Protect Your Valuation with a Strong Compliance Culture

by | Aug 1, 2021 | Uncategorized | 0 comments

Protect Your Valuation with a Strong Compliance Culture

Few people doubt that the speed at which the cannabis industry is growing will continue. As Washington insiders discuss descheduling cannabis, cannabis banking reform, and even full legalization, it’s likely this pace will pick up in the not-so-distant future. With a burgeoning cannabis industry, the stage is set for an uptick in mergers and acquisitions. Even if you’re just starting out, you may be asking yourself what it takes for a company to be positioned for a sale. What if a buyer knocked on your door tomorrow? Do you have systems and controls in place that allow you to easily and adequately respond to a potential buyer’s due diligence questions? In a highly regulated industry, and particularly one with constantly evolving laws, rules, regulations, and guidance, it can feel daunting to build your business while simultaneously planning for a future sale that requires you to be proactive about establishing a compliance program. Here’s what you can expect. 

Due Diligence in Mergers and Acquisitions

A party interested in merging with or acquiring buyer your company will take a deep dive into the books and records and will focus due diligence on evaluating your company’s liabilities and identifying the likelihood of future issues. The merger and acquisition process is comprehensive and can be demanding, but if you plan ahead as you build your cannabis operation, you can protect the value of your company and save yourself both time and money in the long run. Developing a way to keep your company in compliance will put you on the right side of a successful sale rather than bemoaning a missed opportunity. As you build your cannabis company, consider the five recommendations below to set up for long-term success. 

1. Understand the cannabis laws and regulations completely in each state and municipality where your company operates

A party interested in merging with or acquiring buyer your company will take a deep dive into the books and records and will focus due diligence on evaluating your company’s liabilities and identifying the likelihood of future issues. The merger and acquisition process is comprehensive and can be demanding, but if you plan ahead as you build your cannabis operation, you can protect the value of your company and save yourself both time and money in the long run. Developing a way to keep your company in compliance will put you on the right side of a successful sale rather than bemoaning a missed opportunity. As you build your cannabis company, consider the five recommendations below to set up for long-term success. 

2. Develop and maintain a comprehensive compliance program

Even if you are know and understand all of the laws and regulations that apply to your company, are you able to demonstrate your compliance with those laws and regulations today? Specifically, can you point a potential buyer to the systems you use and information you’ve documented to prove your company is operating compliantly? In light of the tightly regulated nature of the cannabis industry, all cannabis companies should be developing and implementing a comprehensive, streamlined compliance program, ideally from day one. Developing a strong culture of compliance is one way to demonstrate to potential buyers that protecting the company’s value is woven into company ethos, providing reassurance that there is less risk for business and revenue interruptions due to licensure and regulatory issues. Focus your efforts on utilizing a system that allows your company to identify and document its areas of risk and implement appropriate controls to mitigate those risks.  

3.  Establish practical, adaptable, and profitable processes and procedures

Successful compliance programs establish practical and adaptable standard operating procedures that integrate state mandated processes, procedures and protocols. Formalizing and documenting the ways in which the company operates can help ensure compliant day-to-day operations and can streamline decision-making. Policies and procedures can and should be utilized by all company members, reviewed and updated on a regular basis, and treated as evolving documents so that you are able to adapt to and incorporate all positive and negative lessons learned over the course of your company’s lifecycle. Abiding by your own internal controls will help establish your brand as well as prevent and detect issues and noncompliance, which is likely to be highly valued by potential buyers.  

4.   Avoid regulatory violations and fines

This sounds obvious, but ask yourself what you are doing to ensure you don’t gert hit with an unexpected fine or interruption in business operations due to compliance infraction. A well-developed compliance program can help you avoid regulatory violations and fines. Failing to comply with state laws and regulations can have significant consequences and result in a enforcement actions and penalties ranging from reputational damage and monetary penalties to license suspension or revocation. Not only can a violation financially cripple a new business, it also raises red flags when discovered by a potential buyer during the due diligence process. In an ideal world, your company avoids regulatory blemishes and fines. If you do find yourself in a situation needing to explain a violation to a buyer, however, a well-designed and implemented compliance system can illustrate how the issue was remedied and show how controls were put in place to avoid similar future issues.

5.  Maintain clean and organized records 

Organization may be the most important aspect of a smooth sale process. Potential buyers will ask hundreds of questions about your company, its operations, policies and procedures, regulatory compliance, contracts, financials, and more. Conducting your own due diligence and tracking and maintaining all of your company’s files in an organized and accessible system will allow you to easily and efficiently respond to questions and produce documentation to support your responses. You don’t want to give a potential buyer a reason to discount the value of your company by not being able to answer a question they may consider critical to their evaluation. For example, if you are asked to demonstrate how you stay in compliance with certain cannabis safety protocols and you are able to produce a readily accessible policy and procedure that addresses exactly how the company complies, and you can show that internal audits are conducted on a regular basis to confirm you are meeting or exceeding the relevant standard, it is much less likely that a potential buyer would find a reason to discount the value of the company and therefore its offer.  

Summing it up

Understanding cannabis laws and regulations and staying in compliance does not have to monopolize your time and money, or keep you up at night, and it certainly should not be a roadblock to the successful sale of your cannabis company. Software platforms such as ProCanna can help you establish and monitor a compliance program, as well as demonstrate and validate your compliance. By being proactive and developing and implementing a comprehensive compliance program from day one, your day-to-day operations will run smoother and you will be well positioned to respond when a potential buyer comes knocking.

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