Do you have a successful (or poised-to-be successful) cannabis business but are struggling to know how to take things to the next level? Excellent. Your industry expertise and success will be a boon to the many savvy investors looking to break into cannabis with businesses that are on the right track. However, finding and attracting the right investor for your business takes some work to instill the confidence in them that you are the best place for them to put their funds.
Based on our extensive industry experience and the work we’ve done with many eager investors, here are our top five recommendations to lay a solid foundation for attracting quality investors. With the right person, you may not only be able to grow your current business, but also identify ways to vertically integrate or diversify your product line. Bear in mind, these steps may not be as easy to implement as they sound. Fortunately, we’re here to support you!
Step 1: Compliance
In a highly regulated industry like cannabis, staying on top of legal and regulatory compliance is one of the most important things you can do to help keep your business afloat and instill confidence in others. The challenge here is that there are many areas where you need to meet stringent compliance requirements. First, ensure that you are properly educated on all the components of compliance that matter to your business, including OSHA, Metric (if you’re in California), county and state compliance rules, tax compliance, and much more that is specific to your segment within the cannabis market.
The second most important piece of compliance is documentation. It doesn’t matter if you’re doing it, if it’s not being documented properly then it’s like it didn’t happen. Quality compliance initiatives require systems of operation and organization, backed by solid processes that your employees understand and adhere to. In our own experience we’ve found that companies with the tightest compliance also typically have the most attractive financials. Compliance shows that you are on top of your business and know the ins and the outs. It means that everything is being accounted for, resulting in less waste or product mismanagement.
If you have any compliance deficiencies or you just need the help of a skilled consultant to make sure you’re meeting your requirements, it’s worth the time to explore getting a Compliance Analysis. As an investor, the cannabis industry is one of higher risk due to the regulatory environment. Demonstrating that you take care to be in compliance and have the organization skills to back that will instill confidence that your operations will be a safer investment for the long haul.
Step 2: Quality Management
If compliance initiatives check the box to ensure you’re following the rules, quality management answers the question of HOW you are doing that. The name is self-descriptive in that Quality Management is simply how well you are managing the people and products of your organization. This goes beyond just following the rules and laws. Quality management cares about how your people are trained, the processes you’ve created, and who is on your team.
Quality management is also something you should have well-documented and at the ready to share with potential investors. This should include floor plans and facility plants, company policies, training, safety and quality initiatives, inventory management, and more. Documentation of Key Performance Indicators (KPIs) are a great way to demonstrate your commitment to efficient operations and meeting goals.
One final piece that many cannabis businesses forget as part of Quality Management, is to have documentation around corrective actions taken by management when issues are discovered. Quality management means not only avoiding problems, but also handling them appropriately when they do arise. If you need support in retooling your current systems or just operating more efficiently to attract better quality investors, consider an Operations Analysis to get you on the right track.
Step 3: Understand Your Market
Many investors looking to get into cannabis will have some level of knowledge around trends in the industry and who the major players are. This is a time to differentiate yourself with your in-depth understanding of the marketing in which your cannabis business operates. Understanding your market is both a review of where you stand now and where things are headed. Who are your current competitors and who do you have to keep an eye on in the future? What is the profitability and longevity of your current products? Where are opportunities to expand in the market horizontally or vertically integrate?
Understanding the market is particularly important to an investor because they want to see where their dollars will be going and what the potential return might be. If you’re too deep into the day-to-day to properly evaluate your market potential, a Market Analysis can refine your focus and give you insight into future growth opportunities.
Step 4: Clean Financials
This is an obvious first stop for nearly every investor and something that you should easily be able to present. As a cannabis operator, your skill in the above mentioned areas will often reflect in the financial statement presentation and recordkeeping. And because this is an important area to make a good first impression, there are a few components that you want to make sure you have well-documented.
- Tax payments
Ensure that all of your required tax payment obligations are up to date and that you have tax returns to share with potential investors. This can be challenging given the ambiguous federal guidance around the classification of expenses, which impact a cannabis company’s tax liability.
- Cost of Goods Sold
COGS can be a line item with a lot of gray based on how you’re determining what directly relates to the production of your product. The best thing you can do is document your decision making and any related rationale behind that decision. Make sure that your rules around accounting and reporting expenses are applied consistently.
- Revenue details
Investors will want a clear picture of where your money is coming from, whether just one or a few products, or a wide variety of sources. Document each of your revenue streams and be prepared to speak to the market risks and growth potential of each one.
For more support in the analysis of your profits and how you’re utilizing your funds, consider an Investment & Profitability Analysis that you can use to position yourself more strongly to investors.
Step 5: Sell Yourself
If you’re planning to stay on board once you bring an investor in, one of the best things you can do is talk up the asset that no other cannabis business has– YOU! How are you involved in the business? Where is your heart at and what drives you to succeed? If you have friends and family involved in the business as well, let an investor know as it may signal that you are that much more committed to ensuring the business does well.
Be clear with an investor about what you’re looking for out of an investment relationship– whether that’s a loan from them that you plan to repay or an equity investment where they become your partner. Create a clean offer for investors that explains who you are, what you need from them, and what they get out of it.
Next Steps for Growth
Taking on new outside investors for your cannabis business may feel like an overwhelming task. In essence, you’re competing against any other investment vehicle where they could put their dollars. Knowing your business well (and knowing yourself even better) will help differentiate you in their eyes.
Don’t allow yourself to get stuck in overwhelm or decision paralysis. Our experience team at BeGreenLegal has been providing supportive consultations to cannabis operators and investors for years, to help them take things to the next level. Contact us today to see how we can help you achieve your cannabis business growth goals.