The process of due diligence is essential to reduce risk when entering into an agreement or contract with another party. As cannabis businesses seek investment or enter mergers or acquisitions, the need for proper due diligence is critical for ensuring successful business transactions. However, there are a few prominent challenges cannabusinesses and their prospective investors or partners encounter when going through the process.
In order to illuminate some of the specific challenges cannabusinesses face, we’ll explore five questions that a potential investor or partner could ask.
- Does the cannabusiness have a public banking relationship?
If yes, that’s immediately a good sign, and an investor can move on to examine other areas. If no, business owners will want to explain to potential partners why not. Lacking a public banking relationship can be a telltale sign the cannabusiness may have compliance gaps or other serious risk factors.
- How are board members legally protected?
In this case, a potential partner will want to know if the business offers directors and officers liability insurance (D&O), regulatory event coverage or other types of indemnification. They’ll need to be clear on what their personal liability will look like in the case of a material issue or regulatory challenge involving the cannabusiness.
- How is the facility regulated?
Naturally, the next thing an interested party might investigate is how the facility is regulated. If they’re considering investing in or partnering with a cannabusiness with a licensed facility, they’ll likely review the two most recent regulatory inspection reports. These reports can provide them with insights as to how the regulatory body that governs their potential investment views the quality of the cannabusiness.
- Who is the cannabusiness’s bookkeeper?
An interested partner or investor will want to get to know the person who manages the company’s books, especially if it’s an LLC. First, they’ll want to find out if this person is knowledgeable about some of the tax intricacies in the cannabis world – such as 280E. Second, they might look at the tools they utilize to do bookkeeping. If they’re not actively seeking the latest technology to support their accounting, this could be a red flag.
- What other information could influence the decision to commit?
Interested parties can ask a whole range of questions pertaining to the cannabusiness’ operations, employees, protocols and more. The bottom line is: a wise potential partner or investor isn’t going to enter into an agreement without feeling completely comfortable and clear on the cannabusiness’s financial and legal standing.
Cannabusinesses are held to particularly high standards when it comes to due diligence, especially because the industry exists in a somewhat gray area, both financially and legally. Business leaders can look into various cannabis-specific tools to help make due diligence much easier. For example, Xero is an excellent cloud-based accounting platform that may be integrated with inventory management and payroll software.
So, before your company even begins seeking partnerships or investing, ensure you can provide satisfactory answers to the questions above. Consulting a cannabis accounting expert can help you approach due diligence measures with confidence.