Most commercial cannabis businesses, whether they are “touching the flower” or providing ancillary services to the industry, are small, family-owned businesses. In this article, I hope to impress on small family business owners the importance of succession planning with four tips entrepreneurs should consider in succession plan development.
Succession Planning
First and foremost, a succession plan is a strategy for transferring ownership and control of the business in the future. There are any number of succession options for a family business owner. Some of these options include, but are not limited to, passing the business on to the next generation or other family members; developing an exit plan, such as dissolution of the business; selling the business or merging with another business. Whatever you choose, the importance of a business succession plan cannot be underestimated.
For most small business owners, such planning is necessary because their business may comprise a significant, if not predominant, portion of the owner’s estate. A comprehensively developed and diligently implemented succession plan can preserve the value of the business for future generations and will enhance the value of the business for current owners and investors. Thus, the purpose for establishing a plan is that the owner may ensure the business will remain healthy and viable and will continue to benefit the business heirs, successors and other interest holders, while providing a stable source of income to fund the exit and retirement of the founders.
Tips and Techniques
1. Put the Plan in Writing
Develop a written plan with the help of a succession planning team. This team could consist of your family, your estate planning attorney, your business attorney, business partners, a tax or financial advisor or perhaps a knowledgeable business consultant.
The plan should be in writing so that you have the succession map in front of you. Failure to have a written plan could cause unintended consequences in the future, such as the unforeseen disability or death of the business owner, leaving the family in a state of uncertainty.
2. Use SWOT Analysis
One method that can be used in developing a succession plan is to use a “SWOT” (Strengths, Weakness, Opportunities and Threat) analysis. SWOT was invented in the 1960s by a management consultant named Albert Humphrey at the Stanford Research Institute.
The SWOT process generates information that is helpful in matching an organization’s goals and capacities to the business environment in which it operates. There are numerous websites that go into detail on how to do a SWOT analysis.
Why is this analysis important in succession planning? Because understanding the SWOT of the business will help set succession goals and objectives. SWOT analysis should also be applied to key employees of the business and also to potential successors of the business.
3. Be Properly Insured
Part of a good succession plan is to make sure the business has proper insurance. Besides life insurance and disability insurance, obtain “key man” insurance, which is life insurance on the key people in a business. In a small, family business, this is usually the owner, the founders or perhaps a key employee or two. These are the people who are crucial to a business — meaning the business is going to be difficult or impossible to run without them.
Typically, a key employee is anyone who (a) is responsible for management decisions; (b) is highly paid; (c) has a significant impact on sales or marketing; or (d) has a special connection with clients and creditors. Key man insurance proceeds can be used to pay expenses until the business can replace the person, or if necessary, it can be used to pay off debts, provide for investor distributions, pay severance to employees and close the business down in an orderly manner. It could help a business avoid immediate bankruptcy as well.
4. Communicate the Plan
Finally, it is important to make sure that people who are intended to be part of the family business succession are informed and want to participate. Communication of the plan might also give a family member some understanding of how they should prepare themselves for taking an ownership or operational role in the business. For example, perhaps they can take appropriate college or training courses or start getting involved in trade organizations.
In conclusion, we all know that running a family business in the cannabis industry is uniquely challenging. Don’t let all that work be for naught. Put that succession plan in writing with the help of respected advisors, periodically do a comprehensive SWOT analysis of your business and its personnel, be properly insured and communicate the plan.
Michele Brooke’s law practice Brooke Law Group (www.brookelawgroup) is a full-service marijuana business law and litigation firm in Los Angeles County, California. As an industry-savvy professional, she strives to assist business owners navigate California’s ever-changing legal and regulatory environment. She is a member of Americans for Safe Access, NORML and the Los Angeles Bar Association.
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