Compliance with changing labor laws and mandates also proves problematic for family businesses. Nearly one-third of businesses (29%) identified it as their most significant HR hurdle.

A number of respondents indicated in open-ended responses that their greatest HR challenge is healthcare, both in terms of cost and the confusion surrounding federal healthcare reform, including new provisions (and penalties) that will impact employers in the coming months.

Workforce

Thirty-eight percent of businesses surveyed said a skills shortage is their biggest human resources challenge.

Combined with 10% of respondents citing workforce shortages as their greatest HR challenge, a picture emerges of family businesses wanting to grow but lacking the human capital to make it happen.

Nearly two-thirds of respondents provide their employees with professional development and training opportunities, which may include sales, technical, lean, or IT training; graduate courses; and tuition reimbursement.

Areas where the greatest skills gaps exist include computer/IT knowledge, engineering or mechanical skills, and management/leadership.

Family (and Nonfamily) Matters

The average tenure for employees at Connecticut’s family businesses is 20.2 years for family members and 12.7 years for non-family members—both substantially higher than the national average for employees overall (4.6 years as of January 2012, according to the Bureau of Labor Statistics).

Though most businesses report that family and non-family employees are treated equally, a considerable number acknowledge that the rules are, in fact, different for family and non-family employees when it comes to:

• bonuses (27%)
• compensation (25%)
• termination (22%)
• hiring (18%)
• performance evaluations (17%)
• promotions (16%)

Roughly half of all family businesses surveyed (49%) admit they do not use market reports, labor statistics, the Web, or any other outside sources to determine appropriate salaries for their employees.

Likewise, 49% lack written job descriptions outlining responsibilities, minimum qualifications, and a reporting structure for every position in their business. More than two-thirds (69%) do not have salary grades for each job function/title, and 48% do not conduct formal performance reviews for all employees.

These results paint a management backdrop that could fuel discord between and among family and nonfamily members, leading to potential legal exposure for family businesses—and they shed light on areas where better education and clearly defined, documented human resources policies are needed.

Legacy, Transition, and Succession

More than three-quarters of family business owners (77%) consider it important or very important that they leave a positive, lasting legacy, and 53% intend to pass their business on to the next generation.

When asked to identify the most important step needed to successfully pass along their business, respondents named mentoring and training, choosing the right leadership, generating interest/motivating the next generation to take over, and developing a succession plan.

More than half of the businesses surveyed (51%) have not developed such a plan.

Of those who anticipate selling their business instead of passing it on, 60% plan to sell to someone outside the company.

About 28% have buy-sell agreements in place.

Advice, Guidance, and Best Practices

Among their group of professional consultants, family businesses largely consider accountants and attorneys to be their most trusted advisors and confidants.

Experienced, successful family business executives often rely on family councils, advisory boards, or single- or multiple-family offices (SFO, MFO) to guide decision-making, investment, and best practices, but adoption of these tools remains spotty among survey respondents.

Only 13% of respondents have an active or very active advisory board, 18% have a family council, and 11% have a family office; only 20% of respondents belong to an organization that specifically supports and meets the needs of family businesses.

Work-Life Balance, Managing Conflict

The same characteristics and relationships that strengthen family businesses often double as vulnerabilities.

While 76% of respondents believe they effectively balance the needs of the company with the needs of their family, 24% admit that balancing interpersonal, financial, and operational obligations is a struggle.

Family conflict also is a fact of life in family businesses. In companies where one or more full-time family member employees left the business in the last 10 years, 19% of respondents reported that those employees were forced out.

Conclusion

Family businesses are a keystone of our economy, generating a significant share of Connecticut’s wealth and economic output, providing good jobs for people throughout the state, and contributing greatly to local communities and the state’s quality of life.

Some of the oldest businesses in Connecticut, in fact, are family owned and operated. Lyman Orchards in Middlefield, for example, started in 1741; Bevin Brothers Manufacturing in East Hampton, in 1832; and Hubbard-Hall in Waterbury, in 1849.

Many family businesses, such as Barnes Group Inc. in Bristol, the Siemon Company in Watertown, Laticrete International in Bethany, Santa Energy in Bridgeport, and Cooper-Atkins Corp. in Middlefield, have outgrown their small beginnings and now collectively employ thousands of Connecticut residents.

Still others have not only grown but have become household names—for example, Munson’s Chocolates in Bolton and Bigelow Tea in Fairfield.

We hope the information collected in this survey helps family enterprises small and large minimize their risks, capitalize on their strengths, and position themselves for continued growth.

We also hope it guides policymakers in shaping a regulatory and economic climate responsive to the needs of Connecticut’s family businesses.

In 2013, CBIA will continue to maintain a powerful presence at the State Capitol, urging lawmakers to adopt policies that allow family businesses to grow, prosper, and create jobs in Connecticut now and far into the future.