Vetting Expansion Partners

Successful national expansion often requires hooking up with local partners – and vetting them adequately

by John Schroyer

Expanding into a new cannabis market isn’t easy for plant-touching marijuana companies.

Depending on the state, such expansion might require a local partner in order to comply with a residency requirement or a financial associate if a company doesn’t have the capital on hand.

That’s easier said than done: Finding the right partner is often critical to long-term success, but the road to a fruitful and successful business relationship is littered with potential potholes.

Just ask Tripp Keber, the CEO of Colorado-based Dixie Brands.

In 2012, his company tried to team up with some entrepreneurs in Arizona, but the venture went downhill quickly because Keber’s partners decided to trust a third party with running their edibles manufacturing facility.

Keber discovered quickly that the third party was possibly obtaining cannabis from the black market instead of legal avenues, which, he said, “scared the daylights out of me.”

“That was an incredibly painful process where we literally had to pick up our ball from the playground and leave,” Keber said. “It only takes one bad apple to literally take down an entire business, and you’re only as strong as your weakest link.”

Since then, Dixie has successfully expanded into six states and Australia.

But many other cannabis professionals are struggling with finding partners.

With that in mind, Marijuana Business Magazine picked the brains of several longtime cannabis industry executives about how to choose whom to get into bed with, and when to walk away.

Get on the Same Page

Value alignment was at the top of the list for every experienced cannabis executive interviewed for this story. If a company is primarily profit-driven, for example, it shouldn’t partner with an individual or business that’s more concerned with providing medicine to ailing patients than making money.

“Whatever values are driving you to do that, you should find local partners who share those same values,” said Andrew DeAngelo, director of operations for the California-based dispensary Harborside, which has expanded into multiple states. “And be very clear with it, because some people will say they want to heal the world, when really they just want to make a lot of money.”

If there’s a major difference in priorities, he warned, partners could wind up not working well together or, possibly, working out their differences in court.

To avoid such an outcome, DeAngelo said, spend as much time as possible getting to know any potential partners. That means lengthy, in-depth discussions about what partners bring to the table, why they’re interested in the cannabis business, if they’re committed to running a legal and compliant operation, and what their long-term goals are.

“It’s smart to balance that deep-dive interview process with some due diligence,” DeAngelo said, “because there are some predators lurking out there in the cannabis waters, and a lot of people have gotten burned over the years because they partnered with someone whose intentions were not revealed or not pure.”

Separate Fact From Fiction

Doing your homework is an obvious way to vet potential partners, but many entrepreneurs looking to expand don’t always take it to heart.

“There isn’t anybody in the business that I don’t do a background check on. With the internet and services that are available, I don’t understand why everybody doesn’t do that,” said Greta Carter, founder and CEO of The G.Car Companies, which has business interests in three states so far.

Specifically, entrepreneurs should look for any red flags with potential partners in federal and state court system records, state tax assessor records and state departments of revenue, said PharmaCann’s general counsel, Jeremy Unruh. PharmaCann has licenses in Illinois and New York and is actively seeking partners in more markets.

“There’s all sort of publicly available databases,” Unruh said. “A vetting of those publicly available references is something I do in addition to general business due diligence, which is, ‘Give us all your financials and all your organization documents, and we’ll take a look at them and ask questions.’ ”

Make Them Show You the Money

There are two sides to finances when it comes to cannabis.

First, partners need to have some capital.

“It’s no different than buying a house. You have to see that they’re for real … so I ask for liquidity, proof of something in a bank account,” Carter said. “If they’re offended, they’re probably not real.”

Second, and perhaps even more important, is for potential partners to recognize that a cannabis business license isn’t a permit to print money. Rather, it takes work and commitment.

“What I’m looking for there is people who understand that this is not a get-rich-quick scheme. It’s a regular business, in that it requires ongoing building and that they have realistic expectations,” said Nancy Whiteman, co-owner of Wana Brands, a Colorado-based edibles maker that has expanded to Oregon and Nevada.

Kayvan Khalatbari, one of the original founders of Denver Relief Consulting, has found cannabis business partners all over the country. He echoed Whiteman’s sentiment.

“If one of the first questions they ask is how much money they’re going to make in the industry, I’m probably not going to work with them,” Khalatbari said. “Money, and the expectations behind it, is one of the biggest killers of teams, even with people who know each other and work well together.”

Seek Out Diverse Professional Backgrounds

Khalatbari and Harborside’s DeAngelo both believe the team members in potential partner groups are a major point to consider.

Especially crucial is that any potential partners have a diverse skill set within their management team.

“There’s about 12 disciplines that we believe must be part of a team,” Khalatbari said, mentioning product development, branding, security, retail knowledge and agriculture, among other areas.

DeAngelo agreed.

“We’re trying to move up the supply chain,” he said, “so we need really good compliance people that don’t come from the cannabis world, that come from the security world, the law enforcement world, the regulatory world. We need skills like that that we don’t have in-house.”

Khalatbari believes potential partners and their team members need to have solid local ties, both politically and socially, to ensure that a plant-touching business will actually get off the ground.

His checklist includes a good relationship with local officials, the ability to find a property that is zoned correctly and establishing goodwill with the local community in which the business will be located. All of that may sound like a big demand. But without it, a cannabis business permit may not mean much; it can take all those attributes to get a marijuana company operational.

Keep Your Secrets

Last but not least, DeAngelo said, it’s important when considering a partnership to use nondisclosure agreements, often referred to by the acronym NDA.

“I’m Andrew DeAngelo. Here’s my NDA. That’s one of the things we’ve learned, is get that in soon,” DeAngelo said. “The bigger the deal it is to sign it, and the more back and forth there is, that’s information you can use. It’s not necessarily negative … but things get over-lawyered. And when things get over-lawyered, it’s a sign. Are you going to be able to close the deal with these people?”