Cannabis firms: going, going and gone
“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning” Winston Churchill after the Second Battle for El Alamein
2023 will be a year of reckoning for the NA cannabis industry.
Around 12,000 cannabis companies operate with less than US$2M in sales. Sadly (but perhaps necessary for the industry), the majority won’t be around in 12 months. This is not just a cannabis phenomenon. Up to 90% of all start-ups don’t survive into year 5 for the same reasons plaguing cannabis firms: poor cash flow, margin compression and product failure.
In Canada, the warning signs of industry contraction are everywhere. About two-thirds of LPs did not pay their 2022 excise taxes on time. Countless firms are not renewing expensive licenses and leases. Q1 industry revenues are typically the lowest from a wholesale & retail sales perspective. Prices and margins are declining quickly, while profits and capital (especially for private firms) remain elusive.
If it’s time to throw in the towel, there are decent exit options.
However, firms need to be shrewd. In a game of musical chairs, being remiss will result in you not finding a seat when the music stops. Here are some ways to leave the industry-
1. Sell
Many businesses have the for-sale out on their lawn - as do many of their neighbours. But don’t think a white knight is coming just to you with lots of upfront cash and valuable stock. It’s a buyer’s market.
2. Find a strategic partner
You can merge with another company or be a bolt-on where you can fold in your unique capabilities or market position into a larger entity for a cheaper price than they could buy or build it. You won’t be alone with this tack and your partner will likely share some of your ailments.
3. Go private
For some public LPs, going private through a leveraged or management buy-out is a smart move if they can find capital and engineer the right deal.
4. Be a distressed asset sale
Numerous firms have taken on a lot of expensive debt. Some of that debt is coming due and many companies don’t have the cash to pay. Good operators and balance sheets will be appealing to distressed asset funds.
5. Seek CCAA
To remain viable, many businesses will use a Canadian corporate insolvency law called the Companies’ Creditors Arrangement Act (CCAA). Filing a CCAA is an option for certain U.S.-based cannabis companies (if they qualify) that don’t have the ability to go Chapter 11. For the best results the filing needs to be planned, strategically.
6. Wind it up
Why sign a new long-term lease or pay high registration fees when you no longer have the stomach for the fight or the market is stacked against you. A wind up will be a common outcome for small, fledgling retailers & growers.
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