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Published in Manufacturing
An aging workforce has further complicated succession planning at family-owned manufacturing companies, experts say. An aging workforce has further complicated succession planning at family-owned manufacturing companies, experts say.

Aging workforce complicates succession planning for manufacturers

BY Sunday, September 12, 2021 05:00pm

Family-owned manufacturing companies are facing similar challenges as the industry at large as succession planning is complicated by an aging workforce.

“This is a different generation of people — manufacturing is not as sexy as it might have been for a Baby Boomer father,” said Laurie Harbour, president and CEO of Southfield-based Harbour Results Inc., a consultant for small and mid-size manufacturers in Michigan and across the country.

“(The new generation) might choose to go a different path,” Harbour added. “We pushed all those generations of kids — those millennials — into school. We pushed them to college.”

In her work advising manufacturers on finding operational and financial success, Harbour said the family-owned dynamic is especially prevalent in West Michigan, based in part on the region’s Dutch heritage. 

For that reason, Harbour is finding a growing number of local manufacturers grappling with succession planning when they don’t have a family member to take over.

Head toward the exits

According to a Harbour Results poll of 400 manufacturing business owners from the second quarter of this year, 70 percent of respondents were over the age of 59 while the average age of manufacturing business owners was roughly 62.

The study also showed the prevalence of family-owned operations in the industry. Of manufacturing businesses that grossed up to $7.5 million in revenue, 21 percent were family-owned. Of businesses that generated $7.5 million to $15 million in revenue, 30 percent were family-owned.

Not only are manufacturing business owners aging, but they’ve also contended with the uncertainties of the COVID-19 pandemic over the past 18 months.

“Now they’re looking at the hard times of COVID and thinking, ‘Maybe we should sell now,’” Harbour said. “Plus, there is a lot of money in the market. The M&A market is good. It’s kind of like selling a home in Michigan right now.”

However, exiting their family-owned manufacturing shops becomes a bit of a juggling act. Most family-owned outfits tend to place a strong emphasis on finding the right buyer — someone who will retain the family legacy and also do right by existing employees. At the same time, these owners want a fair price for the businesses that they’ve worked hard to build.

“It’s usually a really big deal,” Harbour said of finding a buyer to continue the legacy. “The owner has employed 50 to 100 people, and they want to keep them working and make sure everything is fine. They can’t always find someone that wants to do that. Depending on the kind of business, it can be difficult.”

Finding a fit

Max Friar, managing partner at Grand Rapids-based M&A firm Calder Capital LLC, has noticed a similar dynamic when engaging with family-owned businesses. He recently interviewed a 63-year-old owner of a family-owned manufacturing firm that was looking to sell.

“This is something that is definitely not an epiphany, but a lot of owners of manufacturing companies started them 20 to 40 years ago, or more,” Friar said. “Their kids are not candidates for a variety of reasons, so they’re increasingly looking to third parties to try to continue that legacy.”

While Friar acknowledged that fewer owners of family operations are finding successors within their own family trees, the pace of M&A in manufacturing has actually cooled down significantly.

During 2017-2019, for example, manufacturing businesses accounted for around 40 to 50 percent of M&A activity. So far in 2021, manufacturing M&A activity has declined by 9 percent, according to a recent BizBuySell Insight Report.

However, Friar expects that to spike back up in the coming years.

“You have plenty of manufacturers that are playing damage control, which has compounded with supply issues — labor, parts and materials,” he said. “There are a lot of owners of manufacturing companies that are putting out too many fires to make selling a priority. I think it’s creating a pent-up supply of sellers that is growing.”

Friar added that legacy and deal structure are easily the top two concerns of family-owned manufacturing companies when they’re looking to sell. In some cases, owners prefer to meet buyers in person to simply feel out whether the buyer would be a fit, Friar said.

“It’s rare that we find an owner that says, ‘Screw the rest, bring me the highest offer,’ especially in West Michigan,” Friar added. “They acknowledge that the employees who have been there 20, 30 or 40 years got them where they are and they want to make sure that they’re not getting calls or hiding their face in the grocery store because a proverbial private equity firm came in and shut it down in six months and exported it to Mexico.”

Additional resources

In August, the Michigan Manufacturers Association (MMA) announced a new partnership with Grand Rapids-based Prometis Partners Inc., a privately owned company that provides family business succession planning services. Through the partnership, MMA members can get a discounted rate for family business succession planning and other services.

Vincent Mastrovito, founder and president of Prometis Partners, also serves as president of the new Exit Planning Institute’s West Michigan chapter. 

Matrovito previously told MiBiz that one of the primary drivers for forming the chapter in the summer of 2019 was West Michigan’s large percentage of privately held and family-owned businesses that have owners approaching retirement age but with no one to take over.

“I think we’re just seeing what’s on the horizon and talking to our members. … We see a really big need there,” Delaney McKinley, MMA’s vice president of membership, marketing and events, said of the new partnership. “We’re seeing a dramatic uptick in M&A activity and we think the time is right to really support manufacturers and those that are on the near horizon to make sure they’re doing the right things.”

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