Small business is the heartbeat of the West Michigan economy. A small business is a business that employs fewer than 500 employees, and these small businesses make up 99.6% of all Michigan businesses. Here in Ottawa County, according to the U.S. Small Business Administration[1], small businesses employ close to 55% of all employees – where statewide, small businesses employ only 47.9% of employees – representing about 3.7 million jobs[2]. Meaning that in cities such as Holland, Zeeland, Hudsonville, and Grandville, small businesses have an even greater impact because they employ 7.1% more employees than the statewide average.
According to the National Association of Women Business Owners[3], 21% of small business fail in their first year, nearly 30% in their second year, almost a 50% failure rate by the fifth year, and for businesses that survive ten years have almost a 65% failure rate. These high failure rates are attributable to several factors, top among them are inadequate management and unproductive business planning. This underscores the critical role of effective planning in business success, as it can significantly mitigate risks and drive positive outcomes.
Small businesses have a significant impact on Michigan’s economy and can have a lifelong impact on the families that own them. If you want to leave a legacy for your children and grandchildren, you need to have well-planned business succession documents in place. At Parakletos Law, we work directly with owners to ensure a smooth business transition that maximizes the chances of successful implementation of your succession plan.
To create a solid succession plan, you need a two-pronged approach. First, your business’s legal documents should outline how and when ownership will change. Second, each owner should have personal estate plans in place to facilitate the transfer of business shares.
Within your governing documents, virtually every business with more than one owner should have a buy-sell agreement. There are three primary reasons to have a pre-built buy-sell agreement: (1) withdrawing business owners will guarantee a market for the sale, (2) the buy-sell agreement can help pre-determine value (typically by formula), and (3) remaining owners are guaranteed full control of the business on completion of the sale[4]. In addition to incorporating a buy-sell agreement, owners will need to contemplate what happens if a triggering event such as death, disability, drug/alcohol addiction, or a divorce happens to any owner.
After the governing documents are in place with the appropriate provisions, each owner will need to need to form, or update, their estate planning documents to ensure that their ownership goes to the person or people they desire.
It is common for family businesses to transition ownership to the next generation – which creates an inherent issue when the owner has multiple children. Most parents spend their lives convincing their kids that they are all loved equally, when a family-business owner chooses one child over another to run the family-business, that decision may feel in direct conflict with that effort. The business owner must make difficult decisions about continuing financial support and equitable treatment of passive family members – those that do not work in the business.
Succession planning is a natural breeding ground for uncomfortable conversations. These conversations take time and layering of dialogue; the owner must discuss all the ugly what-if scenarios to make sure the business and family are well provided for in the event any what-if scenario comes to pass. One major what-if question involves choosing a child to be a successor. If one child has been working hard in the business, training to be the successor, while their siblings have pursued different passions, should the passive siblings be entitled to equal ownership shares, income, and control? The successor child certainly will not think so. This is where proper estate planning can provide equality to your children. Even though one child inherits the business, the passive children can receive an inheritance in other forms to help equalize your estate between your children.
Building a business is a great accomplishment, and a successful transition can leave a legacy that extends far beyond the founder’s years. With each successive generation, the new leader will inherit a responsibility to the business. It takes work to build a succession plan, but the incoming generation and your legacy are counting on you to be successful. So, plan for the what-ifs and eventualities, and start building your business succession plan with Parakletos Law today.
[1] https://advocacy.sba.gov/wp-content/uploads/2022/08/Small-Business-Economic-Profile-MI.pdf.
[2] https://www.sbam.org/wp-content/uploads/2024/05/2024-Score-Card.pdf.
[3] NAWBO Expert Reviews. “What Percentage of Businesses are Small Businesses?” NAWBO.org. Feb. 9th, 2024, https://nawbo.org/expert-reviews/small-business-statistics/.
[4] Michigan Business Formbook ch 9 (Mark A. Kleist et al eds, ICLE 3d ed 2011), at https://www.icle.org/modules/books/chapter.aspx?lib=business&book=2011551140&chapter=9 (last updated 07/19/2024).