Alternatives to Bankruptcy in Cannabis: When to Enter Into Cannabis Receivership

Due to federal law, bankruptcy is not an option for distressed cannabis businesses. However, entering into a cannabis receivership can provide similar relief.

Dotan Y. Melech, President and Executive Director of Corporate Monitoring & Consulting Services, United CMC

As states continue to give the green light to medical cannabis programs and / or adult-use recreational sales, entrepreneurs are jumping at the chance to get their piece of the proverbial pie. But many with entrepreneurial dreams of taking advantage of the rapidly growing U.S. cannabis market and seemingly endless consumer demand are often in for a stark reality check.

Strict regulations, enforcement, market competition, high effective tax rates, and barriers to accessing traditional funding and banking are only a few of the potential and significant roadblocks to growth and success.

The fact that cannabis is listed as a Schedule I controlled substance at the federal level means that many financial provisions enjoyed by most other American businesses are simply not available for state-licensed cannabis operators and many ancillary businesses that are linked to the cannabis industry—and that includes federal bankruptcy protection.

The various benefits offered by bankruptcy, such as an automatic stay, potentially improved credit, a hold on most evictions, foreclosures and utility shutoffs, and the ability to maintain certain assets and restructure payments, all remain off the table for distressed cannabis. businesses.

However, there is a way forward: Cannabis receivership serves as a critical means to align the objectives of the involved parties and understand the options for the distressed enterprise to resolve debts.

Receivership is also a chance to address operational concerns, in which the receiver takes control of the business operations in the short-term and restructures the business to either ensure continuity of operations or allow assets to be positioned to provide the most value in liquidation.

Why Enter Into a Cannabis Receivership?

There are several reasons to seek out cannabis receivership. Due to the volatile nature of the industry’s market forces and ever-changing regulations, even the most proactively managed the company can quickly turn into a business in distress.

Those running the business might see the writing on the wall and take action to head off impending disaster, or investors and creditors might be concerned about their investment and feel the need to make a move to recover what they can.

Here’s a closer look at some common issues:

Internal Disputes: There could be conflict between owners and the management team, or an investor group might not think that the business is being run properly or efficiently. The result is a culture that inhibits success with a lack of trust among the business stakeholders.

Increasing Debt and Investor Fatigue: Creditors decide that their investment has been poor and want to get out as quickly as possible to recover what they can. Managers or owners realize that the business will soon not be able to function.

Insolvency: Liability is exceeding assets and it is clear that assets cannot catch up.

Current Model and Direction Not Working: A lack of transparency and proper communication among all parties, overspending on product research and development, and insufficient data or incorrect analysis are just a few factors that can indicate the need to start fresh with a new operational model.

Desire for Relief or Redemption: Is there a chance to restructure to regain control and recover what has been lost?

How Cannabis Receivership Helps Business Owners and Investors

Once the primary issues are identified—and accepted—the key objectives listed below should be enough for all involved parties to realize a receivership is the best way to proceed. If a cannabis business owner needs the support of an outside entity to make them happen, it is time to enter into cannabis receivership:

● Create a more efficient operations model; to ease financial distress;
● Restructure and prioritize payment of debts to creditors to ease financial distress;
● Monitor business assets and collateral;
● Ensure regulatory compliance and asses any existing fines and fees; and
● Negotiate with creditors to lower interest rates.

If you are looking for guidance, reach out to United CMC today. Our team of cannabis receivership experts is here to help you.