As we get ready to ring in the New Year, we know cannabis businesses would like to hear their cash registers ringing as well. California cannabis companies have struggled recently with over-valuations, over-promised performance forecasts and under-delivery on revenues and forecasts. Investors have struggled to fully comprehend why their investments have not panned out as expected in the emerging legal cannabis industry.
At Rogoway Law Group, we are aware of the many roadblocks and challenges that can come up for California cannabis businesses. We appreciate and understand the time it can take for cannabis startups to get to dollar one and to become operational with the permitting and licensing framework as a barrier to entry, as well as increasing build-out costs, high rents and high purchase prices in the California cannabis real estate market today.
We encourage our clients to:
- Avoid early stage valuations in obtaining financing if they can (e.g. structure the financing as a debt financing with time to pay off the loans before they mature, cuing off of operational dates and if it’s convertible debt, avoid valuation caps and provide for discounts on conversion instead);
- Avoid unrealistic financial models and forecasts that only set the company up for falling short and disappointing investors (add extra cushions of time and losses onto any expectations or hopes);
- Consider corporate restructuring that may save money (reduce overhead, create an efficient workforce and efficient workspace, including utilizing outside vendors and resources for positions that are not required to maintain in-house and including setting milestone-based incentives for employees);
- Consider in the application stages, rolling out multiple operations in stages if aiming for a multi-operational business, so that one operation can become profitable before money is spread too thin commencing efforts on obtaining multiple cannabis verticals all at once (we find that when companies try to take on everything at the start, they often are unable to get to profitable on any aspect of operation early enough to push to the next goal post). Even though these phases take time to roll out, we encourage patience over spreading too thin financially and operationally;
- Consider revising commercial agreements or shopping around on commercial arrangements that are excessively expensive- we can help connect parties based on anecdotal feedback with respect to cost-efficient service providers and can amend commercial agreements to result in cost-savings (usually existing relationships are amenable since they want to keep customers and the industry is competitive); and
- Consult us on ways to save- we have seen what the various trends are in the industry and have both legal and business legal advice that can be helpful in this area.
Here at Rogoway Law Group, we are happy to assist and would love to help our clients bring in 2020 strong so that at the end of the year there is no “Hindsight is 20-20” about what they should have done differently!