The Hidden Costs of Non-Compliance

May 11, 2020
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The Hidden Costs of Non-Compliance

Anyone owning and operating a cannabis business knows the value of proactive compliance management as fundamental for successful operations. However, as markets expand and people buy into existing or new cannabis businesses, they need to ask several important questions. One of the most important questions: “What do I know about successor liability?” In many instances, a case of hidden costs due to non-compliance holds the potential to ruin business ventures.

Consequently, any business professional coming into the cannabis industry should be seeking cannabis valuation services. Liabilities of previous operators or lack of compliance infrastructure may very well equate to a ticking time bomb. No owner or operator in their right mind would want to risk such an investment. The complexities of cannabis regulations make protecting investment top priority for anyone looking to expand in the market.

Luckily, structured analysis tells a cannabis investor much about their prospective business from sales, foot traffic, capacity, methodology, location, etc. However, investors should ask themselves what else seems critical to this highly regulated industry? 

For example, would an investor trust their CPA or a similar professional to untangle issues not in their field? Understanding the intricacies of the company culture, compliance documentation, and operational environment of a cannabis business ensures that previous ownership was compliant. Would an investor trust that same CPA 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.

Most CPAs have likely never seen a seed-to-sale inventory system. They likely don’t possess the knowledge or experience to audit the system the same way they would audit the financials of a newly acquired cannabis business. Their training often falls short of uncovering the hidden costs of non-compliance.

The Hidden Costs of Noncompliance Can Be Mitigated

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

iComply was able to help this client reconcile their internal inventory tracking system to their METRC reporting and physical inventory counts. This invaluable service ensured the cannabusiness could meet the requirements of a multi-million dollar acquisition. Furthermore, once we stopped the bleeding, we improved 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 more over than the cost of 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. New owners have been audited by enforcement not knowing they bought a ticking time bomb. The results quickly became financially taxing. 

By choosing feedback only from attorneys and CPA’s in the transaction, new owners were unaware of books and records compliance. Keeping these documents on record for 3 to 5 years represents an important requirement (depending on State regulations). 

Protecting Investment

Regulators normally investigate new ownership in the cannabis industry. For instance, enforcement officials performed a twelve-month books and records audit for one business. 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. This represents what most people think the “costs of non-compliance” means. 

However, and in addition to the literal cost mandated by regulation, the costs owners don’t think about many other costs. Especially, they fail to consider the time and fees charged by professionals who will help solve compliance issues. 

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

Compliance Proactivity

As we always say at iComply: “Acting proactively rather than reactive when it comes to operational cannabis compliance management creates more cost-effective business practices.”

Now, imagine that during due diligence or during operations, an owner had a team of compliance specialists to identify any detrimental cannabis compliance issues. This proactive step would produce a very different position to make powerful and informed decisions. 

Discovered compliance issues may lead potential owners to abandon a deal, choose another business they’re considering over another, negotiate a lower price, and at least recognize the hidden costs of compliance reconciliation. Hopefully, this is as a cheap and easy process as possible that will not significantly impact the cannabis business plans. Regardless, owners won’t know until they 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. Consequently, iComply finds answers by examining staff training, development, and management. 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 SOPs often identifies poor policy and potential issues in both operations and compliance. 

Success Under New Leadership

Once operating under new leadership, engaging in audits and compliance packages through iComply answers pressing questions. We delve into details about the team, the risk of the new business, and the true value of assets and operations. This allows proper planning to 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. This builds a case history of compliance success and to allows for ongoing operational improvement in cannabis businesses. Our work strives to uncover the hidden costs of non-compliance and give owners peace of mind.

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 owners and their 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.