Transitioning the family business: First steps

In the past five years, the number of all family businesses making the transition into the second generation has fallen from 30% to 19%, according to the Columbus-based Conway Center for Family Business.

The organization attributes this dip to Millennials’ decreased interest in running the traditional family business and increased interest in using the proceeds of selling the family businesses to start new ventures.

Local professionals in the succession planning field see this trend as well.

“This community is full of family-owned businesses started generations ago,” said Anthony Cotroneo, a Rochester-based partner at Woods Oviatt Gilman LLP. “Many of them succeed to children, but many do not. Over the past few years, we’ve seen less family succession and an increase in selling to third parties.”

Cotroneo, who concentrates his practice in part on mergers and acquisitions, private equity and business succession planning, believes some of this decreased interest in family succession is due to members of the younger generations feeling less connected to the family business or simply having other interests.

Similarly, he finds that often the older generation wants to be fair across the board, which can be challenging when, for example, there is one grandchild interested in taking over the family business and several who are not.

“It really is a personal decision for every family,” Cotroneo said. “One of the questions owners need to ask is, ‘Is it better for the family to sell the business and support the initiatives of several family members with diverse interests or just give it to one member? How do you equitably give it to one?”

Russell D’Alba is founder, president and managing director of Paramax, an investment banking firm with offices in Buffalo and Rochester. Paramax specializes in strategic sell-side advisory services, and D’Alba says he currently sees less enthusiasm for keeping businesses in a family.

“In today’s world individuals are encouraged to strike out on their own,” D’Alba said. “These younger family members saw their senior generations dedicate so much time and effort to the family business and they don’t necessarily want that for themselves.”

Preparing to divest
When it is time for a healthy business to change hands, what are the available options when family succession is not in the cards?

D’Alba identifies four main choices:

• Sale to insiders (ex. a management buyout).
• Sale to an employee stock ownership plan.
• Sale to a financial buyer.
• Sale to a strategic buyer.

When making the decision, D’Alba said, some questions owners should ask themselves are:

• What choice will result in optimized value?
• What are the non-financial considerations or goals of the choice?

“We love helping business owners achieve their goals and many of them have a goal of exiting their business with optimizing the sale price and making sure their employees will be treated well,” said D’Alba, who notes that, generally speaking, when a transaction produces a non-optimized result it is typically due to lack of advanced planning.

When it comes time to divest the company, he recommends following these steps in the exit strategy process:

• Select an ownership succession plan.
• Begin a formal divestiture process.
• Have a timeline in place
• Gather a team of experienced advisors to assist.

Strategic Buyers
A growing ownership succession trend is that of private equity firms acting as strategic buyers — sometimes permitting family members to remain in key management roles, which is the case at Rochester-based Isaac Heating and Air Conditioning, Inc.

The company founded by George T. Isaac in 1945 is one of the largest privately-owned HVAC contractors in the country. In 2021, private equity firm TruArc Partners acquired Isaac Heating and Air Conditioning from the third generation of the Isaac family, who are still involved from installer to leadership roles in the company.

“Five to ten years ago I said I’d never partner with private equity,” said Ray Isaac, the former co-owner and CEO who is now the company’s executive vice president of industry relations. “My perception of private equity was ‘churn and burn,’ but not all private equity partners are the same. We found the perfect partner and they assured us they’d honor and retain our legacy and the legacy of anyone else we bring into the company.”

Isaac now focuses his time on continuing to build the Isaac platform through acquisitions — of which the company has made close to a dozen in the past two years in places including New York, Pennsylvania, Kansas and Nebraska. His personal two rules of acquisition are: Do no harm and only make a deal if it makes sense.

He is confident he made the right succession choice for Isaac Heating and Air Conditioning and encourages all family-owned businesses to be open-minded and examine all options when it comes to succession planning.

“A business is its own entity,” he said. “It is its own living, breathing thing. You should run a business for the business, not the family that owns it. Your last name is a responsibility, not a privilege.”

Isaac also recommends having a strong team of professionals in place when going through any type of succession, including an investment banker who has done deals in your industry space, an attorney who specializes in mergers and acquisitions, and an experienced certified public accountant.

“An owner can’t do this on their own,” Isaac said. “When we sold our own business we submitted over 1,500 pieces of information in the diligence process. You need a support mechanism in place that will help the deal go through.”

Caurie Putnam is a Rochester-area freelance writer.