Business Succession Lawyer in Michigan
What Is Business Succession Planning?
This is where the business plan meets the estate plan. Business succession plans are most critical for small and family-owned businesses and should be addressed as part of the owner's estate plan.
Some small businesses are so dependent on the owner's knowledge, skills, and reputation that they will not be continued after the owner's death. In that case, business succession planning simply means having Trust or Will provisions in place authorizing or directing your Personal Representative or Trustee to wind up the business.
But some businesses can continue in the hands of new ownership. In that case, the business succession plan seeks to hand off control of the business to an experienced manager or team, who then are required to buy the business equity from the late owner's family. This often requires a long term plan that includes a Business Buy-Sell Agreement. If there are multiple owners or partners, a Business Buy-Sell Agreement might obligate the surviving partners to buy out their deceased partner's family. This assures all the owners that if they die, their family will be paid an agreed upon value. It also assures them that they won't suddenly have their deceased partner's family members involved in the business. In either case, a big life insurance policy is often purchased on the life of each business owner. The proceeds are then used to fund some or all of the buy-out.
The death of a key person can disrupt business relationships and raise questions about whether the business can survive without its founder. Remaining management needs to be ready to take the reins and they need to be kept happy so that they don't leave for a competitor. To solve possible cash flow problems or maybe to incentivize the new management, a Key-Person Life Insurance Policy can be purchased by the business.
Common Risks Businesses Face without a Succession Plan in Michigan
Knowing the risks can help you avoid them. Many risks exist when business succession plans are not created for a small or family-owned business. Some of the more common risks include:
- Uncertain value of the business. A business's value is often based on the relationships that are nurtured over the years. When a trusted owner dies or exits the business, the value may be questioned. By putting contractual agreements in place, you can take away a potential subject for disputes. Business appraisals cost tens of thousands of dollars, too. So a contractual agreement on the value can save serious money.
- Loss of trust. If you do not have a business succession plan in place, transitioning from one owner to another will take more time. But time is money, and the longer it takes to recover from the loss of the owner, the more likely clients, customers, employees, and investors will lose their faith in the business and go elsewhere.
- Loss of experienced and skilled employees. If leadership fails due to a lack of a succession plan, you put your greatest resource at risk: specialized employees. Skilled and experienced employees are in high demand and so they may look for professional opportunities elsewhere.
- Vulnerable to competitors. If a succession plan is not in place and a hungry competitor becomes aware of the situation, they could plan to take over your business to increase their market share.
- Potential for conflict. When a business owner dies or exits a business without a succession plan in place, the core values and mission of the business may be questioned. Without the right leadership and quick decision-making necessary to keep the business intact, conflicts may arise among personnel, employees, and others.
- Unqualified new leadership. In the absence of a succession plan, mistakes may be made in the rush to fill the gap. If the new person hired to fill the loss is not capable and qualified, it can facilitate all of the above risks.
Again, these risks are just a few examples of what a strong, solid business succession plan can help you avoid.
Documents You May Need for a Business Succession Plan
Business succession planning can be complex, involving the preparation of a range of documents.
It may require existing governing documents – like a partnership or operating agreement or articles of incorporation – to be updated. It may also involve drafting new documents including:
- Appraisals or business valuations
- Entity purchase agreements, where a company takes out insurance policies on each partner so that in the event of a death, the insurance payout is used to purchase the deceased partner's shares
- Buy-Sell agreements, enabling the surviving partners to buy the deceased's partners shares from his or her family
- Employee stock ownership plans, allowing employees to purchase the departing owner's interest via shares
- Management buyout plan, allowing the management team to buy the company
The circumstances of a business and its specific succession plan will determine the documents needed to execute it. A business succession lawyer can advise you on the relevant paperwork in your situation and draft any technical documents for you.
Challenges to Business Succession Planning in Michigan
Business succession planning is not without its challenges, especially when it comes to family-owned businesses. Issues for consideration include:
- Family dynamics
- Lack of a competent business manager within the family
- Tax issues, such as the transfer of ownership within a family, can generate large tax liabilities
- Conflicting family goals or ambitions, where family members hold different visions for the future of the business
By obtaining professional advice when creating your business succession plan, you can consider these issues and find out how best to manage them in your situation.
Get a Smart Business Succession Plan: Contact an Estate Planning Attorney in Oakland County Today
Risk reduction is what a smart business succession plan is all about. At Lex Novus, our business succession planning attorneys based in Oakland County will take the time to build a solid succession plan intended to significantly reduce risk. Contact us today by filling out the online form or calling us at (248) 581-0987 to schedule a consultation.