As states continue to legalize the sale and use of medical and recreational cannabis, there has been an explosion in new cannabis businesses at all levels of the supply chain. Unfortunately, as with many expanding markets, a company may end up overleveraged or otherwise in financial distress as a result of supply and demand, pricing, competition, and other factors. But all is not lost. With a positive attitude and the can-do spirit that drives many of these entrepreneurs into the cannabis business in the first place, there are a number of options to go from distress to opportunity.
At last month’s MJBizCon, as part of the CannaVest series, representatives from a number of capital providers, operators, and advisors discussed the ways that distressed companies can work their way out of insolvency. Read on for top ideas and insights from the panel.
- Ryan Ansin, Revolutionary Clinics
- Hank Casillas, Rilano Inc.
- David Traylor, Golden Eagle Partners
- Tom Zuber, Zuber Lawler
- In conversation with CohnReznick’s Elena Mervine
The incidence of distressed cannabis companies continues to grow
As more entrepreneurs have entered the cannabis space, many have misread requirements for success and been overly optimistic about running these businesses. Mismanagement, lack of funds, regulatory/tax burdens, and competition from gray markets have proven to make the industry challenging. Many new entrants, especially in the licensed retail space, have never learned to compete, and so are finding it harder to grow sales in a more crowded marketplace. The end result of these factors is that there are a large number of distressed companies out there that will either be acquired, merge, or fold.
The good news is, for those committed to the industry, and for those who have realistic expectations, a clean balance sheet, and the marketing savvy to grow in a competitive environment, there are a number of ways to get out of distressed situations.
Yes, there are options for struggling cannabis companies
While the bankruptcy courts are currently not available to cannabis companies, there is relief available through paths such as restructuring, receiverships, and workouts. These options should be considered as they would in any other industry. Too often in the cannabis industry, operators are reluctant to ask for help. In order to survive, they need to be open to all ideas for saving their business.
Whether by way of divestiture or rightsizing operations, cannabis business owners need to be realistic about their market potential, and to keep their focus on the long term rather than short-term cash flow fixes. It is incumbent upon them to look at alternatives other than equity, which in today’s market is expensive and hard to come by, and raising debt, which can be overly burdensome given high interest rates. Here’s where restructuring comes in.
Investors are willing to buy and/or turn around the right businesses
For some business owners, selling the business is a good option, especially if they have the equipment, location, brand, and some value that is still attractive to investors. Some markets, like California retail, are ripe for consolidation, and there’s significant opportunity to buy troubled businesses, turn them around, and sell to larger operators. Often, it’s less about an operator’s business strategy than the ability to be profitable. For example, imposing normal retail discipline on a dispensary business, including strict cash flow and margin management and expense control, goes a long way in building profitability and value.
Not all companies are worth saving
For investors, it’s important to realize that not all businesses are worth saving, and that just because the industry is struggling, it does not give “free passes” to participants. At the end of the day, how fixable the company is – from a financial, management, and operational viewpoint – is the No. 1 criterion. This means not only assessing revenue opportunities, but also identifying long-term contracts and leases, and understanding the complete cap table to reveal any possible hidden owners.
What's worth saving often starts with the players involved: how adaptable they are to divest or rightsize their businesses, and how they can learn to effectively demand-plan in order to grow their businesses.
The last decade was marked by some of the freest capital ever seen, and the downturn will likely be just as intense as was the ballooning of the bubble. People need to go back to running real businesses that make money. There will be a stratification of the current environment, and the reality is that many businesses will fail, and the stronger players will be there to take advantage of the upside.
Positioning for the future means focusing on the fundamentals
For owners of distressed companies who are committed to remaining in the industry, it’s helpful to think of a complete restart. Focus on the fundamentals as you would if you were a potential purchaser of your own company. Work hard, rightsize, have a realistic perspective, and make sure you’re structurally and fiscally sound to participate in the future of the industry and its inevitable consolidation.
Subject matter expertise
CPA, Partner, Transaction Advisory Services
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