Cannabis Companies in Receivership Good Opportunity or Steep Risk?

Acquiring a distressed company carries inherent risks.

Securing a cannabis business out of receivership can present a unique chance to acquire a cannabis business or its assets for substantially less than what an equivalent business or its assets would sell for on the open market.

But before discussing the opportunities that could be presented by a business in receivership, it is important to understand what a business in receivership is.

Why does a company go into receivership?

When a cannabis company goes into receivership, it means that a third-party appointed by a court or a creditor, the receiver, takes control of the company’s assets, operations, or finances. This action usually occurs because the company is facing financial distress or has defaulted on debts.

The receiver’s primary role is to manage the company’s affairs in a way that benefits the creditors or stakeholders involved. They might sell off assets, restructure the business, or take other actions to recover funds owed to creditors.

Receivership is often seen as a step towards either rehabilitating the company or winding it down to pay off debts. It’s a legal process that aims to protect the interests of creditors and other stakeholders while addressing the financial issues the company is facing.

When a business broker takes on a company in receivership, it is most often a result of a receiver seeking to liquidate assets. It could be in the form of a license or an entire operational business.

Receivership Details

A company usually enters receivership due to severe financial distress. Triggering factors for such a move cover a wide range, including:

  • Defaulting on loans.
  • Overwhelming debts.
  • Considerable back taxes.
  • Operational inefficiencies.
  • Legal issues that compromise financial stability.

The receiver is typically appointed either by a court order (through a legal process) or by a creditor holding security or a charge over the company’s assets. The receiver becomes a legally empowered representative to manage the company’s affairs.

But what are the receiver’s responsibilities?

Asset management: The receiver assumes control over the company’s assets, operations, or finances. This could involve taking over management, selling assets, restructuring departments, or making strategic changes to enhance the company’s value.

Debt resolution: A core objective for the receiver is to address the company’s debts. The receiver works on behalf of creditors to recover funds, negotiate payment terms, or sell assets to repay outstanding debts, aiming to maximize returns for creditors.

Evaluation and strategy: Before implementing changes, the receiver conducts a thorough assessment of the company’s financial health, operations, market position, and potential for recovery. Based on this evaluation, they develop strategies to stabilize or restructure the company.

Impact & Potential Outcomes

Receivership aims to protect creditors’ interests by attempting to secure the funds owed to them. The primary focus is on satisfying the claims of secured and unsecured creditors rather than maximizing shareholder value.

Generally speaking, there are two distinct potential outcomes for a company in receivership.

Business rehabilitation: In some cases, receivership could lead to a successful turnaround. The receiver may restructure the business, renegotiate debts, or introduce new management to revitalize operations and continue the business.

Asset liquidation or sale: If the company’s financial situation is untenable or if restructuring isn’t feasible, the receiver might opt for liquidation. This involves selling off assets to repay creditors, often resulting in the closure of the business.

Legal and Procedural Aspects

Receivership is a complex and legally driven process that aims to address financial distress in a company. It involves a receiver taking control, managing assets, negotiating with creditors, and making strategic decisions about the future of the company.

Receivership proceedings must adhere to legal frameworks, ensuring transparency, fairness, and compliance with relevant laws and regulations governing insolvency and corporate restructuring.

The ultimate goal is to achieve the best possible outcome for creditors while navigating the company’s financial challenges. It is these businesses that are in financial distress that offer considerable value when contemplating whether to purchase such a business including steep discounts on licenses, assets, and even property.

Why Purchase a Cannabis Business in Receivership?

Buying a cannabis company in receivership can offer several potential advantages for the buyer, such as:

Discounted prices: Cannabis companies in receivership often sell their assets at discounted prices. This presents an opportunity for buyers to acquire valuable assets, such as highly sought after licenses, discounted equipment, property, or intellectual property, at a lower cost than their market value.

Strategic expansion: For a multistate operator or the entrepreneurial cannabis business owner, purchasing a distressed company’s assets can provide a cost-effective means of growth.

Access to established infrastructure: A cannabis company in receivership might have an established customer base, operational infrastructure, or technology that could be advantageous for the buyer’s own operations.

Operational synergies: If the buyer operates in a nearby location, acquiring a distressed company could lead to operational synergies, cost savings, or complementary capabilities that enhance the buyer’s business.

Negotiation leverage: Buyers in receivership situations often have more negotiating power. They can propose terms that are favorable for them, including reduced liabilities, renegotiation of contracts, or favorable purchase terms due to the distressed nature of the selling company.

Restructuring opportunities: Some buyers may have the expertise and resources to restructure the acquired company, turning it around to profitability. This could involve restructuring debt, optimizing operations, or implementing strategic changes to revitalize the business.

Key Considerations

Acquiring a distressed company carries inherent risks. These could include inheriting substantial liabilities, facing operational challenges, or encountering resistance from employees, suppliers, or customers due to the company’s troubled status.

Thorough due diligence is essential. Buyers need to meticulously assess the company’s financial health, liabilities, legal issues, market position, and potential for recovery before proceeding with the purchase.

Buyers also should navigate legal procedures carefully, ensuring compliance with all relevant laws and regulations governing the acquisition of distressed companies.

When onboarding a cannabis business that is in receivership you need to know all of its faults and what liabilities are presented in an acquisition.

Having a broker that will first present the potential pitfalls of an opportunity to ensure the buyers know all the details of a potential target. Having a team by your side that is knowledgeable and has brokered the acquisition of cannabis business in receivership is an invaluable asset when acquiring a business in receivership.

Gordon Sattro is a seasoned strategist in corporate finance, leading multifaceted M&A endeavors. He stands out in the cannabis M&A space by leveraging more than a decade of experience as an attorney to astutely structure deals, meticulously analyze market conditions, and adeptly navigate complex cannabis regulations. Sattro has served as the Director of Nationwide Mergers and Acquisitions for Green Life Business Group since 2020.

 

2024, January 26th. Cannabis Companies in Receivership Good Opportunity or Steep Risk?. Green Market Report

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