The future of cannabis in Michigan is bright. Record-breaking sales this year are projected to hit nearly $1.2 billion and massive growth is expected over the next four years. We have only just begun to see what is in store for current and future cannabis businesses in the state.
While there are some obvious front-runners poised to dominate the market, it’s still anybody’s game with the ever-changing laws, regulations, and federal legalization on the horizon.
Michigan is the 11th most populous state in the country and has a head start on other states due to its early cannabis legalization status.
There are an estimated 700,000 people who consume cannabis on a very regular basis in the state. If we look at those who consume on a daily-to-weekly basis alone, it amounts to about 400,000 pounds of cannabis annually (and this doesn’t even include occasional users).
Cannabis Companies Positioning for Growth or Acquisition
Many smaller companies are positioning themselves for significant growth in coming years and some are hoping to be acquired by larger players in the Michigan industry or by multi-state-operations (MSOs).
Whether a company’s objective is investment for increased growth, vertical integration, or acquisition, it is imperative that they have their ducks in a row. This will ensure successful execution of a financial arrangement and maximize the potential of the transaction.
The critical components that businesses need to have at the ready when prospecting begins are many. Ideally, these components would have been in place from the start of business. However, the race to sell the first pound has left many businesses focusing too much on production/sales and too little on procedures and documentation.
These pieces can make or break deals with prospectors and/or increase a portfolio’s value significantly. Components include documentation of appropriate business management practices, legal documentation for operations, and organized financial statements and projections.
Business Management
Personnel Management
Some companies are too small to have Human Resources departments. Others have grown rapidly without giving appropriate attention to formalizing hiring, training, and implementing employee policies. Not only can this open companies to significant liabilities, it can also result in high turn-over which comes at a significant cost.
Investors and those looking for mergers or acquisition look to manualized procedures for personnel management as an indicator of stability for a business. After all, labor is often the highest cost for most businesses in the industry.
Standard Operating Procedures (SOPs)
Similarly, established SOPs for all elements of a cannabis business are a must. This may be a step-by-step explanation of how to close out a register and record inventory for a dispensary or lock-out-tag-out procedures on a mechanical trimmer in a grow facility.
Showing the manualization of all operating procedures can buffer operations from labilities and help to eliminate unnecessary labor output.
Using lean management and production principles in these SOPs is good business practice that provides prospectors with confidence in their potential investments. Further, it provides a basis for replicability for expansion and proliferation of new facilities which can be highly attractive to investors.
Organizational Charts
It is important to have a clear delineation of responsibilities and reporting lines for maintaining a successful cannabis operation.
Org charts are powerful visual tools that provide a structure for explaining complex layouts in an organized manner during negotiations. They should include profiles of company leadership so that the buyer/investor has confidence in who has been steering the ship.
Legal Components
Operating Agreement
Have a well-defined operating agreement is critical for any successful business. Sometimes thought of as the “what if?” document, this agreement can serve as a guide for businesses when dealing with difficult questions of ownership. They will be asked for upon any investment or acquisition conversation and should be evaluated by a legal team and cannabis CPA.
Vendor Contracts & Sales Agreements
Keeping organized records of vendor contracts and sales agreements provides efficiencies for purchasing and sales departments. It also demonstrates to potential buyers/investors that the company has established relationships for procurement and sales. This signals security and stability with product offtake and pricing.
Compliance
Perhaps everyone’s least favorite part of running a cannabis business is adhering to the strict inventory tracking requirements required by the MRA. Having SOPs for these requirements plus a positive track record of compliance provides prospectors with confidence in the business’s ability to play by the rules.
Branding & Propriety
Brand identity and recognition by consumers is directly tied to sales in the eyes of an investor. Any potential proprietary elements of the business should be explored and capitalized upon when possible. Do you have stellar genetics and documentation to prove it? Establishment and valuation of these elements can play a big part in negotiations.
Financial Statements
Financials from Three Years (if possible)
Having audited (or at least reviewed) financials for the last three years from a qualified cannabis accounting firm will greatly help with sale and valuation, giving buyers/investors confidence. This should include the valuation of assets as well as cash on hand.
Strategic Plan Showing Growth Potential
Having an ambitious yet reasonable plan for growth can excite investors. Cannabis is projected to be a $2.5 billion industry by the end of 2025. Needless to say, cornering even a sliver of this market will pay dividends.
Growth projections should be rooted in actuals and include elements such as market development, market penetration, new product roll outs, and alternative growth channels. Skilled cannabis CPAs are essential for this type of planning.
