Entrepreneurs start businesses to make money. At some point, the entrepreneur may want to sell or go public, for a variety of reasons. A company that has an inadequate risk and compliance program may find it difficult to do so.
Bankers, investors and potential partners want to understand the risk associated with the company that may negatively impact the company's future value and the partner's reputation. These risks include, among others, illegal activity, fraud, enforcement actions, intellectual property infringement, litigation or the threat of litigation, a consumer safety issue, or employee lawsuits.
A company, as part of what is known as “due diligence”, must disclose these risks and demonstrate control frameworks that prevent them from occurring. Otherwise, no one will be interested in doing a deal.
The cannabis industry poses a higher risk to investors as compared to other industries, which means that sophisticated investors or investment banks will perform extra levels of due diligence. These extra levels are designed to uncover illegal activity, compliance failures, a lack of a culture of compliance, and determine whether a company’s risk and control programs are on par with industry best practices.
If due diligence uncovers evidence of risky business, the valuation of the business and the ability to enter the public market will be negatively impacted. Between two similarly situated acquisition targets, an institutional player will select the business that mitigates risks facing the business, and embraces a culture of compliance. In the cannabis industry, compliance is a competitive advantage.
It is not too late to take a step back and understand how you can implement a risk and compliance program expected of a public company. There are small steps that can take you a long way including:
Hire a compliance officer and provide them with sufficient resources to create an effective risk and compliance program. The risk and compliance program can be customized to the company’s size, risk, and strategic goals.
Create a culture of compliance. The internal threats posed by employees is one of the greatest risks that can quickly erode a business’ valuation or opportunity to go public.
Grow quickly but wisely. Sophisticated investors and investment banks care about the quality of the assets a company buys. Perform due diligence- otherwise, the investment may be worthless. Remember that a company’s sins are assumed by the buyer and do not go away.
Obey the laws and demonstrate how you do it. Always be prepared to show investors how the business complies with all applicable regulations.
At the end of the day, the companies that have effective risk and compliance programs will become the market leaders. Those that do not, will fall away. The risk to investors and investment banks in making a bad bet is too great for them to support companies that fail to mitigate risk or follow the rules.