Risky Business: The Smart Way to Buy Distressed Cannabis Assets The big Canadian cannabis industry shakeout is underway. Many firms are being sold or liquidating their assets at fire sale prices, while others sit on a financial precipice. Not surprisingly, this upheaval will include many intrinsically solid companies who have fallen on hard times or have a management & shareholders that have run out of patience. Sadly, others will be wound up with no value realized. Adroit buyers can snag these distressed businesses and assets (e.g., facilities, equipment, IP, genetics) on the cheap, combining or fashioning them into something bigger and better. Executing a winning distressed asset strategy is easier said than done. Savvy investors know that you can earn high returns buying cheap and retooling versus buying and selling at high prices. Yet, it is also very easy to blow your money and waste your time on bad deals or wild goose chases. To wit- > The asset or business may be distressed for a good reason: its unfixable or junk; > Negative macro or industry trends may be impossible to overcome; > Hidden rot such as high CRA liabilities, obsolete inventory and pending bad debt; > Even with good management, brands or zero debt, the odds of a successful turnaround are never a slam dunk. Still, tumultuous times regularly see winning companies emerge like a phoenix from the ashes. Today’s cannabis industry could offer even more opportunity for smart distressed investors. For example... a) Market share is up for grabs Low producer revenue concentration equals limited incumbent advantage; b) High levels of buyer power Wholesalers favour larger, more sophisticated LPs for financial and operational reasons; c) A lack of sector capital New, debt-free companies can enjoy higher profitability, cash flow and financial flexibility; d) Market growth is far from exhausted I’ve assisted many distressed funds identify, evaluate, negotiate and integrate quality assets. My learnings include: 1. Be prepared to sift through a lot of cannabis rock to find the diamonds in the rough. Nothing beats knowing the industry. 2. Make sure the target aligns to your financial goals and business strategy. Not everything on sale should be bought. 3. Quickly diagnose the problem/opportunity. Is the failure a result of poor financial discipline, market forces, or something else? 4. Do proper due diligence around financials, operations, risks, IP/licenses, quality of revenue & assets etc. Utilize 3rd party experts to avoid purchase bias and operational blind spots. 5. Move fast, be prudent and keep quiet. You don’t need other bidders; some will follow you if they trust your judgment; 6. Don’t overpay but be mindful of future risks such as losing key talent.

Posted by Mitchell Osak at 2024-03-12 15:19:39 UTC