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November 28, 2016 01:00 AM

When suddenly the kids are in charge of dad's factory

Claire Bushey
Crain's Chicago Business
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    Photo by Kendall Karmanian
    Sara Bales, left, and Stacey Bales

    Less than a week after their father died during a 2009 business trip, Stacey and Sara Bales met with the banker who had lent money to their family's Downers Grove, Ill., industrial plating company. The banker demanded to know how they planned to liquidate.

    The business, the 20-something sisters learned, had taken out a loan to ride out the recession. Now the bank wanted its money back.

    “We had to fight for the company,” says Stacey, now 34 and president. Sara, 32 and vice president, recalls her sister reeling off sales figures and demanding to know why, given $3.2 million in revenue, they would ever consider selling.

    Since that day, Bales Metal Surface Solutions has more than doubled its annual sales to $7.5 million and added 13 employees to total 48 across two plants, in Illinois and southern Texas. As for that banker—who started asking them to lunch about 18 months into the growth spurt — they fired him. “That was the best phone call we got to make,” Stacey says.

    Fraught transition

    Shifting control from one generation to the next can be a fraught transition, especially in manufacturing, where fewer young workers are entering the industry. Millennials account for just 28.5 percent of the manufacturing workforce, according to the U.S. Department of Labor's Bureau of Labor Statistics, the lowest share of any industry save for public administration, and transportation and utilities. Women, too, are underrepresented, constituting 29.1 percent of manufacturing employees compared to nearly 47 percent of the total workforce.

    With factory owners aging and fewer younger workers stepping up, succession planning has become crucial. Rolling Meadows, Ill.-based lawyer Susan Dawson says that in the last 18 months succession planning for manufacturers has become the bulk of her practice. Yet the emotional transition of handing off a business can be just as complicated.

    Another option: selling the company

    Lori Hilson Cioromski's father set up his exit strategy when he hired her in 1985. A marketing major at Loyola University Chicago at the time, she had no plans to enter the family business, TH Hilson Co., until he suggested it. The midsize industrial distributor in Wheaton, Ill. supplies chemicals to manufacturers that make adhesives, shampoos, hand creams and paint, like Sherwin-Williams. It has $57 million in sales.

    As CEO, Cioromski, 53, formalized TH Hilson's succession plan. Key executives receive deferred compensation, and a life insurance policy buys out any shareholder who dies. Then, in March, Cioromski sold the company to Ravago, a plastics materials company in Arendonk, Belgium. The sale, she says, had nothing to do with solving the succession puzzle because she had outlined a plan already.

    As her experience illustrates, there's a second option for handing off a company: selling it. Since the start of 2015, private-equity firms have been scouring the economy for returns in a low interest rate environment, snapping up small manufacturers in the process. Yet there's also a sprinkling of wishful thinking among sellers, born from years of attending to day-to-day operations: “[Owners] don't always think about selling their business. They just think, when it's time, someone will buy them,” Dawson says.

    That can be a problem when the company is too small to pay out the older generation and retain sufficient profit to attract a buyer, says John Ocwieja, a business financial planner at Chicago's Hoopis Group. There's the option of selling to an employee, but that usually requires seller financing. If the business goes south, the owner may need to come out of retirement to rescue his or her investment.

    Moreover, even if a sale to a deep-pocketed buyer does yield a generous lump sum, the newly retired owner has to make it last a lifetime, which could mean a lifestyle change for someone accustomed to bringing home, let's say, $500,000 a year. “That is a big wakeup call to people,” Ocwieja says.

    Changes at Bales

    For the Bales sisters, who had never planned to follow their father, Steve, into the business he founded in 1978 with his brother, the fight to keep his company alive has paid off. Bales makes molds for all sectors and product types, from plastic cutlery and frozen pizzas to car seats, fishing lures, firearms and the press that stamps an “M” on a McGriddle. It also has expanded into diamond polishing. The company rebranded, revamped the website and upped its online marketing; instead of relying on an outside sales force to chase leads, Bales draws in customers.

    They haven't thought much about their own succession plan, though. Right now, that amounts to a buy-sell agreement between the sisters — and an understanding that they always fly on separate planes.

    See a full version of this story at ChicagoBusiness.com, the website for Plastics News sister newspaper Crain's Chicago Business.

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