Cannabis Knowledge & Insights

How to Get Out of Bad Cannabis Business Contracts

In this video and synopsis, our team discusses strategies for how business owners and operators can get out of bad cannabis business contracts.

Hi I’m Jim Breese and this is GreenGrowth CPAs and today we’re going to talk about how to get out of bad cannabis business contracts it’s very commonplace and rushed through your business and trying to get everything started and then you take some contracts you sign them when you know they’re not the best for your business at least in that long term and then as you grow and you expand you start to feel the pains of those bad contracts we’ve seen it you’d help clients deal with this and so what we’re gonna do is kind of shed some light on how to get out of bad contracts how to renegotiate how to find better options or how to get out of them totally so if you need help with any kind of contract renegotiation with your cannabis company then please reach out to green growth CPAs via our website at green growth CPAs com or give us a call at eight hundred 676 now this is very much a common thing that happens again where you rush in you get a lot of contracts going and then you really peel back the layers of those contracts like wow this isn’t really that good for our business how can we move forward with something that’s better and we’re going to explore some of those options on how to renegotiate and get better contracts but before we do I need to let you know that the information contained in this presentation is meant for guidance purposes only and not as professional legal or tax advice and further it does not give any personalized legal tax investment or any business advice in general so with that out of the way let’s review what we’ll cover today so first we’re gonna unpack and learn and understand what bad contracts are so you can really get a grip and understand hey I don’t really like this contract that sounds a little bit like my distribution contracts so give you some color in context to that as well as discuss four ways you can get out of bad contracts including following the agreement terms asking for a renegotiation finding creative workarounds and claiming impossibility of performance so what is a bad contract you know we may think of oh oh I’m not making enough money and you get greedy and think that’s a bad contract well we’re not gonna really talk about those let’s talk about a few different scenarios where it really is a bad contract and it is killing your business so three different things you can look at there’s probably a longer list of things but I just want to go over three common ones so first inequitable or unfair compensation for your effort energy or resources say you’re putting out a lot of money or a lot of resources or giving a lot of things where you’re not getting a fair share of your compensation for the proceeds of that contract then that’s pretty much a bad contract second non-performance of responsibilities by other parties so anybody you’re in a contract with if they’re not performing their duties that they promised in the contract then we would consider that a bad contract or lastly you cannot perform your duties now if you can’t perform your duties that’s a bad contract as well we need to understand why you can’t perform them either you’re just not hiring the right amount of people you don’t have the capital or it’s just a very egregious ask in the contract so those are three examples of what a bad contract is but no matter what the scenario your goal is to find a win/win between all the parties in the contract being a good business person is predicated on being a good person to begin with you have to be fair and negotiate in good faith so try to find that win-win when trying to get out of a bad contract and if the relationship does go south then document your partner’s insufficient performance or any other issues that come with executing this contract it’s very hard to substantiate any claims especially in the court of law if it goes to litigation without any evidence you can’t just have some generalities you need to have concrete examples of hey Company B did not do this this or this on these three dates or they miss these kind of payments or whatever that’s going to be whatever your agreement is a pun you need to have concrete examples of how and why you need to be out of this contract or why it’s a bad contract in the next contact your lawyer for guidance on a remedy or exit strategy from the contract so now let’s talk about four different ways that we have helped some of our clients get out of bad cannabis business contracts right we’re not lawyers we can’t sign in the contracts and draft them up for you but we can help negotiate between you and your other parties to kind of come to an agreement of terms then send it off to your lawyer sometimes in most times I would say it’s about the money and that’s where we can come in as money people and make a smart fair deal for everybody involved so everyone moves forward from this so the first way to get out of a bad cannabis business contra is to just follow the agreement terms and typically this is the easiest way to untie yourself from that bad contract because in most cases there is a termination provision in that contract it’s usually at the end and you’ll see all right follow these steps and then you can actually get out of the contract and sometimes it’s as simple as providing just written notice to the other parties within a certain time window so it’s like hey within 30 days send this kind of written notice to the other parties and then after those 30 days your agreement will be dissolved and if you really really want out and this is your only way out then follow the procedures for termination exactly verbal notice is not the same as written notice you may say hey well we had a phone call in January and I told you I was getting out of the contract I didn’t want to do this anymore that’s not the way it says in the contract if it says written notice then send an email or send certified snail mail whatever the contract says execute upon that termination provision now next if you don’t want to get out of the contract you want to stay business partners with this person then you can ask for a renegotiation now it’s just a few simple uncomfortable conversations but they can lead to a better more equitable deal terms for you and your business partners you know nobody likes to say hey I made a mistake hey I said I could do something that I actually can’t do or actually hearing from somebody hey I promised you something and I can’t do it for you that makes you feel a little uncomfortable but business is not always comfortable you just have to have those big hairy conversations and just move forward from there and find something on a new path to that new destination so what you can do when you’re having those conversations is start out by pointing out how it’s inequitable for your company to do this kind of contract to execute on this kind of contract you provide examples or evidence of this because when people start to see this evidence or these examples they desire to be fair they say oh you know what Frank you have a really good point we can’t do that if you end up continuing to do business like this then you may go bankrupt and we need you so let’s go through two examples of this so a very common example that we see and that we have to renegotiate quite often is that initially distributors pay out on units delivered to a dispensary and not on units collected from the dispensary back right so they may say okay we dropped off 100 units at ABC dispensary here’s payment on those 100 units to the brand well what if the dispensary never ever pays back on those units they just stop paying or what if those returns or you know again non-payment or you become cash-strapped because you’re floating so much operating capital for these brands you can go out of business and essentially the contract is worthless at that point so really be smart to understand hey let’s just show them if we do it this way no one wins we can work for maybe three months but then after that we’re not a business anymore we’re now becoming you know your working capital bank now the second example that you see is quite common is overpaying an employee versus their work product or value-added to the business now you have to understand sometimes roles change and evolve and new compensation needs to be discussed so say someone’s brought in as a head of manufacturing a chief manufacturing officer we’ll just say that right and got that C in there and that officer and you’re like okay well they should get paid a hundred grand but you start paying them this high wage at the beginning when maybe there’s no manufacturing going on maybe the first eight months you guys are working on licensing and you’re bleeding that bank account to pay this chief manufacturing officer when you don’t really need them at that level or in that capacity so you have to have that conversation like hey you know we paid you a lot of money for these first six seven eight months when we weren’t really in business can we find some way to work together to renegotiate because we’re not gonna get a license for the next you know four six months to bring you down maybe 50% or 30% or even 80% and then when we hit time to go build out the manufacturing or actually get to manufacturing we can bring you back up to that agreed-upon wage of the hundred thousand dollars a year it’s just having that conversation but be okay with them saying no and then then walking away right you can’t always be tied to the end result and get all bent out of shape when you don’t get what you want business is not always just get everything you need and get everything you want sometimes you will get shot in the foot and you got to figure out how to run the tactic and a renegotiation is to develop and present a fair solution to the counterparty you have to be practical right you can’t tell them hey I got to continue operating this way because I don’t want to you know ruin our relationship you can’t distribute products or pay employees if you go bankrupt like you really got to be practical with the business and with the cash like these cannabis businesses eat cash and sometimes your ego gets in the way you don’t want to come back and change your mind on certain things change suppliers change contracts renegotiate payments things like that you have to because if the economics don’t work and the contract is useless anyways next is to find work around so many contracts you have to be creative sometimes they very much prohibit you from doing anyways to get out of the contracts and real estate is one of those examples and you know real estate is one of the biggest expenses for cannabis businesses and it’s a cause of major cash flow issues for example you have to get some type of property whether under lease or owning that property to get a license in most states and you can be sitting on this property for 6 12 18 even 24 months before your license actually can come through if you even get a license so one of the things to do is you know we’ll go through an example here if that real estate is too expensive for you to afford you could potentially find someone to sublease part or all of your space in the interim while you’re getting your license or if you don’t get that license find a permanent sublease person what this does if you rent out part of your business part of that real estate that you own this can create cash flow for you to actually support your cannabis business for example we talked about this and using your assets and your licenses to create for the cash flow maybe of a 10,000 square foot facility you didn’t need to rent all that space but they wouldn’t give you anything smaller well what if you rented out five thousand to another business maybe it’s not even cannabis specific maybe it’s just any kind of business that can help to offset your burn on your real estate so that you don’t burn out that bank account too quickly but you need to check your lease to make sure that subleasing is permitted or renegotiate back with your landlord that you can actually do that and if it’s not permitted you know one of the things you can do is just go up to the lessor and say hey I’ll find a new tenant for you and just take me off the lease right you could find somebody to take over that property potentially become the primary lease holder now the second option from this in the real estate space is potentially just walking away from the lease and I know this sounds like it’s crazy there’s no way I would just walk away from the lease well sometimes you need to do a cost-benefit analysis and really get a number around well if I walk away I owe 187 thousand dollars but if I stay here for five years then I’m gonna have to end up owing 621,000 now yes it’s over a certain period of time for that five years but maybe you have 180 some thousand dollars to just get out of the contract now save your mental health and get on with your life and move forward from this and not waste four more years dealing with whatever has to be going on with this landlord so just think about it either finding another person to take over that lease subletting part of your space or just walking away from the lease overall and then lastly one of the things you can do is claim impossibility of performance now this is a legal provision it gives you grounds for contract termination because circumstances beyond the control of the contractual party prevent performance so we’ll go over some examples you hear these relatively often so death or incapacity of a key player so if there’s a key player or key person within a company that performs on those contracts if they end up dying then you cannot perform on that contract that’s your impossibility of performance you’re out so next one is natural disasters and one example especially in California is earthquakes if you have an earthquake and your building falls down and you can’t manufacture any of the goods for your suppliers or for anybody else or your upstream or downstream then hey you can get out of that contract because you have no way to perform on that contract acts of God next is fraud so when a contract is established based on fake documents or other deception you can easily pull out of that contract or mistakes is another one so a contract must be rewritten if there’s an error in a contract term next is misrepresentation so if one party has not stated all the facts needed for both parties to enter into the contract then you can claim impossibility of performance and lastly is breach of contract so say a party did not fulfill on some other payment obligations or anything within their contract terms that you guys have both agreed upon and the party that did not violate the contract is release from the agreement terms so you can let yourself out of that agreement gracefully because the other person did not fulfill on their obligations and breach the contract now it’s all good don’t worry sometimes bad contracts happen it’s a very very common thing to happen especially in the cannabis industry when you’re trying to move fast and put all the places on the board so you can move forward with your business so if you need help with renegotiating or getting out of Bad cannabis business contracts then please reach out to green growth CPAs at our website green growth CPAs com or give us a call at eight hundred 676 with either upstream partners or downstream suppliers and anything in between even between founders we’ve helped them renegotiate their operating agreements in their equity stake in the company and all these different aspects to different agreements so we can help bring that financial side in that understanding of the ramifications of the contract as well as why you should consider different options within your contract now I hope this presentation has brought you a ton of value and you understand it there are ways out of contracts and again if you need any help with renegotiating or getting out of any bad cannabis business contracts please reach out to green growth CPAs at green growth CPAs dot-com or give us a call at eight hundred 676