This is part one in our three part overview discussing due diligence in the cannabis industry.
Nobody likes doing homework. It’s boring, tedious and time consuming… but sometimes its necessary. Doing due diligence – researching and analyzing a company in preparation for a business transaction (such as a corporate merger, investment, purchase of securities or real estate transaction) – is like doing your homework before entering into a formal business relationship. It can be a long, tedious process, but thorough due diligence can save time and money in the future.
This is especially true in the cannabis industry. In addition to traditional due diligence, which involves reviewing a company’s organizational structure, financial records and business plan, due diligence in the cannabis industry requires reviewing the legal and regulatory issues specifically related to the cannabis industry at both the state and local levels.
Due diligence is a necessary step before entering into any business transaction in the cannabis space. Investors must conduct due diligence on potential targets, and cannabis companies need to prepare for the scrutiny involved in a capital raise, or associated with a potential partnership.
Conducting due diligence on companies in the cannabis industry requires a specialized knowledge base, industry expertise and the appropriate resources. Thorough cannabis due diligence involves, among other things:
- Reviewing a company's business structure and organization.
- Inspecting facilities and operations.
- Consulting with government authorities.
- Analyzing third party and vendor contracts.
- Inspecting leases or other real property documents.
- Looking into prior enforcement actions or compliance issues.
- Conducting background checks on equity stakeholders and officers.
- Ensuring compliance with employee licensing regulations.
- Analyzing product packaging and advertising and marketing materials.
For example, equity investors in cannabis companies are generally considered to be owners, and are therefore subject to the same risks and liabilities as the companies themselves. Investors must conduct thorough cannabis due diligence so they do not get involved with a company that may not be fully compliant with legal and regulatory requirements.
Due diligence is important before entering into any business transaction, but absolutely critical in the cannabis industry, which is new and controversial with legality concerns at the federal level. The federal government has agreed not to pursue enforcement actions in states that have legalized cannabis, but cannabis companies that are non-compliant with regulations or have poor business practices can quickly attract unwelcome attention, from local, state or federal law enforcement authorities.
Doing your homework has never been so important.
GCA specializes in cannabis due diligence. For more information on how GCA can help with your cannabis due diligence needs, please contact us.