Mitigating Lenders' Risk: It’s Not Easy Selling a Cannabis Company for Parts

Mitigating Lenders' Risk: It’s Not Easy Selling a Cannabis Company for Parts
Cannabtimes

<![CDATA[ Despite commodity prices and demand growth that are the envy of every other industry, cannabis companies still go out of business sometimes. Why? That’s another story. But despite a spate of high-profile failures, there is still no well-paved path to liquidating a corporation that sells cannabis.This puts potential lenders at risk, which in turn tends to increase the interest rates the remaining funders can charge.As previously reported in Cannabis Business Times, debt raised through private placement is surging as industry firms seek capital. Still, just because investors might have a document entitling them to be paid back from an asset sale upon default, that doesn’t mean they’ll be able to collect.“There is no guarantee,” according to court-appointed receiver Ted Lanes, whose California-based company works to assist creditors and defaulting companies find solutions. “Licenses typically cannot be used as collateral, and inventory has its own issues. Lenders may be able to secure loans with direct ownership of the stock or partnership interests, but those values obviously decrease in a distressed situation. If there is value in the brand, or any [intellectual property], that may mitigate the risk.”When Bankruptcy Is Not an OptionThere are two kinds of investors: equity holders and debt holders. Equity holders are willing to endure higher risk to get a higher reward; there is unlimited upside, but, if the business goes bust, equity holders get nothing. Debt holders aren’t interested in the upside; they’re willing to lend the firm money, but demand that the note be paid back on time—in full and with interest. If the business goes bust, its assets get sold off and the lenders are first in line to get paid.In the non-cannabis world, this is handled by bankruptcy, a court-ordered process which creates a protective legal shield around the debtor, allowing them to do…

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