As many as 60% of U.S. business owners don’t have a succession plan.1 The vast majority of them are over 65. In Canada, it’s much the same. As many as 80% of private businesses are family owned, the majority lacking a succession plan.2

It’s not because the founders don’t want one.

Today’s business owners may have hoped the next generation would take over, but their Gen X and Millennial kids have other aspirations that don’t align with continuing the family’s legacy in manufacturing. They may have launched their own start-ups, or are in high-tech jobs they enjoy.

As the generations progress, those far from the founders will often have less of an appreciation for the “sweat equity” their parents/grandparents/great-grandparents put in to build the family business. While uninterested in the day-to-day, the younger generation may likely still maintain ownership in the company, with or without voting power.

That’s when the problems begin.

When parents no longer are able to participate in the daily operations, or pass away without a pre-communicated succession plan, there will be a lot of opinions as to the correct path for the company and no respected patriarch at the top to lead them through the transition.

The ownership may have been divided unevenly – maybe a cousin took over as CEO and is perceived to have too much power. Maybe one second-gen stakeholder wants to keep the business in the family, and another wants to sell it to fund their next business venture or that dream trip around the world. Shareholders with diverging viewpoints can quickly turn a small personal argument into a corporate family feud.

4 key consideration to family owned business succession planning

When it comes to family owned business succession planning, you’ve got to do it right the first time. Making sure you’ve got the right coverage for it is just as important as how you go about doing it. Consider the following 4-steps to succession planning:

  1. Consider all D&O risks when planning a succession and how your policy may - or may not - respond. Directors and Officers (D&O) coverage is designed to protect management and the board for the decisions they make on behalf of the company. But, when it comes to family-owned businesses and in-fighting, a D&O policy may not cover the lawsuit or claim, often in response to two common D&O exclusions:
    • Insured vs. Insured Exclusion. A D&O policy generally won’t cover claims of C-suite or board member in-fighting, whether the parties are family members, business owners or shareholders.
    • Family Exclusion. When multiple family members, or generations are running a business, the insurer might add a family exclusion to the D&O policy, barring coverage for claims brought by family members even when they are business related.

Look closely at your D&O policy’s insured vs. insured exclusion. Can it be narrowed? Ask your broker to advocate for other D&O policy carvebacks, including extending coverage to family members that haven’t been on staff or the board for a certain number of years.

If you hold your business interests in trust, consider a separate trustee errors and omissions (E&O) policy. This will cover the trustee for a claim against them in their capacity as trustee. A trustee is likely not covered in such capacity under the business’ D&O policy.

  1. Weigh your options. Do you want to keep the business in the family? If that is not an option, who could you sell it to? Consider setting up a trust to own the company with careful consideration of who the trustee and their successors may be. The trustee will make decisions for the family, while the board will make decisions in the best interest of the company. They can be one in the same, but don’t have to be.
  2. Consider your timeline. What’s your ideal goal for hand-over?
  3. Engage an estate attorney to advise on structure of any potential transition, including legal and tax consequences and your role moving forward. You’ll want a clear road map of what the successor/group of successors wants moving forward. Do they expect you to stay involved in the business? Do they want to get the best deal possible in your negotiations?

Contact your HUB D&O specialist for more information on getting the succession process going, and ensuring that your business, its management, its board - including your family - have the right coverage in place today.