News & Articles

Exiting in Cannabis

Posted by Celia Daly on Feb 16, 2018 11:41:08 AM

Remember when your dad was bugging you when you were 18 to start investing in an IRA and you were like - dad, you’re such a loser. And then you hit 45 and realized he was probably right? Yeah - I know - it always sucks when your dad is right.

To be fair, thinking about something so far away can seem like a waste of time and energy. Especially when you’re young. And it’s no different for your young company. With so many elements to organize early on, an exit strategy is an easy part to ignore. But considering an exit strategy early is hugely beneficial to not only your retirement but also to the direction and pace at which your business will grow. Investors look for opportunities for return so developing a plan early can show them what to expect and help demonstrate your value. Considering your exit early also guides you each time you reach a fork in the road and serving as a reminder of where you want to end up.

Everybody got choices….

Ok, so exit plans are important. Now what?

Well, there are choices for exiting. Here, we’re focusing on options for venture backed businesses (though a lifestyle company is surely an option)  because… well... because venture backed companies are what we do here at Canopy.

The first option is the strategic acquisition where another organization has a specific reason for purchasing a company. Usually, they buy businesses that are synergistic with their existing business - either as a way to enter a new industry, garner a greater share of the market or minimize competition. The recent acquisition of CanopyBoulder alumni, Hemp Business Journal, by New Frontier Data, for example, has allowed New Frontier Data to expand their reach and stake their claim of the hemp market.

Another option is the financial acquisition, like when Privateer Holdings bought Leafly. These exits occur when a buyer is interested in the financial gain of purchasing a company and buyers are usually private equity or holding companies that are looking to expand their portfolios. Traditionally, these buyers take 51+% of the company and overhaul the management team, totally changing the structure of the company.

The last option is a traditional IPO, or initial public offering. In these types of exits, the seller lists a portion of their shares on a public exchange to raise capital and gain liquidity for shareholders. Sounds great, right? Well, IPOs demand a lot of a business and its staff, both during the initial sale and going forward, and should really only be considered when an organization is large enough to absorb the time, money and effort it demands. This is why we haven’t seen many cannabis businesses go public in a serious way - they simply aren’t big enough yet. While an IPO can be a good option for some, organizations who go this route need a detailed plan for growth because the public expects revenue, profits and growth, damnit! Despite the federal prohibition of cannabis, a few ancillary cannabis companies have gone public, though many of them are navigating rough waters.

Last dance for… prohibition?

Choosing any exit strategy requires some future thought, regardless of the industry. However, the cannabis industry is interesting because of the very clear milestones we must reach to properly grow the market. Your strategy should depend on when you expect the dominos to start to fall. So what are those dominos?

Well, first is California legalizing. With the 6th largest economy in the WORLD (yeah… world) and a population of almost 40 million, California’s legalization may mark the beginning of the end of prohibition. It sure is hard to stop a moving train, especially when its a $3.5 billion train.

Other milestones will be when Congress eventually finds a solution to the banking problem, freeing up lines of credit and giving the industry a new source of capital (bank loans), and when cannabis is fully federally legal. But you knew that already…

Friends in high places

Regardless of what exit strategy you choose, the process of exiting requires a village to be successful. Beyond the obvious lawyers and bankers, companies that exit need the support of investors, advisors, management and staff. If you think you can go it alone, think again.  Any misalignment of stakeholders can stop an exit in its tracks. So find the right village (CanopyBoulder can help with that).

Exit plans are like any plans in life, which means they should be somewhat flexible. Situations change but thinking about your options and keeping an eye on the changing landscape can help you to make the best decision for your business and ensure a smooth transition when the time comes.

Ok, so maybe not smooth, but, like, less bumpy.

Topics: Entrepreneurship, cannabis companies