About the Cannabis Market
When cannabis was legalized for recreational use in California in 2016, only a handful of states had gone through the process of opening the market for marijuana manufacturing, distribution and sales. Today, seven years later, many reports point to the instability of the market and its growth challenges.
Operating a cannabis-related business in today’s market is challenging, and experienced receivers like Douglas Wilson Companies have seen this firsthand throughout one numerous receivership assignments. Because bankruptcy courts operate federally, cannabis companies currently are unable to file for bankruptcy protection. In essence, if cannabis companies are in need of restructuring or workout support, receivership can be a key tool for them to liquidate, recover value and repay debts.
Given the state of the market in California and in other states, expect to see many more of these troubled scenarios on the horizon.
Cannabis Challenges
While the early outlook for cannabis companies was very bright, many of the difficult realities around cannabis operations have since come to light. In large part because marijuana is not legal federally for recreational use, financing is difficult, cash is critical, licensing is challenging and regulations are ever changing.
Furthermore, because the cost of operating remains significant, the illicit market for marijuana remains very active, leading to competitive challenges.
Experience is crucial and having a team available that knows the in and outs of the market is an important part of succeeding in today’s cannabis market.
Lessons Learned in Cannabis Receiverships
Throughout DWC’s experience in cannabis receivership assignments, the firm has navigated several challenging areas unique to cannabis companies:
Because recreational cannabis use is not legal federally, traditional financing, including bank financing, is extremely challenging for cannabis sellers to obtain. An experienced receiver like Douglas Wilson Companies has developed relationships with several banks that do business in the cannabis market, and are able to open accounts relatively quickly.
Similarly, most credit card transactions for cannabis purchases are not permitted, which can lead to payment and cash management woes for sellers. An experienced receivers has gained experience with alternative payment systems that function similar to credit and enable consumers to make purchases without cash.
Regulations around cannabis are new and they are ever-changing. It’s important to understand the rules that are specific to operating in each state and city.
Cannabis dispensaries are targets due to their cash on hand, meaning a comprehensive approach to security is essential.
Taxes on cannabis are relatively high compared with many other goods, and while different states levy different taxes, they generally fall into three categories: taxes on the product’s price, taxes on the product’s weight, and taxes on the product’s potency. Many dispensaries face f tax payments backlogs amassed during their early operations. This can lead to cash flow issues when the taxes finally need to be repaid.
Early projections estimated there would be roughly 3,000 legal cannabis sellers in California, yet the actual count is less than half that number. Cannabis operations continue to be challenging — and not as lucrative — as many had anticipated. This will lead to future workout and receivership scenarios.
