Given the rapidly expanding state of the cannabis industry and my status as a long-time industry insider, I’ve spent most of the past 10 years looking for like-minded business partners and the funding to capitalize on visionary goals.
This has meant kissing a lot of frogs along the way, and there was a hard-learned lesson there: Don’t kiss frogs. It’s careful planning, thorough searching and a long courtship that fulfills dreams.
Simply put, the cannabis industry is not a place where only the brave can succeed. It’s big business, where the bar for knowledge, skills and abilities is set very high. Given the breadth of experience needed, no one person can succeed alone. The complexities of compliance and banking, combined with the variances in early markets like Oregon and Washington, which seem to be either saturated with cannabis or facing shortages, are pushing the industry out of reach for many people.
Cost is another huge problem. It is expensive to compete for permits and to build out compliant facilities, and cannabis companies pay high taxes and fees that wipe away profits. Granted, any new business anticipates that it will take two or three years to become profitable, but for the cannabis industry, it’s likely to take even longer than this. In fact, many of the small California cannabis businesses have been trying to wait out limited access to banking, while hoping for a reversal of IRS 280E tax rules for upwards of five years now. With these burdens in place, most operators lack access to merchant services accounts, don’t have access to traditional funding, and are not allowed to take regular business tax deductions. It’s an untenable situation for any small business trying to break even. Heck, this environment is tough for large, well-funded companies, too.
My conclusion after five years of brand building, partnering and funding searches is this: Until the market stabilizes, many small cannabis businesses will need to join larger verticals to survive. And, there’s only one way to find the right match for this, and that’s by first establishing a foundation based on shared values.
1. Know your corporate values
I know a lot about this topic. My dispensary, Magnolia Wellness, has a mission: to help every individual be their best selves. We believe that both the use of cannabis itself and the experience of visiting the dispensary are transformational, and this idea is complemented by a full calendar of classes, events and direct services like massage therapy.
Now, our small business wants to join with a larger, vertically integrated company, which has the skills to help build and scale the brand. (Even better if they have other holdings complementary to ours, like cultivation and manufacturing.) So, finding the right partner includes looking for people who understand that values-based decisions lead to strong, long-term performers that attract and retain dedicated, long-term clients.
2. Know your company’s value
It’s tough to determine a cannabis company’s worth, especially following so soon after the widespread downturn in Canadian valuations. But, you can’t go to market without a clear understanding of how much your company is worth. This means creating a clear basis for growth over three to five years, using provable internal and external metrics to base projections and draw conclusions. Investors rightfully are wary right now, and, because of this, retail shops are raising funds at 1x to 1.5x sales, rather than the heady 2x sales valuations being touted a year ago. Spend a lot of time studying the competition and looking at other people’s deals. Investigate who is selling and for what price, and look closely at deals that actually close. Yours will have to meet or beat others on the market to succeed.
3. Decide what you want
Now that you’ve figured out the values you won’t sacrifice to make a deal and determined the worth of your company, you have a decision to make. Are you staying or going? The answer to this lays out a web of choices. If you want to continue working with the company, consider looking for a partner to help fund and manage it with you. Or, find an investor willing to contribute funds, who will support the company under your leadership. Consider folding up into a larger company, selling your entire business to them. You then become an employee there in the same role or maybe a better one.
If you want to leave, think of it a bit like a corporate adoption. Whom do you trust to take your company from toddler to teen? What happens next still will affect your reputation and personal brand, so don’t just hand it off to anyone. You want to be sure your company will thrive in new hands, especially if part of your profits from the deal includes stock in the company that acquires it.
4. Find your funder
You’ve made some tough choices and are ready to find your funder. There are plenty of places to look, but get ready to find lots of competition already there. So, be armed with a well-thought-out business plan and proforma, and hit the field ready to pitch. The first place to look is obvious: Start at one of the dozens of well-attended cannabis business conferences. Investors are there, looking to meet entrepreneurs with interesting projects. While there, keep an eye out for brokers specialized in cannabis deals. Sign with them, and they’ll help find your buyer, pitch the deal and see it through to close, all for a cut of the final sale price. Network and ask for referrals. Find out who’s buying, looking for partnerships, or wanting to invest in industry businesses. Post on your LinkedIn page, as investors and lenders are there looking to meet people. Scour news sources, and watch who’s making deals; contact them with your deal if it looks to fit their portfolio. And, don’t forget hedge funds and other private funds. Investors are out there now looking for the right project.
5. Take time to get to know each other
It takes a lot of work to get this far, but this isn’t the time to stop working or to rush. Mutual due diligence is the next step, and it’s going to be difficult. Your funder is going to want to understand every detail about the company, including regulatory information, financial data and human resources. They are looking for any liabilities—past, current or potential—and are digging deep to verify the balance sheet and profit-and-loss statements. All the dirty laundry gets hung out to dry during due diligence, and you really get to know each other while it’s happening. Plus, due diligence works both ways. Your team needs to know everything about the funder, too—including whether the investor really has the money to pay the asking price and the skills to close the deal. Many funders don’t, so watch out for people who are stringing the deal along, hoping their own funding comes through before you require funding for your deal.
If you make it through due diligence and everything checks out, it’s time to close the deal. You’ll want a lawyer and an accountant to help because there are an enormous number of potential liabilities to prepare for and avoid. Don’t try to close a cannabis business deal alone, as mistakes now can cost money and time, and small errors can cause problems that linger for years into the future. Turn this part over to the experts on both sides, for sure. And then, congratulations! You’ve closed your deal and are ready to celebrate.
