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Tuesday, 02 September 2014 00:00

Family Matters: Study highlights importance of family owned businesses in local economy

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Executives at the family owned Irwin Seating Co. in Grand Rapids put off developing a succession plan until they knew whether or not any of the next generation of the family would join the company, said Chairman and CEO Win Irwin, at bottom. Three of his five sons — (from left) Graham Irwin, Andrew Irwin and Coke Irwin — first worked outside the company before eventually joining the family business. Executives at the family owned Irwin Seating Co. in Grand Rapids put off developing a succession plan until they knew whether or not any of the next generation of the family would join the company, said Chairman and CEO Win Irwin, at bottom. Three of his five sons — (from left) Graham Irwin, Andrew Irwin and Coke Irwin — first worked outside the company before eventually joining the family business. PHOTO: KATY BATDORFF

Until recently, the 106-year-old Irwin Seating Co. shared a trait with many family owned businesses: It lacked a formal succession plan that detailed the company’s transition to the next generation of leadership.

The reasons were many, said Win Irwin, the chairman and CEO of the Grand Rapids-based manufacturer of seating for stadiums and movie theaters. Chief among them: Irwin didn’t know whether any of his children would be joining the family business that he’s led since 1984 and that was founded by his great-grandfather.

But three of his five sons did end up eventually joining the company, but only after first working outside the family business. Today, Graham serves as vice president of product and business development, Coke works as the central region sales manager, and Andrew joined as the focus factory manager.

“In all three cases, the boys that are in the business have made a purposeful decision to come back to the business,” Irwin told MiBiz.

In several ways, the Irwin Seating story mirrors the findings of the second-annual Family Owned Business Survey conducted by Grand Valley State University’s Family Owned Business Institute (FOBI) and supported by professors at the Western Michigan University Haworth School of Business.  

Of respondents to the survey released today, 81 percent said they lacked a formal succession plan for their companies.

“(Respondents) see succession as important, but they don’t necessarily have a written plan,” said Dr. Joseph Horak, the director of FOBI, which is housed in the Richard and Helen DeVos Center for Entrepreneurship and Innovation at GVSU.
Most companies probably don’t even develop a verbal succession plan, he speculated.

The lack of any kind of succession plan poses a serious challenge for companies that are thrust into leadership transitions because of sudden and often tragic events, said Laurel Ofstein, assistant professor of management at WMU.

“A lot of times, succession happens because of a sudden death,” Ofstein said. “These things that have been unspoken come on the table.”

In addition to succession planning, the survey considered multiple factors involved in family owned businesses, including ownership structure, financial success, their impact on community and profit distribution. The survey was sent to 690 family owned businesses and generated 156 responses.

A bedrock of local economies

Despite some of their quirks, family owned businesses come with many positive attributes for their local communities, according to the FOBI survey. One theory Horak and Ofstein developed hinges on how family businesses tend to act as a “ballast” for the economy.

“In an uptick, (family businesses) are not going to be taking on a lot of debt and trying to really ride the wave up,” Horak said. “They are more risk-averse. We’re not Silicon Valley. However, in a downturn, they are not going to have a note called in on them. … They can survive (a) downturn when their competitors may not.”

WMU’s Ofstein added that “risk-averse” family owned businesses are much less likely to take on any large-scale debt as a means to growth. Rather, they “tend to grow organically.”

While acknowledging that his company doesn’t tend to take the big risks that a public company might take in seeking to increase shareholder value, Irwin avoided the phrase “risk-averse.” Rather, Irwin Seating looks at the long-term viability of any new undertaking and seeks opportunities to be entrepreneurial, he said.

“A family owned business doesn’t run quarter by quarter because for the most part, we don’t have to worry about our stock price,” said Irwin, noting that his company is more focused on the long term.

Additionally, the report noted that family owned businesses tend to be more loyal to their communities.

“When anticipating reduced earnings, the majority of family owned businesses indicated they would most likely reduce distributions to owners and reduce salaries to family members before reducing advertising or research and development expenditures. Layoffs were found to be a last resort,” the report stated.

Responses to the FOBI survey also showed that family owned companies have a broader reach in the community than just within their four walls. Ninety percent of respondents said their companies give philanthropically in the community, with 82 percent saying they give up to $100,000 annually.

Emerging best practices

During his time studying and consulting with family owned business, GVSU’s Horak said he has seen a significant change in how these companies are viewed by the broader public and the business community. Today, family businesses account for 57 percent of the United States gross domestic product (GDP) and 70 percent globally, according to the FOBI study.

They’re also no longer associated with simple mom-and-pop operations, as even publicly traded companies such as Ford Motor Co. and Wal-Mart Inc. remain under family control. But that shifting attention to family owned businesses has been a fairly recent phenomenon, Horak said.

When Horak began consulting for family owned businesses 30 years ago, there was only one book written on the model. Now, a student can get a Ph.D. in the study of family owned business.

“Historically, family businesses were seen as an inferior model until they went professional, grew up and went public,” Horak said.

But recently, academia has finally started to pay attention to family owned businesses because of the model’s overall economic impact, he said. The research coming out of that field has helped identify a handful of best practices that could bring some continuity to the business model. Perhaps most importantly, the research led more family-owned businesses to bring on an outside board of directors to help steer the company. In other cases, it’s helped companies see the value in strategic planning and in having regular family meetings, he said.

By their nature, any family business comes with elements of the family dynamic, sources said. Family traditions, culture and history — and of course, their tensions — can all play into the operations of a family owned business.

And because every family is different, every family owned business will also have its own unique situations, Irwin said. Luckily for Irwin Seating, each of the next-generation leaders spent time outside of the company and can help bring in new perspectives and ideas that should prove beneficial in addressing those situations over the long term, he said.

“In all three instances, they were working at other companies … prior to coming back, which has been terrific for us because each one has a different experience with other organizations,” Irwin said. “That has helped both Irwin Seating Co. and themselves be better at fulfilling their roles. Soon we will make the next generational jump and try to continue to keep it going.”

Broadening the impact

This survey marks FOBI’s second annual study of family owned businesses in West Michigan. The institute has plans to continue conducting the research in an effort to better understand the business model and to educate people about the importance of family owned businesses in the broader economy.

The collaborators also have plans to eventually compile their data and research and begin lobbying for policies that could benefit family owned companies. For instance, Horak said that there could be certain changes made in the tax code that would be advantageous for these types of businesses.

The continuing research and businesses’ participation in the survey could also help create a networking tool of sorts for the companies, Ofstein said. In essence, family business owners aren’t alone in the issues they face and could build off the experience and advice of other companies who’ve faced similar situations, she said.

Additionally, succession planning at family owned businesses will only continue to be in the spotlight as baby boomers close in on retirement age, sources said.

In that sense, Irwin Seating is just one of countless companies getting close to a leadership transition. While Irwin told MiBiz the company does have a transition plan in place for his eventual exit from the company, he declined to share any specifics at this time. In the meantime, it’s business as usual for the company and its CEO.

“What the people in the company want to see is for us to continue with the same values and ethics,” Irwin said. “That’s what the next generation provides and that is a tremendous opportunity in the future.”

 


FAMILY OWNED BUSINESSES, BY THE NUMBERS

A recent survey released by the Family Owned Business Institute at Grand Valley State University in collaboration with the Western Michigan University Haworth School of Business delves into how family owned businesses operate, both internally and in their communities. The partners surveyed 156 companies across West Michigan. Here are some highlights of the results:

  • 79 percent of businesses surveyed are owned by one family.
  • Only 9 percent of businesses are owned by more than one family.
  • 12 percent are owned by more than one family but with unequal ownership distribution.
  • 80 percent of businesses included in the survey were intended to be handed down within the family.
  • 38 percent of businesses were in manufacturing, transportation, communication or utilities industries, while 20 percent of respondents were in wholesale and retail businesses.
  • 66 percent of West Michigan family-owned companies “obtain their consumables from within the state of Michigan.”
  • 60 percent of the companies were headquartered in Kent County; 10 percent were based in Kalamazoo County.
  • 38 percent of respondents had annual revenues between $1 million and $9.9 million; 18 percent had revenues between $10 million and $24.9 million.
  • The respondents represented collective annual revenues of $5.2 billion. (138 of the companies reported revenues.)
  • 30 percent of West Michigan family businesses said that in the face of reduced earnings, they would “not at all” consider layoffs as a means of adding to revenue; 27 percent said layoffs would not likely be an option.
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