The Hidden Costs of Non-Compliance

Anyone owning and operating a cannabis business knows the value of proactive compliance management as a fundamental foundation for operating successfully. As markets expand and people buy into existing or new cannabis businesses, they need to ask themselves: “what do I know about successor liability?”

Any business professional coming into the cannabis industry should be seeking cannabis valuation services for any cannabis business they are interested in buying into. The liabilities of the previous operator or lack of compliance infrastructure may very well be a ticking time bomb no owner or operator in their right mind would want to deal with. 

Structured analysis can tell a cannabis investor much about their prospective business from sales, foot traffic, capacity, methodology, location, etc., but investors should ask themselves: “what else is critical to this highly regulated industry?” 

Would you trust your CPA, for example, to untangle the intricacies of the company culture, compliance documentation, and operational environment of a cannabis business to ensure that previous ownership was compliant? 

Would you trust that same CPA would be able to uncover compliance issues with METRC, BioTrack, or MJ Freeway and the liability of the business in its inventory management from years ago? 

Of course not. Your CPA has likely never seen a seed to sale inventory system, let alone possess the ability to audit the system the same way they would audit the financials of a newly acquired cannabis business.

This exact issue arose recently for one new cannabis business owner necessitating a METRC audit going back six years, and iComply took on the reconciliation process to bring the company back into compliance for an upcoming merger. 

iComply was able to help them reconcile their internal inventory tracking system to their METRC reporting and physical inventory counts to ensure they could meet the requirements of a multi-million dollar acquisition. Furthermore, once we stopped the bleeding, we improved their internal operating procedures and put oversight in place to ensure it wouldn’t happen again. 

Their minimal expenditure to ensure compliance in inventory literally translated to a return on investment many times over than the work it took to do the right thing and prove it to the new acquirer. 

Unfortunately, iComply has also seen the opposite all too often – wherein new owners have been audited by enforcement not knowing they bought a ticking time bomb. 

By trusting only their attorneys and CPA’s in the transaction, they were unaware of their books and records compliance – which are required to be kept for 3 to 5 years, on average, depending on each State. 

It is normal practice for regulators to investigate new ownership and, when enforcement performed a twelve-month books and records audit, they found 63 missing signatures on transport manifests dating back months. The business was fined $1,000 per missing signature! 

These types of unexpected issues represent significant costs for cannabis operators in fines which is what most people think the “costs of non-compliance” mean. 

However, and in addition to the literal cost mandated by regulation, there are the costs owners don’t think about: in the time and fees charged by the professionals that will have to help you solve these issues. 

How much time and stress will you spend on compliance rather than focusing on the future of your new business? 

As we always say at iComply: “It is always more cost-effective to be proactive, rather than reactive, when it comes to your operational cannabis compliance management.”

Now, imagine that during due diligence or while you were operating, you had a team of compliance specialists to identify any detrimental cannabis compliance issues. You would be in a very different position to be able to make proactive, rather than reactive, decisions. 

Discovered compliance issues may lead you to abandon a deal, choose another business you’re considering over another, negotiate a lower price, and at least recognize the hidden costs of compliance reconciliation – hopefully, as a cheap and easy process that will not significantly impact your cannabis business plans. But you won’t know until you find out.

To truly valuate a cannabis business, one must also consider the cannabis business SOPs (Standard Operating Procedures) and how they affect the underlying facts regarding production numbers, safety, risk, and overall value. Beyond identifying SOP deficiencies, integrity, and whether they are followed, one must ask: are the SOPs even up to date and compliant? If not, how bad are they? How much will it cost me to run this new business by the books?

So many questions surround the operational viability and success of a cannabis business and iComply finds answers by also examining how staff is trained, developed, and managed. Too often, deficient SOPs lead to deficient employee training and oversight – and simply putting a cannabis business under “new management” does not guarantee the operational compliance infrastructure will create success in a new or existing staff. 

Having an independent consultant review your SOPs can identify poor policy and potential issues in both operations and compliance. 

Once operating under new leadership, and by engaging in audits and compliance packages through iComply, these questions can be answered about the team, the risk of the new business, and the true value of assets and operations so that proper planning may commence in an efficient and effective manner.

iComply operates on a proven philosophy of ensuring cannabis businesses have:

  1. Compliant processes (cannabis business SOPs), 
  2. Compliant people (cannabis staff training), and 
  3. Compliant measures and management (cannabis business auditing) 

We make sure important components of compliance are scheduled and adhered to frequently to build a case history of compliance success and to allow for ongoing operational improvement in your cannabis business.

Ultimately, iComply helps investors and operators answer the question of “how do I buy a cannabis business?” And answers by doing so the right way and by increasing transparency for you and your business associates. 

 

Contact the compliance professionals at iComply to ensure you’re not simply buying hopes and dreams, or even worse, the nightmare of a ticking time bomb waiting to go off.

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