Recently I spoke on a panel that highlighted the murky waters ahead for operators and investors in the cannabis sector. In a competitive market, cannabis operators may find themselves behind the 8-ball. With no federal bankruptcy protection afforded to plant-touching businesses, receivership is usually the last resort. During our discussion we talked about how companies can make sure they do not get to this point, how to stress test your financials, and steps that can be taken to avoid losing control of your assets.

Specifically for this industry we have seen a lot of money go into new ventures states that have made it legal. While sound business plans were presented to investors, most of the c-suite or managers do not have the skill set to operate a full-integrated business.  Understanding who you are investing in and their background is imperative to making sure you have the best skill set for each business line.

Management of cash flow has become a concerning topic when we meet with companies tittering on distress. A lot of businesses have large account receivables that become extended past normal terms and, in many cases, become not collectable. Making sure you conduct regular stress test around 13-week cashflow and considering a large deposit upfront for services can help lessen your exposure to cash balances and overextending the business.

One mistake many companies have made since entering the market is scaling too fast or over building for future demand. Many models have been built with the end goal off cannabis becoming federally legal and then selling to a large multi-state operator that wants a footprint in their state. That is a flawed business strategy. This kind of attitude has allowed companies to focus on getting market share at all costs while losing margin or worst, not being profitable. Scaling back or crawling before you walk can save you from losing control of your asset.

Cannabis is no different then other business in the sense that you should be focused on profitability, management of cost and returns for shareholders. Understanding the team you are backing that is being a steward of your investment can make or break you. Know the regulatory environment in which you are participating in and that proper reporting is in place and being followed. If you are not receiving monthly or quarterly financial statements, you may want to dig deeper to make sure it isn’t a larger issue. Taking a more active role in how the investment is managed may keep you from losing control or having to deal with a court ordered process.