When discussing the strength of a cannabis company there are several obvious variables that arise: the state market in which a company operates, capital accessibility, number of holdings/locations, levels of integrated operations, and cash flow, to name a few. And when the question is asked, the market almost immediately turns to large, multi-state operators (MSO) for the answer. But what about the independent operator? How does a single operator, or one with maybe only one or two levels of operation, determine its strength in a given market? More importantly, how do they grow?
MSOs dominate the market. They are usually well-funded from a variety of private funding sources. They gained their foothold in a given state market through early-stage license applications that point to a huge source of funding and plans to cover the state in readily-available cannabis products. Alternatively, they were simply able to buy their position in the market by purchasing an already existing, licensed operation. But this doesn’t mean an independent operator is doomed to fail.
First and foremost, if you have been able to make it through your burn rate from startup and are working with positive cashflow, you are in the best position you could be. Many independent clients of mine have been at the cannabis game for more than five years and are still finding it difficult to put their startup costs behind them. And that’s fine. Many of those clients positioned themselves for quick build-out and early exit, knowing limited cannabis licenses in a given market still account for a highly-coveted asset that can be easily sold. But most business growth requires funding, and that is inevitable. For example, if you want to concentrate on efficiencies in inventory, you will need to purchase technology, such as a new data analytics software or application.
One move that independent licensees rarely consider is a merger or acquisition with another similarly situated independent licensee. There are many beneficial results from a merger or acquisition: instant addition to your market share; spreading your brand over a larger geographical area; creating the opportunity to increase greater revenue over a shorter period of time; and creating a stronger buying position by purchasing more from your suppliers at any given time, usually resulting in discounts at the wholesale level.
And if your company’s not in the black, that doesn’t mean you are ultimately doomed to failure either. The right partner may find value in areas of your business other than the financials – location, current client base, low overhead, etc. And that partner may be willing to provide the funds necessary for the merger or acquisition if they determine those attributes to be attractive enough. In the end, it’s all in the negotiation of the deal.
The point is, consolidation between the independent cannabis licensees may be an inevitable option to compete with MSOs who, for the majority, seem to be able to weather the financial storms the industry has shown in all U.S. markets.
If you are an independent operator in the cannabis industry and are looking to competitively grow, contact Nemphos Braue to discuss the options. We’ll analyze your current position, discuss your end goals and provide you with a clear path for execution.
George Nemphos and Tim Braue started Nemphos Braue LLC in 2016, combining big firm expertise with the flexibility and creativity of a boutique practice. From venture capital and private equity to intellectual property, mergers and acquisitions and general corporate counsel, Nemphos Braue is a different kind of law firm.
Before joining Nemphos Braue, Of Counsel Bill Huber served as in-house counsel for a large multinational cannabis organization, addressing the full spectrum of corporate formation and product development from seed-to-sale, and cofounded a Maryland-based medical cannabis dispensary. His business, legal and hands-on entrepreneurial expertise helps support startups across industries.
