Get cannabis businesses back on track by putting the right models in place.

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

Financial and Operational Models to Success

Cannabis receivership exists in the void created by federal law that prevents distressed cannabis interests from declaring bankruptcy. It is a logical alternative that provides investors and creditors an opportunity to either turn struggling businesses into stable enterprises or retrieve some measure of return before the business is completely shut down. With so many cannabis ventures opening across the country—dispensaries, manufacturers, transporters, real estate firms, cultivations, and so on—the cannabis industry will inevitably see more businesses struggle. Demand continues to grow for receivers who know how to successfully build operational and financial models for businesses to stay in operation and reach solvency.  

Cannabis Operations and Information Asymmetry

Information asymmetry, or an imbalance of information, is a key problem in the cannabis industry. Simply put, there is a serious lack of standardization that manifests in an inability for cannabis companies to fairly compete on cost efficiencies, marketing and other important factors. In sophisticated industries, information is shared or public, and differentiation and growth occur through innovation, competition and cost savings. This information, including critical competitor insights, is simply not available in the same way in the cannabis industry. Information asymmetry puts cannabis businesses at an immediate disadvantage and presents challenges to competing within the industry. Intellectual property (IP) is protected to such a degree that industry confidence is curbed and creativity stunted. IP in cannabis is often overprotected by operators because they have such few assets that can be leveraged. 

As receivers, we are sensitive to protecting IP and work to protect the IP we might put in place during the receivership process. But that sensitivity needs to be measured against the need for access to the core information about the business that will help the receivership be successful. There is also a need for transparency that will allow creditors to know what—if any—return they will get from the business, or to attract new investors or experts who can help the company to ultimately succeed.

Successful Cannabis Operations in a Maturing Industry 

So how can a receiver create a financial and operational model in an industry where protection of IP is so extreme? By utilizing the freedom that they ideally have to get away from the day-to-day problems of the business in order to change direction without distraction or disturbances. Keep the “noise” that is adversely affecting the company separate and operate with visibility, transparency and accountability.

In general, receivers first look at the history of the company in question and do as complete a review as possible without any outside interference or information. They then determine what is holding the business back and establish a model that allows the receiver to align with operators with proven records of success that can bring their expertise to bear on the situation. If the business appears to be in good shape, but there are difficulties selling enough of the inventory, the receiver creates strategic alliances with interests that have access to distribution channels in order to introduce the products to a larger market. This will allow the company to diversify and create revenue by becoming more integrated into the marketplace.

If the receiver discovers greater problems at play, they may consider restructuring the company in its entirety. They likely will establish new Standard Operating Procedures (SOPs), investigate the labor structure and change the direction of the business. That type of overhaul is much easier if the receiver can operate in a stay and stop any collection efforts or other types of interference that will constantly interrupt—and disrupt—the process. The history of the company should inform the receiver enough to establish a starting point of operations upon which a 90-180 day model can be developed. 

Cannabis Financial Models

Any model put in place should allow the distressed cannabis company to implement and measure Key Performance Indicators (KPIs) so the receiver has tangible data directly related to performance. The definition and measurement of the KPIs is critical. The receiver needs to establish a monetary reporting policy and structure that will allow them to frequently measure how the business is performing in relation to the KPIs. This will instill a solid culture of responsibility and trust moving forward. There is a need for accountability, and that is created when people are held to something measurable. 

A 30-day model that allows for adjustments to be made based on future performance indicators can then transition into the 90-180 day model if a stable environment can be developed. Flexibility and agility as the business regains its footing are crucial. Once a reliable financial operations model is employed, creditors and investors will be able to understand where the business stands, what the process will entail and what the final goal will be. The models in place allow the receiver to have a system for monitoring that can avoid costly problems down the line and keep negative chain reactions at bay. 

To access expert cannabis receivership guidance, reach out to United CMC today. Our experienced team is here to help.