As a cannabis business, you may experience tough financial times and it can be very stressful.
You cannot claim bankruptcy, but you can enter into receivership.
Receivership is a process that helps businesses navigate out of those deep waters and potentially get back on track.
In this episode, we will discuss:
- What is Receivership?
- Why Go Through Receivership?
- Pros of Receivership
- Cons of Receivership
- Evaluating Your Cannabis Business
If you need a financial analysis by a cannabis CPA of your business to determine your next steps, then please reach out to us at https://greengrowthcpas.com/get-started or call 800-674-9050.
Below is a video playlist of Receivership for Cannabis Businesses
Watch Playlist on Youtube
So today’s topic is receivership for cannabis-based businesses. We are GreenGrowth CPAs. Now as the industry gets tighter, as the industry matures, you’re starting to see a lot of shifting in the financing and how businesses are actually being run. Some businesses are being run into the ground while some are seeing great success and there’s, and there’s a big spectrum in the middle of all of that. So today we’re going to talk about what receivership is and how that can be used as a cannabis business. A little bit about GreenGrowth CPAs before we get started. We are a firm that only helps cannabis-based businesses. We work with hundreds of active clients throughout the entire country in 12 States. We have some international clients as well. Now we help with not just taxes and tax preparation but also with audits, valuations, compliance, outsource CFO where we can really help you build up the numbers in your business as well as an exit strategy and helping you get ready for your IPO.
And we service all verticals in the cannabis industry, from the cultivators to the distributors, the manufacturers testing, retail delivery and everything in between. So everything from seed to sale, we can help out with cannabis businesses, anything that’s cash and cannabis-related. We have experience in helping cannabis businesses achieve their goals in those aspects. Now before we get started, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional legal or tax advice. Further does not give any personalized legal tax investment or any business advice in general. So without the way, let’s review what we’ll cover today. So first I’m going to help you understand why we’re even talking about receivership at this point in the industry and how some businesses are coming to the point where they actually need to potentially enter into receivership.
Now we’re going to talk about what receivership actually is. Then we’ll talk about some reasons to go through receivership as well as some pros and cons about the process as well as taking a very cold hard look at your cannabis business and see if this is a potential option for you. So first, why even talk about receivership? Well as you know, a lot of capital has been rushed and pushed into the cannabis industry, but it went into a bucket that essentially had a ton of holes in the bottom. Very, very big holes. Investors saw this as a once in a lifetime opportunity, a green rush. Let’s make some big bucks. Let’s bring an industry out of the, you know, shadows into the light. Let people, you know, really benefit from this. You know, people get their medicine, we make some money. At the same time, some black market folks, they also saw, Hey, this is our chance to go legit.
They’d been operating again in the shadows for seven, eight 12, 15 years. Let’s go and bring this to the real market. Let’s go on the straight and narrow. But what you’re seeing is that there’s a lot of current financial pressures on these businesses because it’s the very complex industry. Neil, the big boys out there, the MedMens of the world, med men completed a licensed selloff where they, you know, found underperforming assets. They sold that off for $54 million. They ended up selling some stock that was a $27 million. They’ve got layoffs coming. They have trouble covering their debt, so they’re asking vendors to take stock instead of cash or wait a longer period to get paid. You know, everyone wanted to be in a med men dispensary as a product, but is it really that good if you’re not getting paid right? These are financial pressures that they’re not just affecting med men, but if you fronted product to med men and you’re not getting paid, now that’s putting financial pressure all the way down the chain.
Now look at another company like Eaze, which is a technology platform. They are also running out of cash and they’re doing a bridge round, right? They close, I think like a $15 million bridge round to keep the lights on when they were initially funded for $166 million or something around that number. A lot of money, right now, they’re going through layoffs. They’re experiencing poor margins. They’ve got lawsuits, they have payment processing issues, right? It’s not just, Oh, let’s go and make a bunch of money. There’s a lot of pressure that potentially sometimes you don’t see coming down the pipeline and it’s not just the big people as well. Right? Small and medium-size operators, people that are our clients, you know that two to $15 million in annual revenue. They’re also feeling the squeeze. As I said, when you front product to a MedMen or to any other dispensary, I don’t want to just pick on med men or just bring them up.
Other dispensary’s big chains, small individual operators are feeling the same pressure. They are also putting that pressure down the pipeline and squeezing clients, squeezing brands. It’s squeezing distributors, right? We even helped a few clients through this receivership process and that’s why I wanted to talk about this because the mental relief it gave to one of our clients was just amazing and I want to share this with you guys today. Now again, think about it. This complex industry, it’s coming out of 80 plus years of prohibition. The regulations are changing. One month it’s this and then they changed it in. They updated to this and taxes go up and potentially taxes go down. You’ve got expensive real estate, huge upfront costs. You know, we’re betting on this unknown future. You have black market pressure where the black market is selling more cannabis than the legit market, heavy tax burdens.
All of this creates huge unknowns and people are throwing money at it to try and solve it, but it’s really hard to solve that problem when you run out of money to throw at the problem. So enter in receivership. Now, what is receivership? Essentially, when a business cannot meet their financial obligations, say the default and alone or their debt outweighs their cashflow and they’re unable to continue their operations, right? Their balance sheet just looks really, really lopsided with a lot of liabilities and not enough assets, it can become really, really stressful. So essentially once one of those kinds of things happen, we’ll just take the example. You default on a loan. Litigation will probably start by the creditor, right? And they’re going to Sue the debtor, you the business, the cannabis business. Now either side, once they’re in this litigation can request a court-appointed receiver.
Now this is an important detail because whoever asks or requests for this receiver may end up being on the hook for the fees cause these receivers they don’t work for free. We’ll get to that in a moment here. After you go and start this litigation, that receiver is requested then a state or federal court, wherever it’s being filed at that lawsuit appoints a receiver. Now this is similar to a bankruptcy trustee, but the receiver executing usually has greater flexibility to perform the duties of their job, but the court will specify with the powers of the receiver are and what they have and what they can do, right? It’s not always just like here, take the keys and do your thing. Right? There are a neutral party. You know the primary duty of the receiver is to protect the interests of the stakeholders and preserve the value of the receivership estate through, you know the means that are based upon the local jurisdiction, the judge overseeing the matter, the receiver’s appointment order as well as the circumstances of the case.
Now, there’s not a lot of cases out here for cannabis. There’s a few of them, you can look them up and read about them. But in essence, a receiver serves as a fiduciary to help recover value for the company and for its creditors. Now, it’s not just a one-person thing. They may be working with a team of professionals. Okay. Forensic accountants. If there’s any kind of, you know, fishy things going on. Lawyers, operations, scenes, people that help them execute on the ground level, if they’re going to continue to maintain the business. Now they may even partner with the IRS and or the FBI. This is the case with a regulatory receivership and you could see this more and more if taxes become such a big problem for operators, cannabis excise tax, sales tax, and every other tax. These are not things you can just escape from and the regulatory bodies and agencies may help and work with the receiver on the business, you know, maintenance of it to try to extract that value or preserve that value so that they can get paid as well.
Now the receiver’s powers, they can manage the business to get it to better financial standing. They can potentially sell off certain assets like buildings or machinery or excess stock or excess inventory. They can enter into new agreements or contracts. So if you have potentially some fulfillment contracts or production contracts and things like that, now they can also help to pay off creditors. And what it really comes down to is the receiver will generally have an order of who they’re going to pay back. And if certain parties are unpaid, it is what it is. You know? Too bad. So sad. Now the receiver is in power until this legal matter that kicked the whole thing off is resolved, right? It’s not just to, you know, liquidate the business every time. It’s not just to kill the business. Sometimes it could be just to pay back that one creditor and this receiver is in for a temporary small thing and then goes and takes care of things and then is relieved of their duties once that legal matters resolved.
So now that you understand what receivership is and how it kicks off and what it can do, you know, you may be asking yourself, well, why go through receivership? Why can’t I just go through other processes? Well, as you understand, maybe you’ve caught some of our other videos or you’ve read up somewhere else. There’s no bankruptcy for cannabis businesses. Receivership sounds a little bit like, well, you know, you’re not going to get access to bankruptcy through federal court because cannabis is a federally illegal business and bankruptcy is a federal protection, so there’s no access to bankruptcy court and bankruptcy protection for cannabis businesses. Now there’s another option outside of receivership and because you have no bankruptcy is to work kind of like on a handshake agreement, you know, you start sending paperwork and you already defaulting on loans. You know, there’s already this mistrust in the air between the debtor and the creditor, but the debtor in the creditor in a handshake agreement was worked together to find a resolution to this whole problem.
But again, it involves a huge amount of trust and that’s not usually present in cannabis to begin with. It’s also not present because we’re in a bad situation. But this option, you know, of a handshake agreement and working things out outside of the court system could be less costly than receivership, less legal fees, not paying the receiver, things like that. So you just have to be very thoughtful that this is why you go into receivership because you get that court-appointed, you know, neutral party receiver to kind of take care of things and almost play like a mediator between the debtor in the creditor. So what are the pros of receivership? Well, there’s a few here. I’m going to go over three basic ones, but there are many other pros as you get through the process and every little situation is nuanced. So the three that I really want to hit on here, first and foremost is going to be that the owner gets some reprieve from the complaints.
As a business owner, you know, you get a lot of things going on and then you start to maybe miss a debt payment or seven of them and now it’s like, Aw man, everyone’s calling. Everybody wants their money. Going through receivership and having that receiver help you can help relieve stress. You know and keep you from having to shoulder all that burden of your obligations. You can deflect this over to that receiver, right? When you have vested interests combined with high stress and personal self-worth tied up into the business, it can really lead to poor business choices and dissatisfactory outcomes for everyone involved. So this is why some creditors actually ask for a receiver. It’s not always the business owner that asks for this. You get a rational nonpartial party to take over and kind of guide this business hopefully gracefully to its next step.
You know, no one wants to kill somebody else’s business, they just want what’s due to them through the contract. So this can help kind of clear the mind of the business owner. Use a third party to kind of navigate this business and get this whole business back on track. Now the second one here is it can help you easily liquidate non-licensed assets. Things like real estate manufacturing or grow equipment supplies, additional inventory by going through this and having someone help you with this, especially if you’re a business that’s like, you know, not driven by financial people. You may be a manufacturing business and you’re really, really good at manufacturing, but you’re terrible at finances and managing a P&L and making sure your balance sheet is actually balanced and not, you know, falling apart. Doing this sale can turn business potentially into being cast neutral, especially if you’re large enough.
Say you grew too quickly or you’ve got too many things going on and it’s just too much to handle. You can pair down your company to a manageable size and then start again. That’s a great thing. Okay, and this is why you need to be thoughtful when setting up the business and why you need to break licenses and assets into separate entities so that this process can be easier and not just don’t plan to go through receivership, but you know your basic M & A transactions. This is, you know why you want to break things apart into, Hey, license a is in this one, license B is in this entity, license C is here, our property is in this other entity. Yes, it makes things a bit more complex on your taxes, inner company payments fund flow, but it could come in to save you in times of need like this.
You may not be doing your fire sale for your assets through receivership, but you may be doing them, you know, just the normal Merger and Acquisition and having these assets and these licenses broken out can really make things smoother. Now, the third pro of receivership is that it could be access to cheap investments for other people. Okay. For investors who are not involved on either side of the litigation, potentially other people that are, you know, investing in your business, they can potentially pick up a bigger piece of the pie. Other creditors get the potentially buy and you create that synergy between the creditors, right? They could potentially pick things up, assets that are distressed and they get context to actually why this company has been failing and potentially create a better operating plan for you. People that have become investors, maybe they are just, you know, hands-off, but they want to get deeper into your business.
They can potentially buy out some of those assets. That cash goes to the creditor who’s in need of the money, who’s due the money and this person who is, you know, investing can come in and help you turn that business around. Because sometimes when you take investment money on, you may not show the whole story, the whole project. You may, yeah, share some financial statements with them, but you’re not opening up the closet to show them all the skeletons. But when you go to the receivership, you have to, you have to pretty much take everything out and show all the pieces in the box. And this kind of transparency could potentially lead to some investments for your current investors. And then, you know, pay off some creditors in the same vein. Now, some cons of receivership. It’s not all sunny and everything’s going to be great at the end of the day.
Let’s go over three things here. So it can be expensive to go through receivership, right? These receivers are not working for free. Now. It’s typically capped at 5% or whatever the proceeds are that the receiver disperses and they get out like they sell something or they create additional sales, things like that. Again, yes, it’s a percentage of revenues that come from the cannabis business, right? Again, selling an asset, generating revenue receiver gets paid a create, another contract receiver gets paid, but say this business has a total, total mess and no revenue is generated. There’s no, the court could assign the costs to either party. Now, I brought this up earlier about who requests the receiver potentially has to hold onto the costs, and that’s typically how this goes. Whoever requested the receiver is going to have to take the burden on of the cost of that receiver.
So if you’re the creditor and you request a receiver, know that you may get stuck with the cost of that receiver. Yes, your debt may be, you know, fulfilled, you know back. You maybe get that, you know that money that you loaned out to the cannabis business, you may get that money back. Yes, but you also may have to pay the receiver for going to get that money for you. So just be thoughtful about that. It’s not free. This is not a free process by any means. Now secondly, there are licensed transfer restrictions. So as you know in California there are huge hurdles when changing ownership of a cannabis business at a state level. Licenses are not easily transferable and can even be prohibited at some city levels. This is why we need to break things out. If you ended up, you know, selling off certain assets, does that affect the license in your state?
Do you want to sell the license? Right? When you have that restriction, this could really, really depress the value of your license. You may say, Oh, we spent millions of dollars to get this license in West Hollywood, but if you can’t do anything with it and you’re the only person that can hold it and you don’t want to be a part of this business anymore, or the investors don’t want you part of the business anymore, that license is, you know, essentially worthless or worth very, very little. So just a thought there. You know, these license transfer restrictions can really depress the value of your licensing assets. And lastly, you could be left with nothing or worse, less than nothing. Now the receiver can liquidate everything, just sell off all the assets and get you out of everything. And then you’re left with nothing at the end of this.
And that’s not so bad, but who wants to come up with a goose egg and not have anything for all this effort and work they put in there. But what is really, really bad is losing all of your assets, losing your business. You know, potentially feeling really bad about yourself, which it’s a personal thing. You’ve got to work through that. But you could potentially still be getting a tax bill at the end of this whole thing, right? These taxes, sales tax, it doesn’t go away. You’re going to have to be stuck with sales tax forever because you’re just a custodian of the state’s money excise tax. You’re stuck with it forever is not something you can just write off. I’m like, well sorry we don’t have it. You took money, like in a sales tax scenario, you took money from a consumer, promise them, you would give it to the state and then you maybe use that, you know sales tax money as working capital.
You totally messed up. The business went sideways. The state still wants that money and we’ll get that money. So this is not just like a whole wipe the clean slate kind of thing. This is not bankruptcy. Hey, wipe your hands clean and walk away. You could be left with less than nothing at the end of this and you are not in charge. Again, the receiver is in charge. You know, they could have a team, they may have the lawyers and they may have some CPAs or they may have accountants and things like that to help them out. But you’re not in control at this point anymore. So just understand that you could be left with less than nothing at the end of this whole thing. So now that you understand kind of what receivership is in the scenarios in which this is viable for cannabis businesses and when they should really consider moving into receivership, you know, I want you to take a really hard look at your business and evaluate your cannabis business.
You know, think about this. Just, you know, it’s not the worst thing in the world to admit that you need help. You know, you need to look at things like how many days of operating capital do you have left in true operating capital, not all that excise tax you’ve collected that you’ve been floating your receivables in your payables on and you know, now you’re going to pay this tax bill. You don’t have anything left. You know how much true operating capital do you have? If you’re sitting on 15 or 30 or 45 days operating capital, you know, maybe you start thinking, how can we restructure this thing? You may not have to enter into receivership, which you really need to be thoughtful of, you know, not living by the skin of your teeth. You know, think are you really current on your tax payments and can you meet those upcoming tax payments?
Right? It’s coming up to be April soon. Are you going to be able to cover your federal income tax payments? Can you cover your quarterly sales tax payments? Can you cover your excise tax payments? Then you think about what kind of assets do you have? Do you have any real estate or equipment that you can do a lease buyback or a sale-leaseback and create new cashflow for the business? If you don’t, you get to start thinking, all right, well what are we going to do if we can’t cover these costs? You know, is there any debt obligations that are coming due? Do you have any other committed capital that you can call on? Maybe you’ve raised $5 million and you pulled 3.8 of that. Now you have 1.2 when that last traunch, you know, what are the milestones you need to hit to actually be able to pull on that capital?
Or can you just freely pull on it? So just be thoughtful that if you’re getting close to bankruptcy territory or insolvency, then consider preserving what you have entering into receivership, you know, or working with a financial consultant, a CPA firm, having them help you kind of steer this business around. It’s not just something you have to shoulder all by yourself. As we did, we worked with some clients and they were just, you know, under so much pressure having to take all this on by themselves. They thought, Hey, I got myself into this mess. I’ve got to get myself out of it. That doesn’t mean that you specifically have to go and make all these arrangements and call these creditors. You can contract lawyers and CPAs and other team members to help you through this process and make this a better situation for you. So be thoughtful, evaluate your business and say, Hey, maybe we need to kind of consider this receivership thing so we can get back on track.
Again, as I said earlier, this is not a let’s just kill the business kind of thing. You could potentially kill your business, but you could preserve what you have. Almost putting a pause on the business, you know, not looking for more contracts or this or that. You know, realigning cause the strategy again that got you from a to B is not going to take you from B to C. sometimes you see and you read these articles, you know we are in hyper-growth stage, we’re just spending money and we didn’t have tight SLPs and now we’re going to do a consolidation and we really gotta be, you know, careful in how we approach the future. That’s what these CEOs and CFOs are saying about these businesses that are in financial turmoil. That can be the same situation that you’re going through as a smaller operator or maybe even as a big operator.
Just be honest with yourself about your business and consider receivership. Now let’s talk about some key takeaways for receivership for cannabis businesses. Now, receivership is an alternative for cannabis companies that are facing insolvency. I’ve talked about this, you know, in that last slide, the really, really honest with yourself. If you’re getting really close to insolvency and you still want to operate your business, receivership can be an option and receivership can help with satisfying your creditors and getting your business back on track. If you’ve got somebody calling constantly, where’s my money? Where’s my money? Where’s my money? And that’s pulling emotionally at you and pulling at you physically and you can’t operate your business. Then getting the help of a receiver could help to limit that emotional pole, that physical pull and allow you maybe 16 months, you know, 24 months to be back on track with your business.
It can go a lot quicker than that. But you know, you’ve got to go through the process of receivership and then you know, reorganizing, getting the business going forward. So that’s, you know, getting yourself back on track is a good thing and it’s very possible in a receivership. Third thing to take away from this is that restrictions on licensed transfers could cause values of those licenses to plumb it. So really look at your balance sheet. What nonlicensed assets do you have that you could potentially sell-off during a receivership or even out of receivership to cover this potential insolvency in your business. And lastly, you may still be able to operate and build your business if everything is not liquidated. I want to make it very, very clear. This is not a throw your hands in the air and just quit kind of thing.
You just potentially need to go through a restructuring of your business, restructuring of the balance sheet to make yourself financially solvent to allow you that space and that runway to build a valuable business. So we’ve covered a lot of ground here and I hope that this presentation has brought you some value to help you understand that you do have options as a financially challenged cannabis business. If you’re approaching that bankruptcy territory or insolvency, then consider getting help with being ready to enter into receivership. And if this is something that you want help with, then please reach out to GreenGrowth CPAs via our website at GreenGrowthcpas.com or give us a call at (800) 674-9050 we’ve helped a few clients gracefully go through this process of receivership. It’s not a painless process. There is still pain, but it doesn’t have to be, you know, the end of everything for you.
You can still make it through this and come out potentially even better months down the line. You just have to be willing to partner and work with people, your creditors, CPAs, lawyers, operations teams, potentially the IRS to go through this process and get to a better place financially since you can build your valuable business again with all this new knowledge that you know. So if you need help with thinking and considering receivership, maybe you want a financial analysis, we can help you out with that. Reach out to us via our website at GreenGrowthCPAs.com or give us a call at (800) 674-9050 thank you for your time and listening today. Have a great day and we’ll talk to you soon.