Limiting the Scope of a Receivership Can Lower Your Costs

Dotan Y. Melech

Until cannabis is legalized at the federal level, the inability to declare bankruptcy means that a cannabis receivership will remain the best option for distressed cannabis businesses to find relief, return to solvency, or distribute assets to creditors or debtors. But a receivership can be very expensive. The need for analysis and assistance from third-party experts, lawyers and engagement with the courts comes at great cost for distressed businesses. 

Define the Scope

A receivership is adversarial by nature. The parties involved are primarily interested in figuring out what they can get for themselves as the business issues are addressed. It is important to remember the emotions in play during such contentious circumstances. The “need to win” and money at stake can produce tangible negatives like litigation and lawsuits, but can also create a loss of trust and an increase in anger and discord. The best way to manage the non-productive issues that emerge is by establishing the scope of the receivership as early as possible—ideally, prior to entering the receivership itself. If expectations are managed from the start, opening the Pandora’s box of a receivership without a scope can be avoided. 

Once the receiver enters the picture, it is their duty to not only act in a neutral manner, but also to convince the parties involved to buy in on the process and participate in the motion to define the scope. Understanding the landscape of the case is essential. Who is involved? Why are they involved? Who will influence or attempt to influence the outcome? There are often several creditors or more in the space, and the goal is to keep costs as low as possible. If the fundamental problems with the business can be identified and agreed upon, the process will be far smoother and less costly than a receivership that must spend time and money searching for and arguing over what and / or who is responsible. 

Options for Keeping Cannabis Receivership Costs Down

Operating transparently, with an early focus on identifying the fundamental issues that led the business down the wrong path—as well as what might solve the problems the quickest—is the best strategy for preventing a high-priced undertaking. There are three options particularly best suited for relatively rapid and cost-effective receiverships. The transfer of a cannabis license, management reorganization or liquidation of assets (if in the common interest of all involved) are the best options. Transferring a license can significantly limit the scope of a receivership and provide a quick end to the process. If poor management is identified as a key contributor to business failings, a rapid reorganization of management personnel and strategies can lead to solvency. And if it is determined and agreed that the cost of attempting to return the business to solvency will be too expensive, liquidation is the quickest and least expensive way to handle the problems facing a distressed cannabis business.

Those on the business side of the operation should refrain from giving the receiver complete authority to do as they please in order to keep costs down and minimize scope. Fees for the receivership—normally billed by the hour—should be negotiated based on the receiver’s skills and experience, with clear parameters confirmed for what work will be done. An experienced receiver should be able to understand the budgeting and finance situation quickly so a structure can be established for moving forward. Borrowing money to pay for a receivership is possible, but receivership lending comes at a high cost (as much as 18%) because of the unknown aspects of the process. 

The receiver should manage costs with proper planning, communication and agility. The ability to adjust and manage changes quickly while allocating remaining resources will curb the financial burden. Creditors should be aware of what is happening in the process and understand what problems might affect their potential payment. Costs can be controlled by clearly communicating what the costs are. If creditors are in the loop of the arrangements being made and what operations are underway, they are less likely to create additional chaos with immediate or untimely demands. 

The Regulatory View

State regulators like and support receiverships because the receivers clean up the mess that surrounds a cannabis business in distress. It can save regulators time, money, and resources while ensuring a transparent process will provide a clear picture into both the issues present throughout the enterprise and the solutions needed.The receiver is the one responsible for compliance during the process, so regulators work with the receiver instead of the principles of the distressed company. The receiver has to manage the expectations of the regulators who want the receiver to authorize more spending on regulatory issues while also trying to keep the costs of the receivership down. It is yet another tightrope the receiver must walk to maintain a realistic budget and manage expectations of all of the interested parties.

Expert cannabis risk mitigation guidance is here. Reach out to United CMC today.