The Highs and Lows of Serving Canada’s Newest Emerging Market

Financial Strategies to Manage the Opportunities and Risks of the Cannabis Sector

As the country moves towards legalization in 2018, the cannabis industry is quickly emerging as one of the most promising Canadian markets. Early estimates predict the medical / recreational cannabis industry will reach $10 billion by 2020, offering exciting opportunities for astute entrepreneurs.

One of the greatest challenges businesses will face is how to strategize growing their companies without robust consumer data to bank on. While there is plenty of data to be collected from external markets ‐ most notably the U.S. – Canadian consumers may very well differ from their American counterparts. With legalization fast approaching, it's difficult to predict consumer trends. Questions around demand and preference leaves open how this industry will evolve once commercial. 

The promise of high yields is leading many industry cowboys to go all in on their investments. Between their high stakes ventures, a lack of Canadian consumer data and a heavy push to market, casualties are expected. In an emerging market like cannabis, it is survival of the prepared.

What we are certain of: merger and acquisition (M&A) activity is inevitable and so are bankruptcies. MNP has been watching this unfold and has been working with cannabis companies to navigate the variables as best as possible.

The Challenges of Restructuring a Cannabis Business

Insolvency legislation in the U.S. is federal, yet cannabis is legal in only a handful of states –making it difficult for federal courts to approve any restructuring of cannabis-related businesses. In the summer of 2012, two medical cannabis dispensaries sought Chapter 12 protection of the U.S. Bankruptcy Code (CGO Enterprise, L.L.C. in Colorado and Mother Earth's Alternative Healing Cooperative in California) but both failed.

Meanwhile in Canada, both cannabis and insolvency will be federally legislated, providing a clear legal mechanism to restructure. MNP expects to work with numerous companies requiring assistance with their financial distress, restructuring their existing operations, understanding the best way to handle insolvency or protecting themselves against potential issues.

If a cannabis-related entity was in financial distress and had a secured lender who wanted to recover its collateral in a liquidation (bankruptcy or receivership) the big unknown is the licensing. A federally granted license is required to possess or market cannabis and cannabis-related products. It has yet to be determined if the license is transferrable to a purchaser through a statutory restructuring, which would affect the price of the cannabis and / or its related products. Equipment can likely be sold without restrictions, albeit to a limited number of available purchasers.

An Experienced Leader in the Cannabis Sector

Since 2014, MNP has proactively worked with companies in this emerging cannabis industry to position them for success. The first step is to help companies identify the optimal business strategy for the market. We work with companies to identify and articulate their mission and vision, a basic concept, but critically important for a company operating in the unchartered waters of the cannabis sector. As the sector is evolving, there will be numerous strategies to successfully capture a share of the market, but finding the right one for each company is key. It doesn't mean that they must remain committed to this strategy but having a game plan is paramount.

Once a company has a clear understanding of where they want to go, the next crucial step is to develop the right corporate governance and human capital strategy. These strategies are built around attracting and retaining talent that possess the skills needed to successfully execute a company's vision and mission. Businesses will need to graft the skills of the founders and entrepreneurs; combining the knowledge and the skills to grow a successful business in a fast-paced market. As these businesses transform from a start up to a growing enterprise, underestimating the need for having the right skills on the team could be a fatal mistake.

Concluding Thoughts

Identifying the unknown is difficult, but preparing for it is easy. Knowing both the risks and rewards of working within the cannabis industry will underpin any successful venture. We believe the regulated cannabis sector will be a major driver of the economy, bringing many business opportunities. We are proud to be a leading advisor in the sector.

Grant Bazian, LIT, CIRP is the President of MNP's Insolvency Practice and can be reached at 1.877.363.3437 or grant.bazian@mnp.ca

Glenn Fraser, CPA, CA, MBA, is the National Leader of MNP's Cannabis Services team and can be reached at 1.877.251.2922 or glenn.fraser@mnp.ca