Going Beyond the Green Rush – Insider Strategies for Vetting Investors and Operating Partners

There is an ancient proverb that says the journey of a thousand miles begins with a single step. While it might seem cliche and overused, it is certainly true in the realm of business – particularly the volatile world of legal cannabis.

It is particularly critical in the current cannabis climate to identify investors, operators and facility owners who will be reliable partners and who have the ability to help grow business on a transactional and strategic long-term basis. In the first “Green Rush” phase of cannabis, there were many examples of traditional vetting processes that seemed to have been abandoned, resulting in many disputes and failures.

The inclusion of traditional business fundamentals is essential to success in the new era of legal cannabis. Union Cannabis Group applies traditional business vetting processes that would be utilized in any other high-stakes deal.

For example, I recommend using the following high-level criteria for vetting either a facility or licensing partner, as well as potential investors that are interested in getting into cannabis projects:

  1. Financial Security – Potential partner must have project financing secured, including enough CapEx and OpEx to sustain operations until revenue is generated
  2. Corporate Structure – Potential partner’s corporate structure, governance, and assets/liabilities are reviewed to determine likelihood of success
  3. Management Team – Leadership team is assessed for track record of success, scaling businesses, and industry experience, as well as potential weaknesses
  4. Business Strategy and Plan – Potential partner’s long-term goals for the business, ramp up timeline, manufacturing infrastructure, and supply chain/distribution are considered as indicators of project viability
  5. Geographic Location – Market size and demographics, real estate (current and future expansion), state regulations, and local tax considerations are evaluated for sustainability
  6. Strategic Relationship – Potential partner should be able to provide strategic benefits as well in related fields or disciplines that will bring additional value to the cannabis venture, such as success in scaling other operations, access to additional capital, strategic or synergistic relationships in the cannabis or outside markets (marketing, supply chain, distribution). Basically, these are things that will increase resources and talent pool. Essentially, strategic money is smarter money in cannabis. This is especially true in cannabis as the industry and markets are consolidating.

When you are assessing the viability of a cannabis operator (a manufacturer or cultivator), some other criteria can be applied. Because this industry existed in the shadows for so long and there is a lack of standardized talent pool, management experience, and resources, this has led to a fragmented market which is marked by an oversupply of inexperienced operators and an undersupply of experienced operators that understand business management and scaling.

A few ways to confirm whether or not an operator will be successful include:

  1. Looking into the operator’s data and metrics to confirm actual production and sales numbers
  2. Performing on-site due diligence and investigation to confirm the level and standard of operations
  3. A review of the operators’ written SOPs
  4. Ensuring that your operations team has a detailed understanding of all the elements required cohesively to build a successful manufacturing facility, such as: facility build-out, equipment specification, product development, supply chain, distribution, training and management.

Because of the lack of standardization in terms of qualification, education and performance in the industry, there are a lot of people that claim to be “master growers” or “master extractors”. It is important to look at each case deeply because of this lack of standardization.

Undergoing a thorough and time intensive due diligence process before engaging with a potential business partner, employee, or consultant might seem like a hassle, especially when they look great on paper and sell themselves with exceptional charisma, but not exercising this caution can cost you immeasurably in the long run.

While the road can be bumpy, there’s a lot of success to be found in the cannabis industry. Take your time and look both ways before crossing the street. Good luck on your journey!

Eli Korer

Eli Korer is the Chief Legal Officer of Union Cannabis Group.  In addition to managing the company’s legal matters, he also contributes to the company’s business and commercial activities.