Cannabis & CBD

As the legalization of recreational cannabis has taken hold over the last few years, PE and independent investors have invested large amounts of capital. However, the sector went through a very difficult 2019, which saw valuations drop dramatically. 2020 is proving to be even more challenging.

Legalization has resulted in margin compression as prices have come down across categories due to increased competition, which in turn has translated into operating losses for companies across the value chain.

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While several companies have decided to vertically integrate, the supply chain remains very fragmented and inefficient, putting additional pressure on margins, particularly for distributors and retail (dispensary) players.

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In addition, cannabis dispensaries tend to operate in a less-than-optimal fashion with cost structures that are out of sync with the company’s revenues, sub-optimal working capital, and less than ideal  day-to-day execution discipline.

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Although several states have designated the sector as essential under COVID-19, 2020 will be a difficult year for the industry, but opportunities may exist as consumer demand continues to grow.

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Whether owners go it alone, or look to find outside investors, getting back to solvency and increasing EBITDA, are the main targets they should aim for.

The inability of cannabis companies to use bankruptcy (chapter 11) to restructure, means that owners need to develop an out-of-court like turnaround and restructuring plan, one that can help then get back to solvency and set the basis for future profitability.