What is Receivership?
As the cannabis industry matures, financing and operations are shifting, with some businesses struggling and others succeeding. In this article, we’ll discusses how receivership can be used as an option for struggling cannabis businesses. With capital rushed into the industry, many businesses face significant financial pressures, and receivership can help to recover value for the company and creditors. The receiver can manage the business to improve financial standing, sell assets, pay off creditors, and preserve the value of the receivership estate. The receiver serves as a fiduciary to protect the interests of stakeholders and is in power until the legal matter is resolved.
Why Go Through Receivership?
Now that you understand what receivership is, you may wonder why it’s necessary for struggling cannabis businesses. Since cannabis is federally illegal, there’s no bankruptcy protection for cannabis businesses. While there’s an option of working on a handshake agreement with the creditor, it requires a significant amount of trust, which is often not present in the cannabis industry. In contrast, receivership provides a court-appointed neutral party receiver to mediate between the debtor and creditor, making it a more reliable option.
Pros of Receivership
The benefits of receivership include relief from complaints, preservation of assets, and a potentially more favorable outcome for the debtor. While there are many other pros to receivership, these are the most significant.
Relief from Complaints
Receivership can create a more positive outcome for the debtor because it relieves them of the burden of managing their financial obligations and assets, which can be incredibly stressful and overwhelming. By appointing a neutral third party, the debtor can take a step back and focus on their core business operations instead of being weighed down by financial stress.
Preservation of Assets
A receiver can also help liquidate non-licensed assets such as real estate or manufacturing equipment. Breaking licenses and assets into separate entities can make the process smoother and easier to manage, potentially getting the business into a cash-neutral position.
Renewed Investment Interest
Additionally, receivership can create opportunities for cheap investments for other investors. The transparency required in receivership can help attract new investments and investors who may be more willing to inject capital into the business to help turn it around.
Cons of Receivership
However, there are also some cons to consider when going through receivership. It is not always a smooth process, and it may be costly and time-consuming. It can also lead to potential job loss and damage to the reputation of the business.
Receivership can be Expensive
Receivers are not working for free, and their fees are typically capped at 5% of the proceeds they disperse, such as revenue generated from the sale of an asset or the creation of additional sales. However, in the case of a business with no revenue, the court may assign the costs to either party. Therefore, whoever requests the receiver, typically the creditor, may have to bear the cost of that receiver, even though their debt may be fulfilled.
License Transfer Restrictions can be a Hurdle
Licensed transfer restrictions in California can pose huge hurdles when changing ownership of a cannabis business at the state level. Licenses are not easily transferable and can even be prohibited at the city level. This is why it’s essential to break down assets and licenses into separate entities to ensure a smoother process during M&A transactions or receivership.
Owners are Vulnerable to Negative Outcomes
Lastly, a business owner can be left with nothing or worse, less than nothing. The receiver can liquidate everything and leave the owner with no assets or business, potentially leading to negative consequences like personal tax bills. Sales tax, for example, cannot be written off, and the state will eventually demand payment. Additionally, the owner is not in control anymore, and the receiver may have a team of lawyers and accountants to help them make decisions. Therefore, it’s crucial to evaluate a cannabis business carefully before considering receivership.
Evaluating Your Cannabis Business
Consider these points when evaluating your cannabis business: Firstly, admit that you may need help and assess your true operating capital. This includes looking at your tax payments and debt obligations.
Secondly, consider if you have any assets that can be leased or sold to create new cash flow. If not, think about how you can preserve your business by entering receivership or working with a financial consultant, a CPA firm or lawyers. It’s not something you need to tackle by yourself.
Thirdly, receivership is an option for cannabis businesses facing insolvency, and it can help to satisfy your creditors and get your business back on track. However, there may be restrictions on licensed transfers that could affect the value of your licenses.
Lastly, understand that receivership is not a “kill the business” situation. It may be possible to restructure your business, balance sheet and operations, and come out better on the other side with a valuable business. Remember, you don’t have to do it alone. Partner with people such as creditors, CPAs, lawyers and the IRS to help you through the process.
GreenGrowth CPAs helps our clients navigate business options everyday. We have several financial programs to assist companies and individuals with their fiscal responsibilities, including tax planning and compliance, accounting & finance support, audit preparation, tax controversy support, and much more.