Study: Strength remains in the family-owned metal fabrication businesses

Strong families make for strong companies. Industrial Machine and Engineering Co. is one such company. Dan Conner founded the metal fabricating business in 1982 in Monett, Mo. Today the business has grown to include (from left) son-in-law Eric Merriman, daughter Rebecca Merriman, wife Charlotte Conner, Dan, and son Mark Conner. All are involved in the family business. Image provided by IMEC

Speaking with Don Gahagan, president of McDougall Processing, Nashville, Tenn., about the transition his company has made from focusing heavily on industrial and architectural work to more precision sheet metal work, he mentioned how important this new path was for the family-owned company. He referenced how the new business direction would give the third generation of the McDougall family “a fighting chance for the future.”

There is a very definitive belief in the metal fabricating industry that a select few family-owned companies make it to the third generation of company ownership.

What if I told you that’s not necessarily the case?

In the story “Do Most Family Businesses Really Fail by the Third Generation?” in the July 2021 Harvard Business Review, authors Josh Baron and Rob Lachenauer, business consultants with expertise in family-owned companies, took a critical look at the belief that family-owned firms are excluded from the possibility of long-term success. In particular, they called into question the 1980s study of Illinois manufacturing companies that is likely the source of this idea.

That study looked to see just how long family companies lasted. To establish a framework for the study, the researchers took their target group of companies and placed them in respective generational blocs (with each bloc representing 30 years or about one generation). When doing this, only 30% of the businesses made it through the second generation of ownership. (The wording in that last sentence is key. That 30% represented companies that existed for 60 years!) Only 13% reached that third generation of ownership.

The authors of the article also noted the study of Illinois companies didn’t offer other types of companies as a reference point. Baron and Lachenauer pointed out that public companies often are short-lived; one study of 25,000 publicly traded companies from 1950 to 2009 showed a 15-year average lifespan, and Boston Consulting Group research for 2015 suggested almost a third of public companies would falter over the next five years. Whether family owned or otherwise, running a business is hard work.

The duo made the case that family businesses actually might have advantages over other types of companies:

• They plan for the long term. Families think in terms of generations, not quarterly performance, the authors wrote. The family members can feel comfortable knowing that they are in firm control and make investments that don’t have to be paid right away. They don’t get distracted by the latest fads. They know that serving their customers to the best of their abilities is the recipe for long-term success.
• In most instances, they don’t have a lot of debt. You hear this a lot from metal fabricating company owners. Being debt-free keeps the bank out of your affairs, especially when the economy is slow. Family owners can stay the course and make sacrifices that publicly held companies would never entertain, which typically puts these companies in a good position to pounce on new opportunities coming out of a recession.
• Good family ownership translates into a good family culture. When owners of a company tell me that their employees are "like family,” I believe them. These owners feel responsible for the livelihoods of not only their blood relatives, but also their employees because so many families are dependent on those paychecks. It can be a huge burden to carry when business is slow, but the benefits can’t be overstated. If employees feel that sense of gratitude, they will show it with outstanding performances and a willingness to go the extra mile.

So the next time you hear about a family-owned metal fabricating company celebrating a significant anniversary, remember that it’s likely around because of the family ties, not in spite of them.