Cannabis and the Emerging B2B Businesses Landscape
As the cannabis industry continues to grow and the promise of green-riches tantalizes, industry “professionals” are popping up in droves.
Indeed, perhaps what makes the emerging marijuana space so interesting (and potentially fraud inducing) is that along with the (State-governed) legalization of the cultivation/sale of the plant, ancillary business are afforded the opportunity to pitch their services to an entirely new sector. Suddenly, accountants, social media experts, web development companies and a variety of other traditional B2B service providers are professing a unique expertise in the cannabis space in an effort to win valuable and increasingly disappearing market share. Naturally, one begins to wonder whether or not these self-proclaimed experts are in fact cannabis experts and as a corollary, if the services being peddled are worthwhile.
Cannabis Financial Advisors
Above all others, the financial advisory service area has been subject to a great deal of scrutiny and skepticism from industry analysts. Certainly, it is not hugely surprising that companies offering, “advisory services” are met with doubt and resistance – “What precisely are these companies providing?” Of course, it goes without saying that there are some truly incredible financial advisory groups in the cannabis space whose services are indispensable for companies looking to enter (or exit) the industry. Without the help of these firms, marijuana startups would be lost. Similarly, it is equally incontrovertible that there are certain predatory financial advisory groups in our community (to remain nameless) who promise cannabis specific financial services without possessing the requisite expertise and experience to provide real value. What kind of vetting process can and should be used to weed out reputable financial advisory firms from the unqualified? Well, before we get to that, let’s first examine the core function of a financial advisory firm.
When to Employ a Cannabis Financial Advisory Group
On the most fundamental level, financial advisors help individuals or companies manage their finances. While this seems rather obvious, the scope and complexity of this management varies and may range from the mundane to very high-level and nuanced decision-making. For our purposes, let’s assume that a generic company may benefit from the services of a financial advisory group when structuring deals involving mergers & acquisitions, bridge financing, convertible debt, and some of the other more elaborate financing packages that involve risk and liability. Typically, a contract is drafted between the company and the financial advisory firm, which details the scope of the services provided and the associated fees. While seemingly straightforward, as with any type of “advisory service”, it is critical that specific objectives are outlined in the agreement so as to provide the company with a concrete way to measure progress against tangible benchmarks.
For example, companies looking to sell their assets may hire a financial advisor to identify and negotiate a deal with a qualified buyer. In this instance, financial advisors may target specific buyers, invite several potential buyers to place competitive bids on a company, or compile a list of potential buyers for review and allow the company greater control over the vetting and negotiation process. When pitching a sale on behalf of the company, financial advisors are tasked with formulating an estimate by massaging the numbers (within reason) to garner the highest valuation. Ultimately, financial advisors are there to help the company analyze and solve various financial quandaries.
Is the Financial Advisory Group Qualified to Work in the Cannabis Industry?
Marijuana’s federal illegality presents a host of unique and idiosyncratic regulatory challenges. Thus, the fact that a financial advisory firm is “experienced” does not necessarily mean that it is well suited or indeed qualified to provide cannabis specific advisory services. When our attorneys are asked by clients for suggestions as to how to best evaluate the strength of a financial advisory firm, we counsel to consider the following criteria:
- Ask to speak to their cannabis clients. It is great that the financial firm has clients in other sectors but if none of their clients are in the cannabis space, the firm likely does not have the experience required to successfully navigate through the industry.
- Industry name recognition. Reputation is king. Are other people in the cannabis industry familiar with the advisory firm? Has the firm contributed to any marijuana publications or had its advisors speak at industry events? If not, your BS radar should be bleeping.
- Size really does count. Even if the financial advisor you’ve spoken to has great referrals and extensive experience in the cannabis space, it is crucial that you consider whether or not his firm has the manpower and bandwidth to handle your account. We strongly advise against going with a sole practitioner – complex financial deals often require a tremendous amount of work and even the most well-intentioned sole practitioner simply cannot handle the paperwork required to successfully manage the deal. Selecting an advisory firm with at least several financial analysts will hopefully provide you with a stronger and more robust support system.
Cannabis Companies: Vigilance, Vigilance, Vigilance
The cannabis industry is both wonderfully exciting and frustratingly uncertain. The objective for any marijuana company is to maximize its own security while taking necessary risks to advance the company’s interest. Should you trust the financial advisory firm trying to sell you its services? Well, when all else fails, what does your heart say? Sometimes the most hackneyed advice is the best advice.
Abe Cohn manages THC Legal Group, a Marijuana Law Firm specializing in the cannabis industry. Their attorneys assist startups, entrepreneurs and established businesses protect their most prized assets. Connect with them to learn more.
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