There are 5.5 million family-owned businesses in the U.S., which make up a whopping 57% of GDP. In other words, they are the lifeblood of our economy. Set down your coffee and think about that. From the neighborhood shop where you purchased your coffee beans to the dairy conglomerate that produced your creamer to the local potter that made your mug, you may have a clutch of family business products right in front of you, powering your day.
Many of these businesses are owned by individuals approaching retirement. Yet surprisingly few have planned for their individual (or family) exit from the business. In fact, recent studies estimate that more than 80% of privately-held businesses have no written transition plan, and nearly half of them have not planned at all. As attorneys and family business consultants, we know that advising family enterprises involves matters of the head and the heart — that is, economics, law and psychology. Like heads of any type of business, family business leaders should approach high-stakes decisions rationally, but that is often easier said than done when family, pride, legacy, finances and sense of self are involved.
We always approach our family enterprise engagements with both optimism and realism. As outlined below, there are substantial benefits of effective planning and significant risks of failing to plan. Of course, even with the best planning, disputes and challenges may still arise. In addition to describing what planning for a transition entails, we’ll explain how parties at odds can turn toward the off-ramp rather than accelerate the dispute (perhaps to formal litigation). We’ll also discuss how family-owned businesses can protect themselves and their principals.
Transition Planning
What is transition planning? Transition or exit planning is the process of developing a strategy to relinquish control of a business. Transitions can take many forms, including selling to a strategic buyer or a private equity firm, transitioning gradually to key next generation employees, forming an employee stock ownership plan (ESOP) to transfer ownership to all of the business’ employees or liquidating. When it comes to family-owned businesses, this process often involves transitioning ownership and control to the next generation. And when it comes to families, there are unique estate, tax and interpersonal dynamics to consider.
What does transition planning entail? It starts with assembling a team of advisors to advise you on core decisions about your and the business’ future. Who will own the business (who will not)? Who will run it? When will the new owners buy in, for how much, in what form and over what time horizon? How long will you want to stick around?
Why is transition planning important? Early planning is critical to maximizing enterprise value, minimizing taxes, smoothly transitioning management, maintaining confidence in the company’s viability (both internally and externally) and amicably addressing any deep-seated issues among principals.
Planning is the economically rational thing to do, so why are owners reluctant to do it? There are many reasons. Some principals have unrealistic expectations about their longevity; some underestimate the importance of planning; some do not wish to commit the necessary resources; and some prefer to kick the can rather than let those deep-seated issues bubble up to the surface. While it is never too late to plan, owners who plan early are more likely to enjoy the benefits and avoid the risks involved with transitioning.
A Case Example
The fictional story of a hypothetical company — the Faber Corporation — exemplifies common planning issues we encounter in our practices. Faber was established in 1960 and is the engine of the Faber family, both financially and in terms of maintaining interpersonal connections. As of 2025, the founder of the business, known as G1 (first generation), is in his 80s and serves as board chair. Two members of G2, who are in their early 60s, are the majority shareholders and also hold senior operating roles. There are six grandchildren, comprising G3.
G1 and G2 are passionate about the business and eager for it to remain family-owned and -operated. G3 is interested in owning the company, but none of them knows much about the company or about what it means to be an owner.
The family wants to plan wisely for the future. But must they start planning now? Everyone is in good health; G1 enjoys the prestige and flexibility of being the board chair; G2 is happy to be working the business day-to-day and G3 is young and interested in other pursuits. And while the family members are close, there has been conflict among G2 relating to the business, which has spilled into their family life.
The business is at a fork in the road. Path 1 is to invest now in planning for the future — i.e., begin to discuss and eventually make — difficult decisions about ownership and control. That requires significant resources, including out-of-pocket costs for a team of accountants, consultants and attorneys, as well as emotional energy and opportunity costs because planning takes time away from day-to-day operations. Path 2 is to focus on the operational issues of today — i.e., continue generating significant returns now. Path 2 requires the Faber family to wait to address the future of the company, well… in the future.
What do these paths look like?
Path 1: Proactive Planning and Preparing for Potential Disputes
The Faber family, long before any anticipated transition, wants help strategizing about ownership and leadership succession. When we advise families like this, we start with the following key principles:
Identify Areas of Alignment and Misalignment
- Define the company’s and family’s mission, vision and values.
- Consider what family owners truly want (e.g., inorganic or organic growth, sale, dividends, sustainability). Sometimes these desires are at odds, and that may cause friction.
- Be real about family members’ respective levels of interest in planning and the future of the business.
- Where there are differences of opinion, take care to consider interests, not positions. Listen to understand, not to debate.
Lean Into Difficult Conversations
- Get curious about differences. Facilitated, consultant-led conversations provide a forum for family to talk about challenges, versus having differences sneak up at inopportune times.
- Use behavioral science tools to better understand patterns and ways of working, e.g., genograms, psychometric assessments or 360-degree feedback processes, where appropriate.
- Focus on what might be gained through change rather than lost. Future planning — involving the retirement of G1, shuffling of roles and ascent of G2 and G3 — is exciting and anxiety-provoking. Try to look at change through a positive frame and to recognize that the future is only possible through change.
Help NextGens Learn by Doing and Encourage the Leading Generation to Consider Their Future
- Establish a company curriculum for G3. Founders often learn through hard knocks and it can seem anathema to set up a curriculum for the NextGens. However, G3 likely has not lived and breathed the business like G1 and G2 have, and it is important to create opportunities for learning and exposure (e.g., rotational programs, family enterprise education, peer groups).
- Foster collaboration on meaningful work. It is important that the next generation learn how to work together productively on real challenges of the family or business, versus invented “busywork.”
- Provide support and coaching for leading generation/exiting generation members.
Provide Necessary Structures to Survive and Thrive
- Set up family governance structures that provide clarity, e.g., a family employment policy, family council to represent the family’s interests as shareholders, policies about involvement of spouses or significant others, and regular family meetings among all the owners and future owners.
- Review and, if necessary, refresh or formalize corporate governance, e.g., an active advisory board that provides good advice, and a high-functioning fiduciary board that includes independent advisors (i.e., more than just friends and family) and has proper documentation (see below for more). Looking critically at existing structures is a key part of the planning process.
Over time, we make substantial progress with family-owned businesses towards understanding each other’s wants, hopes and needs; preemptively addressing challenging topics versus reacting to them after they appear; upskilling the next generation before time slips away; and setting up essential structures for the family business to thrive. This progress requires a commitment to planning that helps persist through the inevitable difficulties in talking about the future, including the uncomfortable events it implies, like retirement, passing on, ascent of the “kids” and involvement of “outsiders.”
Planning Cannot Resolve Every Issue, but Even Thorny Situations Can Be Managed With Diligence and Engagement
While companies can amicably address transition issues through planning, closely-held business owners must also realize that not all issues can be resolved definitively. The mere planning for such a possibility often raises contentious issues and may hinder efforts to remain amicable. Nonetheless, it is critical to minimize the risk of protracted future disputes.
There are other ways in which business owners can prepare for future disputes. What an owner does may depend on whether they are a fiduciary to the entity or just a minority or passive investor.
The unique obligations of fiduciaries. Fiduciaries like company officers and directors should ensure the ongoing practice of good corporate governance. For example, it is important to hold regular board meetings, take minutes and notes of the meetings, and regularly communicate with stakeholders. A prudent fiduciary should consider engaging appropriate professional advisors (accountants, lawyers, etc.). Be careful not to waive the attorney-client privilege by revealing confidential advice to outsiders or low-level employees. All significant decisions and transactions should be documented.
Protect the company’s sensitive information, including financial information, trade secrets and customer information. Sometimes confidential information can be a company’s most valuable asset. Review any restrictive covenants agreed to by employees to ensure that the company’s intellectual property and confidential information are safe. This is a developing area of the law, so consult appropriate professionals when negotiating or reviewing a restrictive covenant.
A fiduciary should, as soon as possible, inventory corporate governance documents. Sometimes even successful companies do not have an operating agreement (or have only barebones/outdated agreements), have not held formal board meetings or taken minutes, and do not have stock certificates evidencing ownership. What happened in board meetings or even who owns the company are litigated frequently in the absence of proper documentation.
Issues specific to minority owners. Minority/passive owners must understand their rights, which derive from statutory law, common law and contract. The interest of the majority shareholders and company management might not always be aligned with those of the minority.
To stay informed, minority owners should obtain whatever corporate governance documents are available, such as shareholder or operating agreements, bylaws and periodic financial statements. Request these documents informally first if they are not provided as a matter of course. If that doesn’t work, there are formal procedures for making a books and records demand. At all times, build a written record of your requests. If a dispute arises, the correspondence will come in handy.
Early planning can avoid many common disputes that later arise in family companies. To be sure, even the best planners cannot anticipate every potential problem. But diligence and early engagement can help business owners better prepare for and safeguard against those disputes that might escape the planning process.
Path 2: Kicking the Can
What of Path 2? In our hypothetical story, rather than planning ahead, Faber focused only on near-term business objectives. Though it continued to thrive for years, the lack of planning did eventually catch up to it.
Without proper planning and the help of independent, objective advisors, the following scenario often arises: G1 departs (by death, illness, retirement, etc.) and the management and personal disputes among the members of G2 come out into the open. Because each G2 member owns a significant percentage (but not the majority) of the business — which, without planning, may lack an up-to-date operating or buy-sell agreement — the disputes negatively impact the business’ profitability, employee and customer confidence, as well as the company’s long-term viability.
Those problems often concern everyday issues like compensation and business expenses, but also longer-term issues like future strategy. Allegations of mismanagement, misappropriation, and self-dealing can follow these types of disagreements. So can litigation, which, because of the frequent paucity of corporate documents and the scope and scale of allegations in these matters, is often time-consuming, expensive and detrimental the company and its employees. Every litigation eventually comes to an end, but litigants in these types of disputes — even the ones that prevail — are often unhappy with the outcome.
To be sure, attorneys often help resolve bad situations that have been made worse due to poor planning. But consider the costs: in our hypothetical, G2’s litigation drains company resources, creates uncertainty and results in an unclear “winner.” G3 watches all of this from the sidelines and, not surprisingly, sours on the family enterprise. Restoring the company to its former profitability seems out of reach, and G3’s confidence in working with their family members is diminished. Many of these problems could have been blunted or avoided altogether with planning.
There’s No Time Like the Present
We have touched on the importance and prevalence of family businesses, which make up a substantial part of the U.S. economy. We also described some “what if” scenarios involving successful, multigenerational family businesses that may not differ all that much from yours. Engaging in advanced planning and structuring dispute resolution methods can mitigate future challenges, some of which may be existential. We encourage you to plan wisely by buttoning up your agreements, fostering more effective communication and discussing your family’s aspirations now.