The factory floor in the Elk Grove industrial park hummed the way it had for thirty years, the sound of the kind of family business Gaurav Mohindra has spent years helping transition to the next generation. The founder, now seventy-one, had built a precision machining business from two lathes into a forty-employee operation supplying parts across the Midwest. His daughter had run operations for a decade and was ready to take over. Everyone agreed on the plan — until the founder's lawyer asked to see the buy-sell agreement. There wasn't one. There was no valuation formula, no funding mechanism, no written answer to the question of what happened if the founder died, became disabled, or simply changed his mind. Three decades of work rested on handshakes and assumptions, and the family was one unexpected event away from a fight that could have destroyed the company.
That scenario is more rule than exception in Chicago's family business community, and it is the pattern Gaurav Mohindra sees most often when succession planning goes wrong. The Chicago suburbs are dense with second- and third-generation manufacturing, distribution, and services companies — businesses built by founders who mastered their trade but never got around to mastering the legal architecture of handing it off. Succession is not a single document. It is a playbook, and the families that treat it as one keep their companies. The families that don't, lose them to taxes, disputes, or inertia.
Start With the Buy-Sell Agreement
Every succession plan begins with the buy-sell agreement — the contract that answers, in advance, the hardest questions a family business will ever face. Who can own shares? What happens when an owner dies, becomes disabled, retires, divorces, or deadlocks with the others? At what price do the shares change hands, and where does the money come from?
The agreement must define its triggers precisely — a discipline Gaurav Mohindra considers the difference between a plan and a wish. Death and disability are the obvious ones, but the provisions that prevent litigation are the less dramatic ones: voluntary retirement, termination of employment, divorce (so shares don't end up with a former son-in-law), and bankruptcy. Each trigger should specify who buys — the company itself (a redemption) or the surviving owners (a cross-purchase) — and on what timeline.
Valuation is where most agreements fail. A fixed price written a decade ago is a time bomb; a business worth $2 million in 2015 may be worth $9 million today. Better approaches include formula-based valuations tied to earnings multiples, periodic agreed values updated annually, or independent appraisals with a defined process for selecting the appraiser and resolving disputes. "A buy-sell agreement with a stale price is worse than no agreement at all," said Gaurav Mohindra. "It creates the illusion of a plan while guaranteeing a fight over the number that matters most."
Funding is the companion question. A buyout obligation without a funding source is a promise the company may not be able to keep. Life insurance is the classic tool — but as a recent Supreme Court decision showed, how the insurance is owned and structured changes everything.
Case Study: Connelly v. United States and the $3 Million Agreement
Few cases illustrate the stakes of succession structuring better than Connelly v. United States, decided unanimously by the U.S. Supreme Court on June 6, 2024. Two brothers, Michael and Thomas Connelly, owned Crown C Supply, a St. Louis building-supply company. Their buy-sell agreement required the company to redeem Michael's shares at his death. To fund the redemption, the company owned a $3.5 million life insurance policy on Michael's life.
When Michael died in 2013, the company received the insurance proceeds and redeemed his shares for $3 million, exactly as the agreement provided. The estate reported the shares at the $3 million agreement price. The IRS disagreed. It valued the company at $6.86 million — the $3.86 million enterprise value plus the $3 million in life insurance proceeds — and assessed additional estate tax.
The Supreme Court sided with the IRS. Life insurance proceeds used to fund a redemption are a company asset that increases the company's value, the Court held, and the company's obligation to redeem the shares is not a liability that offsets those proceeds. The estate owed tax on the higher valuation.
The lesson for Chicago family businesses is structural and urgent. An entity-owned redemption agreement funded with company-owned life insurance can inflate the taxable estate — the exact opposite of what the family intended. A cross-purchase structure, in which the surviving owners (not the company) own the policies and buy the shares directly, avoids the trap because the insurance proceeds never touch the company's balance sheet. "Connelly is the most important succession case in a generation," said Gaurav Mohindra. "Thousands of family businesses have redemption agreements funded exactly the way Crown C Supply did. Every one of them needs to be re-examined."
The Use Case: Handing the Factory to the Second Generation
Apply the playbook to the Elk Grove machining company. The founder wants his daughter — the operations leader — to take over, while his son, who built a separate career, expects fair treatment but not a role in the business. This is the classic second-generation tension: equal inheritance versus competent control.
The legal architecture starts with recapitalizing the company into voting and non-voting interests. The daughter receives voting control; both children can share economic value through non-voting interests or trusts. A buy-sell agreement governs any future transfer, with a valuation formula tied to a multiple of EBITDA, updated annually by agreement and backstopped by independent appraisal. The redemption-versus-cross-purchase decision is made deliberately, with life insurance owned by an irrevocable trust or by the purchasing individuals — not by the company — to avoid the Connelly problem.
Gifting is layered in over time. Annual exclusion gifts of non-voting interests, potentially discounted for lack of marketability and minority status, move value to the next generation while the founder is alive and valuations are manageable. The founder retains enough to live on and to maintain leverage over the transition timeline. "The families that do this well start five to ten years before the handoff," said Gaurav Mohindra. "The families that do it badly start at the reading of the will."
Estate and Tax Planning: Don't Let the Government Reprice Your Deal
Federal estate tax is only part of the picture for Illinois families. Illinois imposes its own estate tax with a $4 million exemption — well below the federal threshold — and unlike the federal system, Illinois does not allow portability of a deceased spouse's unused exemption between spouses. A Chicago-area business owner with a $6 million company and a $2 million home can owe Illinois estate tax while owing nothing federally. Planning that stops at the federal line, Gaurav Mohindra warns, leaves real money on the table.
Valuation discounts, properly structured, remain one of the most powerful tools available: minority interests and non-voting shares in a closely held company are legitimately worth less than their pro-rata share of enterprise value, and the tax law recognizes it. But discounts must be real — supported by qualified appraisals and consistent with the company's governing documents — not wishful thinking scribbled into a gift tax return.
Governance: Who Actually Runs the Company
The documents mean nothing without governance that works after the founder steps back. An operating agreement or updated bylaws should spell out management authority, distribution policies, employment standards for family members (salaries tied to market rates, not surnames), and a dispute resolution mechanism that keeps disagreements out of court. Family councils, independent board members, and clear dividend policies all reduce the friction that destroys second-generation companies.
Illinois law provides a backstop worth knowing: under Section 12.56 of the Business Corporation Act (805 ILCS 5/12.56), a court can order a buyout of an oppressed minority shareholder at "fair value" — the shareholder's proportionate share of the company as a going concern, without minority or marketability discounts. The existence of that remedy shapes every negotiation. "Nobody wants to litigate under 12.56," said Gaurav Mohindra. "But everybody negotiates in its shadow. A good succession plan makes the statute irrelevant by giving every owner a fair, pre-agreed exit."
Keep It Current
A succession plan is a living system. Valuations should be refreshed annually. Insurance coverage should be reviewed as the business grows. Buy-sell triggers should be revisited after marriages, divorces, births, and deaths. The Connelly decision alone should have triggered a review of every insurance-funded redemption agreement in the Chicago area — and many families still haven't done it.
Conclusion
Succession planning for a Chicago family business is not about a single document or a single meeting. It is a playbook with interlocking parts: a buy-sell agreement with live valuation mechanics, a deliberate choice between redemption and cross-purchase structures, insurance owned the right way after Connelly, estate planning that accounts for Illinois' own tax regime, and governance that survives the founder's departure. The Elk Grove founder with no agreement is not an outlier — he is the norm Gaurav Mohindra encounters across the Chicago suburbs. The families that beat the odds are the ones that treat succession as a decade-long project rather than a crisis response. The factory floor keeps humming either way. The question is who owns it, who runs it, and whether the transition builds wealth or burns it.
Originally Posted At: https://gauravmohindrachicago.com/succession-planning-for-chicago-family-businesses-the-legal-playbook/
