Family-Owned Business Succession—or Dissolution?

They make great stories when they’re successful, but maintaining continuity of family-owned businesses from generation to generation presents many challenges.  A family-owned business can be an excellent means of transferring and preserving generational wealth when run smoothly. Learning to work together as a family can benefit everyone and the business.

But many families just don’t get along, and those internal familial problems have a way of working themselves into the operation of the business.  When that happens, family members inevitably look to their attorneys for guidance, and at that point litigation may be the only option.

More than three-quarters (77%) of small businesses draw upon significant family involvement, according to the Cornell University Smith Family Business Initiative. Family Enterprise USA has tallied 5.5 million across the country, which contribute more than half (57%) of the U.S. GDP, employ 63% of workers and create more than three-quarters (78%) of all new jobs. 

But most don’t sustain themselves, according to Business Week, which has reported that just 40% reach the second generation, 13% get to a third and 3% are passed down to a fourth generation or beyond. The average life span? Just under a quarter-century (24 years), according to familybusinesscenter.com.

Why is that? Cornell’s research identifies lack of succession planning as one cause. Nearly one-third (30.5%) of owners never plan to retire, while about the same number (29.2%) say retirement is more than a decade away; to make matters more tenuous, nearly one-third (31.4%) have no estate planning in place other than a will. (For a deeper dive into the research, please click here.)

HOW TO AVOID PROBLEMS:

The best way to avoid problems is to discuss management issues when everyone is amenable.  

• Adopt bylaws that deal with management issues such as: 
  • the election of officers 
  • the responsibilities of officers 
  • appointment of an independent board of directors to oversee the actions of the officers
• Enter into Shareholder Agreements that deal with issues such as:
  • Management of the business
  • Employment of family members
  • Distribution of profits 
  • Buyout provisions in the event of bankruptcies, disability, or death of a shareholder
  • Restrictions on the transfer of shares
  • Mandatory mediation in the event of a deadlock
  • Mandatory arbitration in lieu of litigation