By Vince Sliwoski, Attorney at Harris Bricken
We work with a good number of multi-state operator (MSO) cannabis companies. Always have. Most of these companies are publicly traded, although others remain closely held. With more MSOs on the scene than ever before, it seems like a good time to list out some pitfalls for MSOs, their decisionmakers, lenders, etc., as these companies stretch across state lines and even internationally.
Many cliches exist along the lines of “a company is only as strong as its people.” These cliches may feel insipid, but they also tend to be true. Many cannabis MSOs suffer from poor leadership which may be exacerbated by inappropriate compensation structures. Here’s a piece from last fall, for example, on Aurora paying out millions in executive bonuses, immediately following mass layoffs and a reported loss of US $2.3 billion. Those are outsized numbers, but this kind of thing isn’t uncommon in cannabis public companies at various scale.
That said, it’s not all about the C-level. For newer and smaller MSOs in particular, it is vital to have strong personnel on the ground. Some of our MSO clients have excellent “grinders” who network fluidly, cut through nonsense, identify strong acquisition targets, etc. These MSOs understand the markets where they are buying and they make informed choices. The same rule applies to local hiring. It’s great to own a fleet of stores, for example, but much better if those stores are maximally profitable. Local management makes all the difference there.
This ties into the point above. We have seen (and admittedly helped) cannabis MSOs buy all sorts of things that should never be bought— at least not for the prices paid. I’ve helped MSOs buy businesses and then sell them two years later for pennies on the dollar. I’ve also helped buy businesses for MSOs where the acquisition goes lights out a year or two later. When a deal looks off, I’ll give the client some general thoughts, but at a certain point the lawyer’s job is to hold his nose and paper things.
Many times, MSOs will buy things (with other people’s money) just for the sake of buying. Companies are racing for market share; or the MSO has made a public announcement that it has locked in XYZ amazing deal; or the MSO feels pressure to quickly return capital to investors; or it wants to look active to attract more investment; or leadership is unsure when another deal will materialize in a certain jurisdiction; etc. There are all sorts of motivations and pressures to be “forward moving.” However, if no coherent strategy exists with respect to markets or operations, the chances of success are quite low.
This happens a lot! Everyone loves a good press release. Read them closely. MSOs exist that shall go unnamed and are always announcing things, seldom coming through and never making money. One example of this is the myriad of zombie cannabis companies on the Canadian Stock Exchange that rebranded as psychedelics companies and/or began issuing press releases about their psychedelic “initiatives” last year. These releases say things like “we have entered into a nonbinding letter of intent to buy [whatever psychedelic research company] with its valuable formulations to treat [anorexia or depression or some other thing] by [issuing super cheap common shares or warrants and paying some cash], and consummation of the transaction will all be subject to satisfactory due diligence.” These announcements are designed to raise a company’s profile and attract investment. In the short term the announcement may have limited positive effect; in the long run, the opposite will be true.
This is the most general problem of all and ties into everything written above. A successful MSO will understand exactly: 1) where the discrete market opportunity lies; 2) how to execute; and 3) when to execute (or not). I’m often surprised at the types of questions people will ask me midstream on a transaction, with respect to market characteristics and trends in Oregon, for example. Or I’ll be interested to learn about some other deal the MSO is running concurrently, with some other angle in some other jurisdiction and with no discernible synergy. Sometimes, a cannabis MSO will careen along from one shiny prize to the next, with no underlying strategy or long-term vision.
True story: A few months ago, I received a call from a large, out-of-state law firm we have assisted over the years. This law firm advertises heavily in the cannabis space and is Chambers-rated and all sort of things. I like them. The lawyers wanted to discuss a “last minute disclosure” issue on a deal, mid-closing. In the call, the lawyers explained how the disclosure tied into a complex business structure they had created to avoid a “non-resident ownership issue” for the acquiring MSO. Friends– Oregon has not had a residency requirement for cannabis business ownership for the past five years. That call was pretty awkward and I do not know what happened next.
When our MSO clients go to other states, I never want to run those deals. I don’t care if someone else earns the fees. I don’t know the local rules; and even if I can research them, much of what I’d need to know to provide the best possible value is unavailable online. With no exceptions, I will either have a Harris Bricken lawyer handle it (if we have an office in that state), or I will steer the client toward a good local lawyer from another, solid firm. Too often, however, I see MSOs trust that one lawyer or law firm is good enough to run their deals all across the country. Better to work with someone qualified. The value will be there.
Re-published with the permission of Harris Bricken and The Canna Law Blog
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