Want Your Cannabis Company To Be Acquired? Do This First.
Four quick tips to prepare yourself for a clean exit.
The cannabis industry is experiencing the natural highs and lows that any burgeoning sector faces. Today’s investors, especially those overseeing deals, are being more scrutinizing, asking for detailed information. In some instances, deals have fallen apart, causing entrepreneurs to ask: What's changed?
The answer is pretty much everything. As the industry evolves, so does the complexity of running a business. Many companies in the cannabis sector have gone from a gray market to a regulated market and have had to adjust. Seed-to-sale tracking is new. California regulators are still trying to wrap their heads around the Marijuana Enforcement Tracking Reporting Compliance (METRC) system that launched there in January 2019. The same system is used in Colorado, Oregon, Alaska, Maryland, Maine, Michigan, Ohio, Massachusetts, Missouri, Montana, Nevada, Louisiana and Washington, D.C.
It’s not that cannabis companies have been doing anything wrong. There’s just little to no history to prove they are doing many things correctly. But to play in the M&A space today, businesses need to show legitimacy, and that starts with buttoned-up books and paper trails for money going in and out of the enterprise.
For those who want to make a clean exit through M&A, they should realize the field is being looked at with discerning eyes. You can’t do anything about that, but you can take charge of where your business stands. Here’s how:
Keep your accounting clean
Have a history of every single transaction. This includes all income, all purchases, and all other expenses. Keep up with all your receipts. If you are paying vendors, keep detailed records of what service they provided you and how much it cost. The same goes for payroll. Record every hour every employee works and what you paid them. Tax records also need to be kept in order, lest they slow down potential mergers.
The cannabis industry is one of the most highly regulated industries in the world, and the potential for catastrophic pitfalls and significant business interruption seemingly resides around every corner. Cannabis companies need to keep detailed records, reporting the movement of the product from seed to sale, as well as each and every sale. Clean books aren’t only necessary for potential deals, they can also help businesses avoid hefty fines or even revoked licenses.
Involve the experts
It’s often worth getting outside help from attorneys, accountants and tax advisors. Third-party companies can also make easy work of hard tasks. In the cannabis space, many vendors specialize in the space and know the pitfalls that cannacompanies encounter, such as banking and 280E tax restrictions. Experts and third-party vendors can help a business prepare for an exit and will have the experience to help executives overcome obstacles when they arise.
Tighten your company narrative
While numbers tell one story, a compelling corporate narrative can help cohesively and concisely relay a broader corporate vision. A strong marketing and PR team can help craft a credible brand story that not only inspires confidence among employees, customers and stakeholders, but also convinces potential buyers why they should bank on your company.
No matter what industry you’re in, advance planning and preparation are key to a successful M&A transaction. If you can reduce the stress for the due diligence process upfront, you can increase the likelihood of a deal in the end.