Steering a Family Business Through Ownership Transitions

Family businesses face a range of ownership options as they plan for the future. With strong governance, families can navigate decisions that align with their legacy and business goals. 

A family's decision about whether to sell its company can come with unexpected risks. As Mary Lee Schneider, NACD.DC^®, notes, the stakes of selling a company are high, including a loss of the family name, culture, or control.

“Many companies think that nothing is going to change for the company when they sell, other than the name on the paycheck. That’s often what the buyer says. But that doesn’t happen—everything changes,” Schneider, a director who has served on the boards of family-, private equity-, and employee-owned companies, said.  

A lack of planning, along with unwanted or unavoidable situations, may push families to make changes that are not fully informed. An alternative path is to evaluate the ownership transition early and carefully think through all options. Family businesses typically face a small set of well-known ownership paths, including generational transfer, employee ownership, or outside capital. The right choice requires aligning the transition strategy with intentional board oversight, thoughtful governance, and long-term planning.

The Silver Tsunami

Demographic trends forecast a wave of family business owner retirements. According to HeadwayExec’s April 2025 article, “The $10 Trillion Transfer: How Baby Boomer Business Exits Will Reshape the Economy,” baby boomers are estimated to own approximately 41 percent of all privately owned small businesses and franchises in the United States. This means that in the next 10 to 15 years, more than 70 percent of these companies will change ownership.

Additionally, such transitions may be necessary due to changes in the economy, rising market pressures, and shifting customer demands—even for families with a long history of continuity.

Brad Neilley, who serves on the board of Turtle & Hughes and the board of trustees of William Paterson University, emphasizes the importance of evaluating governance structures carefully. “The first thing … is [to] look at the current structure and ask: Is it working? If it’s not broken and the business is operating on all eight cylinders and delivering results, then leave it alone,” Neilley said.

What Signals a Transition

Before determining whether a transition to a new ownership structure makes sense for the company, families should clarify what they are trying to achieve over the long term. Items to consider include the business’s strengths and weaknesses, as well as whether the current ownership structure meets the financial needs of family members, which may span multiple generations.

This decision should also take into account the family’s identity and priorities, which “may not just be monetary,” Schneider said. She notes that sometimes the issue isn’t business performance. Instead, it could be about whether the family is looking to head in a new direction.

How Independent Directors Can Help

Boards play a critical role in identifying when performance trends may signal the need to consider an ownership transition. While the specific timeline depends on the company’s situation, some transition discussions begin years in advance. Planning early is crucial, as these decisions take time, from having appropriate conversations with family members to dealing with legal and financial matters. 

In any situation, the board will need to discuss these ideas with the family. “The family should have a vision, and the board should have a view on performance. The two need to come together, and a discussion needs to happen,” Schneider said.

Often, family members sit on the board of the family business. When considering ownership transitions, independent directors play a key role in navigating decision-making processes by helping separate personal dynamics from business realities. Moreover, they can use their outside perspective and experience to ask questions that may be uncomfortable but necessary.

Keeping the Business in the Family

Although knowing when and how to prepare for an ownership transition is important, most family businesses are determined to keep the company within the family, passing ownership down to the next generation. Deloitte’s Family Business Insights Series: Defining the Family Business Landscape, 2025 report found that only 3 percent of family businesses aim to sell their organizations in the next three to five years.

As families look to perpetuate their legacy for future generations, they should ensure that strong governance and leadership structures are in place to support the business.

The family should also consider both nonfinancial and financial priorities. For example, a business may not be well positioned financially to take on a new ownership structure in the short term, but doing so may be the best way to maximize long-term financial returns.

Families should consider the following financial areas prior to making a decision:

• Liquidity and capital needs. This includes how much cash the business can generate to support owners’ goals, fund growth, or facilitate buyouts.
• Debt and balance sheet health. Highly leveraged transactions may constrain options, while a strong balance sheet might make a partial sale or an employee stock ownership plan (ESOP) feasible.
• Potential value realization. Families should consider how much they can realistically gain from a sale, recapitalization, or employee ownership transition.
• Risk tolerance. Ownership transitions may require taking calculated financial risks to achieve long-term gains.

An organization's nonfinancial priorities take into account the people side of the business, or how the company is run and the impact this type of change will have on the family. These can include the following:

• Legacy or reputation. Families may wish to consider the importance of preserving their culture, values, and mission over the long term.
• Employee impact. Changing ownership structure may affect job security, engagement, and incentives, such as through potential workforce reductions during a transition.
• Control or influence. Transitioning to an ESOP or selling to private equity may require the family to give up some decision-making power.

Moreover, throughout the decision-making process, it is important to maintain transparency between family members and the board. Ownership transitions may cause tension between family members and potential next-generation heirs, but clear communication between all parties can mitigate misunderstandings regarding the company's priorities.

Prioritizing open communication between the board and family members also allows independent directors to offer insights into the transition process that may otherwise be missed. This can come as guidance on the family's long-term strategic plans or the best direction for the company.

Another critical question to ask is whether the next generation is prepared to lead the business: Do they have the necessary skills and interest to guide the company? If not, it may be time to consider selling the firm.

Greg Cessna, NACD.DC, served as the lead director for a first-generation family business where the founder continued to lead the company well into his 80s. As the founder contemplated retirement and succession, the family's successor was in his mid-60s and was not eager to take over the business.

A fiduciary board was never formed, and with limited discussion and governance practices in place, the founder had few options other than to position the company to sell. This is not an uncommon outcome, aligning with the findings in Family Enterprise USA’s Annual Family Business Survey 2024 that reveal only about 33 percent of family-owned businesses have passed down “full or controlling interest” to the next generation.  

To ensure that family members are equipped to lead, families should be “constantly thinking about [how] to bring the next generation along,” said Sam Cecala, a fifth-generation family member and current director at J.M. Huber Corp.

He noted the importance of preparing future successors at a young age and shaping them for a lifetime of working alongside the broader family. Sometimes, this can be done through bonding activities. This way, when it’s time to have a tough conversation, it doesn't feel like it is being done with a stranger, Cecala said.

Another area to consider is governance and professionalization, including whether the company has a formal board that allows the business to operate smoothly. Depending on the size and experience of the firm, a family business may operate under an informal governance structure that makes it more difficult to pass the organization to the next generation. A lack of strong governance processes can also be a barrier to informed and deliberate decision-making processes, which could result in negative financial outcomes.  

Kevin Sweeney, a retired US Navy rear admiral and director on the boards of Airbus US Space & Defense, Colonna’s Shipyard, and Element US Space & Defense, notes that part of professionalizing the board includes bringing in qualified independent directors, updating bylaws, and ensuring there is a shared understanding of the role of the board as it becomes more independent.

Research by McKinsey & Co. in its November 2023 article, “The Secrets of Outperforming Family-Owned Businesses: How They Create Value—and How You Can Become One,” shows that more than 90 percent of high-performing companies have an “effective and independent board of directors in place.” Establishing formalized governance can help the business thrive and increases the likelihood of a successful generational ownership transition. 

Converting to Employee Ownership

For families deciding whether to convert to an ESOP, considerations include either a model in which the company is fully or majority employee-owned or a hybrid model. A hybrid ownership structure might be beneficial for families who want and are able to retain some ownership of the company, with the rest held by employees or the management team.

Sweeney believes that an ESOP is “a softer way to transition from family [controlled entities] over private equity,” while still allowing families to retain some control and achieve liquidity over time.

Additionally, an ESOP can be attractive for “an owner or a family that really cares about the legacy of the business they've created [and] cares about the employees that help them build that business,” said Joe Lyons, a board member of Jordan Aluminum, Kano Laboratories, National Guard Products, and RK HydroVac.

In making the decision to transition to an ESOP, families should analyze whether this ownership structure aligns with the company’s values. For instance, if the organization has a collaborative culture and strong employee engagement, an ESOP may allow the family’s culture to be maintained while it takes a step back.

Because this ownership model calls for releasing at least some control to an external party, the family should adopt a more formalized governance structure to share decision-making, if it doesn’t have one already. This means creating or strengthening an independent board, clarifying roles, and updating policies.  

In terms of financial feasibility, ESOPs offer potential tax benefits, including deductions for employee stock contributions and capital gains deferral. In this exit plan, families can access liquidity gradually and retain some independence and control, as opposed to handing the keys over to outside investors.

Transitioning to Private Equity Ownership

The Deloitte Family Business Insights Series report found that 26 percent of family businesses target outside investment, often through private equity, when considering an exit strategy. This is often due to a family business needing outside investment to spur growth, seek stronger operational discipline, or forge a clear path for ownership exits. In doing so, a family's options include selling the company entirely, taking in a strategic investment, or selling a portion of the business that no longer aligns with its goals.

Private equity firms operate in an increasingly competitive fundraising environment, in which limited partnerships are scrutinizing governance, operational discipline, and value-creation potential. As a result, family businesses that are well governed and professionally managed are better positioned to attract private equity interest on favorable terms.

Because of the operational goals of these types of companies, transitioning to private equity often yields the highest financial return, which can be beneficial for families that need liquidity or want to diversify wealth.

When founders decide to sell the company, the process is time-consuming and requires careful thought, Cessna said. To maximize value, the business needs to have a strong leadership team, quality accounting, a clear value proposition, and alignment with shareholders. 

Once management is in place, an investment bank is a necessary partner to position and sell the business. The investment bank will help prepare the company for sale, refine its value proposition, and negotiate with potential buyers to maximize value. Throughout the process, the board should ensure the company is attractive to buyers. This includes demonstrating strong governance that positions the company for growth. Having candid conversations with the family will reveal where its goals and priorities lie.

A family business may consider selling to private equity in another situation. In her experience, Lynn Clarke, who serves on several family boards, finds that some companies sell off a part of the business that is no longer a strategic fit. Independent directors can help facilitate such a transaction by bringing an objective perspective to the table.

Unlike an ESOP, where a family can potentially maintain some independence and governance control, selling to private equity means giving up that control. “The minute the deal is closed, private equity owns the company [and] owns the decisions,” Schneider said. Whether the new owners decide to keep the family members on the board for the sake of continuity or find new directors is up to the firm, she added.

Family members who want to stay in a leadership role with the company after selling to private equity therefore need to have business experience and be prepared to meet performance targets. They should also be prepared to sacrifice existing family culture and values that may differ from what new leadership has in mind.

Making the Decision

Ultimately, ownership transitions are not only about what is the “best option” but also about what is the best fit. Keeping the business in the family, transitioning to an ESOP, taking in outside investment, or selling to private equity can help the company meet both financial and nonfinancial objectives.

Beginning these conversations early and continuing them throughout the transition process is essential to coming to a successful decision. The value of the board lies not in recommending a specific option, but in guiding the family through a disciplined decision-making process it can stand behind over the long term. ■

This article is from the spring 2026 issue of Directorship.

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