As a 25-year veteran investment banker specializing in mid-market mergers & acquisitions (M&A) and private debt capital markets transactions, I have lived through my share of business cycles; some affected the economy at large while others were more industry-specific.
At any rate, the fledgling legal cannabis market’s intense growing pains, and the resultant drought of available capital to support the market’s development, has all the trappings of a severe cyclical downturn in a more mature industry.
Having worked with over a hundred companies across a variety of industries facing down similar crises – one course of action has proven time and again to generate the worst possible outcomes – panic.
Investors and strategic buyers that, like me, believe in the long-term prospects of the legal cannabis industry in the US and globally, will still value and invest in “good” assets. The old investment adage, “buy low, sell high” has never been more apropos. Therefore, holders of valuable assets that find themselves in a liquidity squeeze and view a sale or merger as the only way out, would be wise to pause – not panic – and hire an advisor (on a contingent fee basis) to develop and manage a process that generates the optimal outcome available in the marketplace.
If your company has established a viable business model, or obtained a market position (e.g. licenses) upon which another company can establish a viable business model, you have created value that you should be able to monetize, current market conditions notwithstanding.
Nevertheless, seller beware, not all white knights are created equal. Companies and investors with adequate liquidity to buy will be looking for blood in the water. Moreover, they will be looking to use their relatively inexpensive stock as purchase price consideration. For these reasons, companies should hire an experienced M&A advisor who can not only create a private auction environment that yields the highest “headline price,” but who can also fairly assess the value of the underlying securities being proffered in the trade.
All too often we see cannabis business owners with valuable assets accept stock of questionable value from the first suitor that presents themselves solely out of desperation borne from illiquidity. Don’t panic, work with your investors to buy time, hire a seasoned advisor to manage a private auction process, find the market-clearing price and make sure you properly value public-company stock consideration whilst considering the relative value of various offers. Remember, there is always a market for viable business models and/or assets that do or can generate free cash flow.