3 Signs Your Family Business Structure Is Hurting Your Exit Plan

By Ahmie Baum, CFP® CFBA

We've watched too many family business owners discover critical problems with their legal structure at the worst possible time: during exit negotiations. What should be straightforward becomes complicated because documents that were created years apart now contradict each other, or because the entity structure that made sense a decade ago now limits options.

Over four decades of working with family businesses, I've seen how well-intentioned business structures can become obstacles to successful exits. The problem isn't that families don't plan. They do. The problem is that their legal and financial infrastructure hasn't kept pace with their reality.

Here are three common structural red flags and how to address them before negotiations.

Sign 1: Your Operating Agreements and Estate Plans Don't Align

Think about when you last reviewed your operating agreement. Five years ago? Ten? Fifteen?

Now think about when you last updated your estate plan. Those timelines rarely match.

This is where families run into trouble. Your operating agreement might specify that if you die, your ownership transfers to your spouse. But your estate plan might funnel that same ownership into a trust for your children. These documents don't talk to each other, and lawyers rarely cross-check between estate planning attorneys and business counsel.

We have seen this misalignment create situations where:

• A deceased owner's shares end up in probate for years while the business stagnates

• Family members discover they own different percentages than they thought

• Buy-sell provisions trigger at values that no longer reflect business reality

• Successor ownership structures conflict with tax planning strategies

The financial impact can run into the millions in unnecessary estate taxes and legal fees. More importantly for exit planning, potential buyers will uncover these conflicts during due diligence. When they do, they will either walk away or use the uncertainty to negotiate down your price.

Sign 2: Your Entity Structure Was Designed for Yesterday's Reality

You probably formed your LLC or S-Corp when your business was smaller, your family was younger, and tax laws looked completely different. That structure made perfect sense then, but it might be costing you millions now.

Here is a pattern we see regularly: a family forms an S-Corp when it's just the founding generation and maybe one child in the business. Fast-forward 10 or 15 years and now there are multiple children, some active in the business and some not. The family is exploring various exit options—maybe a sale to a strategic buyer, perhaps private equity, possibly an ESOP.

Suddenly that S-Corp structure creates problems:

• S-Corps can't have corporate shareholders, limiting buyer options.

• The inability to create different classes of stock makes it impossible to treat active and passive family members differently.

• Tax laws have changed, making the structure less advantageous than alternatives.

• The structure doesn't support certain exit strategies the family is now considering.

Changing entity structure isn't simple and often triggers tax consequences. But not changing can be far more expensive when you're trying to exit. We've worked with families who discovered their entity choice significantly limited their buyer pool. Others found they couldn't implement tax strategies that would have saved substantial capital gains because their structure wouldn't support it.

The question isn't whether your structure was right when you formed it. The question is whether it still serves your current goals and exit timeline.

Sign 3: You Have No Clarity on Decision Rights at Different Ownership Levels

This is the silent killer of exit strategies.

Most family businesses have multiple entities: maybe a holding company, operating companies, real estate LLCs, and various trusts. But if you ask family members who has the authority to make decisions at each level, you will get different answers from different people.

Who can approve the sale of an operating company? Does the holding company board decide, or do trust beneficiaries get a vote? Can one sibling block a transaction the other three want? What decisions require unanimous consent versus majority vote?

When these questions don't have clear answers written into your governance documents, exit planning becomes paralyzed. We've seen families spend months figuring out who has the authority to even hire investment bankers. Potential transactions collapsed because decision-making authority was unclear. Siblings discover they don't have the voting power they assumed they had.

Consider a hypothetical but common scenario: three siblings jointly own a holding company, which owns two operating businesses and several properties. When a buyer approaches the family about one operating business, the family has to stop and determine who can even authorize negotiations. Is it the holding company board? Do all siblings need to agree? What about the trusts that own parts of the holding company, do those beneficiaries get input?

Without clear answers already documented, families can spend months sorting this out. By then, buyers often move on.

Clear decision rights don't just prevent conflicts. They signal to potential buyers that your business is professionally managed and ready for transition. Unclear rights raise red flags about family dysfunction and implementation risk.

What to Do Next

If you recognize your business in any of these signs, don't panic. But don't wait either.

Start with an honest assessment. Pull out your operating agreements, your estate plans, your entity formation documents. Look at them together, not separately. Better yet, have your advisors review them as a complete package, not in silos.

Ask yourself:

• When did we last update these documents?

• Do they reflect our current business reality and family situation?

• Are we clear on who makes what decisions?

• Would these documents support or complicate our exit strategy?

At Interchange Capital Partners, we use our Clarity Foundation™ to help families identify these structural misalignments before they become crisis points. We look at how your individual needs, family dynamics, business operations, and ownership structure intersect, because a decision in one area ripples through all the others.

Your business structure should be a tool that facilitates your exit strategy, not an obstacle that sabotages it. The families who exit successfully don't just have good businesses; they have governance infrastructure that supports their transition goals.

Are you wondering whether your structure is helping or hurting your exit readiness? Reach out to us at team@interchangecp.com or call 412-307-4230. We can help you assess what needs attention now versus what can wait.

Frequently Asked Questions About Family Business Exit Strategy

How do I make my operating agreement and estate plan work together for my exit strategy?

Start by having both documents reviewed simultaneously by your advisory team. Your estate planning attorney and business attorney need to coordinate, not work in isolation. Look specifically at how ownership transfers are handled in each document and confirm the mechanisms align. If your estate plan creates trusts that will own business interests, your operating agreement needs to address how those trusts can exercise voting rights and receive distributions. This alignment work should happen years before you plan to exit, not during due diligence.

When should I consider changing my family business entity structure?

Consider restructuring when you're three to five years out from a potential exit, when your family composition has significantly changed, or when tax laws have shifted enough to make your current structure inefficient. The key indicators are if your structure limits your exit options, prevents you from treating different family members appropriately, or creates unnecessary tax burden. Keep in mind that restructuring takes time and has costs, so you want to evaluate this well before you're actively negotiating with buyers.

What happens if potential buyers find misaligned documents during due diligence?

Buyers will either walk away entirely or use the confusion as leverage to reduce their offer price. Due diligence attorneys look specifically for conflicts between operating agreements, shareholder agreements, estate plans, and trust documents. When they find inconsistencies about who owns what or who can approve a sale, it raises red flags about both the business's professional management and potential legal complications post-closing. We've seen these discoveries delay transactions for months while families sort out the conflicts, and in some cases, the buyer moves on to cleaner opportunities.

How often should family businesses review their exit strategy documents?

Review your complete set of documents every three years at minimum, or whenever a significant event occurs (e.g., death, divorce, birth, business expansion, or major tax law change). Don't review documents in isolation. Your operating agreement, buy-sell agreement, estate plan, trust documents, and entity structure should all be evaluated together as a system. Most families review these documents separately with different advisors, which is exactly how misalignments develop.

Can unclear decision rights really derail a family business sale?

Absolutely. When buyers can't get clear answers about who has authority to approve the transaction, they assume there will be problems post-closing. If one family member can block a sale that everyone else wants, or if it's unclear whether the holding company board or individual shareholders control the decision, that uncertainty kills deals. Buyers are purchasing not just a business but a clean transition. Governance confusion suggests family dysfunction, which dramatically increases their perceived risk.

About Ahmie

Ahmie E. Baum is the founder and executive chairman of the board of Interchange Capital Partners, a premier family business advisory firm committed to empowering family-owned businesses and a registered investment adviser that engages with companies and individuals, offering collaborative and comprehensive planning, as well as disciplined wealth management. With over 45 years of experience, Ahmie specializes in guiding families to safeguard and grow their wealth through our strategic Clarity Foundation™.

Passionate about helping multi-generational family businesses, Ahmie excels at navigating their unique challenges, allowing them to focus on what they do best. One of his greatest joys is getting to know the firm’s clients personally, listening to their stories, understanding their journeys, and identifying and solving for the challenges that keep them up at night.

Ahmie began his career at EF Hutton in 1979, eventually rising to the position of Senior Vice President. In 1993, he transitioned to Paine Webber, later acquired by UBS, where he spent nearly 27 years. During this time, he earned an Executive Certificate in Financial Planning from Duquesne University and obtained his CFP® designation. He holds a Certificate in Family Business Advising (CFBA) from the Family Firm Institute. He has been actively involved with Strategic Coach, an internationally renowned entrepreneurial coaching program, for over 20 years. Additionally, he has earned certificates from The Growth Institute, specializing in business growth, scaling, and cash management.

When he’s not working, Ahmie enjoys spending time with his wife, Sara, their three children, and four grandchildren. He recognizes that health is wealth, so he has committed to daily yoga, meditation, and plant-based eating. His other hobbies include woodturning, golf, reading, listening to music, and biking. He is active in his community, has served as the Foundation Chair of the Jewish Federation Community Foundation of Greater Pittsburgh, and supports various philanthropic endeavors. To learn more about Ahmie, connect with him on LinkedIn. 

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