Succession Planning in Family-Owned Businesses

Starting a family-owned business is hard work. But unless you have a succession plan in place, you may be putting your ability to leave the business to the next generation at risk. Studies have found that nearly 70% of family-owned businesses do not survive to the second generation and 90% do not make it to a third generation. The failure to consider succession or a poorly considered or executed plan can cause generational conflict and lead to years of litigation.

Many family-owned business owners find themselves so occupied dealing with immediate needs that they fail to consider the future. However, the time spent considering and putting into place a succession plan is time well spent. Once formulated, it is important to share the succession plan and discuss it openly with all family members. By ensuring that all family members are aware of the succession plan well before the reigns are handed over to the next generation, there will be less of a chance for conflict when the turnover happens. It also increases the chances of a smooth transition with minimum impact on the business.

One of the biggest mistakes families can make is assuming that leaders from the next generation can simply step into the role of CEO and run the business exactly as the previous generation would have. Part of succession planning requires discussing the requirements of a CEO and considering the skills needed to fill the role along with the shifting needs of the business. An even larger part of succession planning in family-owned businesses should focus on managing family expectations and navigating family dynamics. When formulating a succession plan for a family-owned business, you should ask yourself three important questions:

• When should I start considering succession?
• When should I begin the transition process?
• Who should my successor be?

As a business owner, you should start considering succession planning sooner rather than later. It may be difficult to do as it forces one to contemplate his own mortality but as the coronavirus pandemic has demonstrated, an unpredicted event can happen sooner than expected. Experts agree that the best time to start considering an internal succession plan in a family business is when the next-generation of family members are working in the business in management positions.

As with the first question, the answer to when to begin the transition process is sooner than you expect. Transitioning a family-owned business from one leader to the next takes time to do properly. Experience reveals that it takes upwards of a decade to properly install a successor. This time may be spent educating the next generation on the finer points of the business, introducing the successor to key business contracts, and exposing a successor to governance and management challenges that will be all part of a day’s work post-transition. A hasty transfer can doom the business and tear a family apart.

When considering which member of the family should take over, a wise business owner will not simply pick the family member that is the closest facsimile or is the eldest. Instead, the business owner will consider the evolving needs of the business and which family member possesses the skillset (or shows an aptitude for developing these skills) necessary to lead the business (and the family).

By formulating a succession plan early on and starting the transition process well in advance of an expected retirement, you can avoid many disputes and settle those that do arise before they lead to feuding and litigation. Some of the common disputes that we have seen arise in family-owned businesses include:

• Freeze-outs or squeeze-outs of family members;
• Claims of fraud or self-dealing
• Minority shareholders’ rights;
• Disputes concerning management or corporate governance decisions; and
• Disputes over compensation or dividends.

Our attorneys have tremendous experience dealing with disputes involving family-owned businesses. When family members to a closely-held family business dispute cannot resolve their disagreements privately, the attorneys of DiTommaso Lubin, PC can assist with the litigation process. We have been trusted by clients in high-stakes cases to deliver quality service and results for more than three decades. And our record speaks for itself. We have recovered millions of dollars for clients involved in family business disputes.

The Chicago family business dispute attorneys of DiTommaso Lubin, PC have practiced business law in the greater Chicago area and DuPage County, as well as elsewhere in Illinois, Indiana and Wisconsin, for more than thirty years. Contact us today at 630-333-0333, or online today to schedule a consultation with a family business dispute lawyer in Chicago or Elmhurst, Illinois.