The cannabis industry already had a rough go of it, and the whole COVID-19 pandemic didn’t help matters. Cannabis businesses already have a plethora of federal, state and local roadblocks, even before the shelter-in-place orders took effect. Left out of SBA relief due to the pandemic, every option to gain some financial footing is valuable.
Here are 10 tips for canna-businesses during an economic crisis.
1. Face reality
Don’t wilfully ignore signs of trouble. Refusing to acknowledge potential financial issues proactively can limit your options down the road. As soon as financial problems start rumbling, develop a strategic plan to address them. If a solution means liquidating assets, be realistic in what the current (and future) marketplace will pay.
2. Scrutinize creditors
So you have financial issues in your business, and you’ve acknowledged it. Good. You have created a strategic plan for handling your financial situation. Excellent. And if you haven’t yet developed your strategy, you’re doomed. Until you do that, you can’t prioritize who to pay, when to pay and how much to pay. Scrutinize your creditors when you are developing your strategic crisis financial plan so that you hold as many of the cards as possible. Leverage creditors to your advantage to avoid using up precious cash.
3. Take the call
What most people tend to do when faced with creditors starting to demand payments is to stick their heads in the sand and avoid the situation. Don’t do this. Creditors are more likely to work with you if you are honest and transparent — and you’re accessible. So if a creditor calls, answer the phone. If they leave a voicemail, call them back. Heck, there are even attorneys who will assist with the pressure by handling creditor inquiries on your behalf, engaging with them to help with your financial turnaround. Depending on how much money (and stress) this is, you might find that this is money well spent.
4. Account it … with your accountant
If you have an accountant, keep them involved in your process. Accountants are like the clairvoyants of finance and often notice financial red flags before their clients do. Your accountant can also guide you through cost-saving strategies. If your financial plan involved debt cancellation, an accountant should review tax implications ahead of time. Avoid surprises down the line — that debt cancellation could turn into income per Uncle Sam, so it’s best to get a professional involved.
5. Ask before action
If you are in a better spot than other canna-businesses and are considering transferring assets from a troubled entity, hit pause. Get advice from experienced legal counsel before completing or agreeing to any transactions. In some cases transferring assets when a company is considered insolvent might be seen as fraudulent or “undone” by creditors. Officers and directors might also be thrown under the bus, with liability shifted and allegations of breaches of fiduciary duty. I don’t know about you, but most folks want to steer clear of situations like that.
6. Pay the man
Pay the taxes and wages you owe. Realizing these obligations are critical to success, and debt related to taxes and salaries is hard to eliminate or settle for anything less than the full amount owed. Likewise, thanks to interest rates and penalties, not paying taxes can put a stop to reorganizing options. Some cannabis companies have seen their officers or directors facing personal or civil liabilities. This makes things more difficult down the road, even if the business starts to pick up. Let’s face it; anything that distracts a business owner in crisis from the end goal is potentially preventing business stability and success.
7. Respect boundaries
Don’t co-mingle assets. Just don’t. While co-mingling assets might be convenient, it can annihilate the business structure. Mixing it up can create a real mess, with the risk that creditors may decide to force consolidation of a profitable entity with an unprofitable one. This could jeopardize the survival of both entities, so unless you’re willing to deal with the consequences, just steer clear of this practice. Likewise, pay attention to the boundaries of corporate governance, from holding meetings to obtaining proper approvals on significant decisions. Once you “pierce the corporate veil,” you’re now open to the possibility that a court could decide that the company officers and directors are no longer protected from liability on corporate debt.
8. Keep records
Don’t only keep good financial records — maintain them. If a canna-business has debt that can’t be resolved by an out-of-court settlement, litigation might be the next step. And if that happens, financial records are discoverable by creditors. Poorly maintained records can diminish the reputation or perception of your company, its officers and its directors. Paying close attention to your documents and quickly resolving any inconsistencies now is an excellent way to avoid scrutiny later.
9. Prioritize licenses when planning
Loop in your legal counsel before agreeing to any proposals that involve licensed entities, especially those that involve license transfers. The timing of license transfers is critical to coordinating the regulatory approvals needed to maximize value. This could be the one step that is key to a financial about-face.
10. Know COVID
Navigating business regulations in the cannabis sector is hard enough when things are “normal,” and even more complicated when trying to work through a worldwide pandemic like COVID-19. Merely understanding what businesses are classified as ‘essential’ and the parameters around social distancing are critical right now. Keeping abreast of future debt-relief proposals winding their way through the legislature can help educate a business owner on what’s currently happening — like the Paycheck Protection Program — and provide options for business assistance.