To get the best outcome in a cannabis receivership, here’s how to structure the process and plan for worst-case scenarios.
Dotan Y. Melech, President and Executive Director of Corporate Monitoring & Consulting Services, United CMC
The cannabis industry is booming. But with every boom comes an inevitable bust.
There are thousands of dispensaries across the country in legal medical and adult-use markets, and they’re supported by myriad businesses in the supply chain and ancillary service providers—cultivation facilities, processors, manufacturers, distributors, security entities, point-of-sale software tech, real estate, accounting … the list goes on. And not all businesses survive in this crowded, ever-changing space.
In a cash-driven industry dictated by the continued illegality of cannabis under federal law and restrictive, confusing and often-debilitating state regulations, there are a number of distressed businesses with cannabis creditors turning to receivership as a means to recoup whatever is possible after loan payments have stopped and owners aren’t returning calls.
Here’s a closer look at what receivership means for cannabis creditors.
Creditors will get the most out of a receivership if they are clear about what they want the receiver to accomplish and are on solid legal footing. A lawyer who is well versed in the cannabis industry is a key asset in ensuring that the receivership motion is filed in court with specific goals and objectives properly defined, along with clearly established mechanisms for borrowing money (necessary for the receivership to operate properly). A comprehensive and structured plan will help prevent time-consuming and costly corrections down the road.
Cannabis industry creditors should also be aware of how essential it is to conduct a rapid cost-benefit analysis early in the process. A receivership isn’t always feasible or truly the best course of action.
Any records or reports that can be accessed during the early stages should be analyzed as quickly as possible in order to gain as much information and knowledge about the distressed company’s most significant challenges. Creditors should be aware that management might try to limit communications and keep creditors in the dark in order to cover up poor operational oversight, financial irregularities or, in some cases, fraud.
It is not uncommon for the creditor to have little to no knowledge of exactly how the company is operating and why it has gotten to the point that a receivership is necessary. Addressing those unknowns can be costly, and they include, but not limited to:
- Compliance deficiencies
- How internal parties are involved
- What external parties are involved
- Labor force issues
- Payroll claims
If the receiver can act quickly and gather critical information, the interests and goals of the creditor have the best chance of being respected and realized.
In an ideal situation, the receivership (and the actual receiver) has been stipulated by all parties, and then he or she can enter the business and begin recording the pertinent information and interviewing the key players. There is agreement on what the job is that the receiver must do, and all parties work to facilitate the best possible outcome. The receiver’s work will achieve more and cost less.
Unfortunately, most receiverships tend to operate in an adversarial manner. Management and owners who are forced into receivership due to the business becoming distressed often aren’t too eager to accommodate a third party investigating their standard operating procedures and how they have run the business.
Creditors also need to know that sabotage is a very real concern. The destruction or removal of records and other collateral by disgruntled management or staff has been known to happen. Similarly, cannabis plants in grow facilities can be poisoned or simply killed, and manufacturing equipment tampered with. Cash and equipment, as well as inventory, may be removed without authorization.
When faced with these types of adversarial situations, the receiver must be able to make the important decision to spend time and resources attempting to recover what was lost or damaged, or move forward and try to compose a report based on only what is available.
The decision to fight the sabotage through legal channels can be very expensive when it comes to subpoenas, depositions and law enforcement involvement. Creditors will spend valuable resources on legal fees as the company continues to deteriorate until there is little value left.
Looking at the big picture, creditors will benefit most by working closely with the receiver to make sure that she or he has a plan in place to capture records and secure institutional knowledge.
Receivership can be expensive, and creditors should be prepared for additional outlays of funds. The creditors should hold the receiver to a 90-day plan and be aware that assets deemed to be worthless in the early going might actually prove more valuable when the situation is reassessed further along in the process.
Creditors should look at projected revenues, determine if there is a profit to be made and be ready to borrow money or secure additional investments to keep the business operating efficiently and productively.
And always be prepared for pushback.
If you are looking for cannabis receivership guidance, reach out to United CMC today. Our experienced team is here to help you.