10 Questions to Ask Before Entering a Cannabis Partnership

As we edge closer to the legalization of cannabis for recreational purposes, it is anticipated proponents preparing to enter into or expand their presence within the cannabis industry will increasingly approach First Nations offering partnership and investment opportunities. With expansive traditional knowledge, land, a strong and engaged workforce and potential tax and federal subsidy opportunities – businesses will likely see numerous benefits to establishing partnerships with and within Indigenous communities.

As with any industry, it is important for Indigenous communities to prepare themselves and their communities by ensuring they perform proper due before engaging in any partnerships. The responsibility falls on leadership to ensure any opportunity will provide the greatest potential benefit and minimize risk.

Below are the ten considerations any Indigenous group should ask before partnering with a proponent operating in the cannabis industry:

Does the opportunity align with our strategic plan or investment criteria?

Ask this question early on. Your answer will make or break your decision to move forward with a potential partnership. Even if you do decide to proceed, you need to know how much you’re willing to invest and how involved you’ll want to be with the business operations.

Given the attention the cannabis industry is receiving, entrepreneurs and stakeholders will naturally be excited by the potential upside of getting involved. Less apparent are the start-up costs involved, the potential volatility of a new and uncertain market, and the time it can take to realize a meaningful return on investment.

Ensure the opportunity aligns with your community’s strategic plan and fits within your investment criteria. This will dictate the level of investment made in any cannabis venture you’re considering.

Has the proponent provided adequate information to make an educated decision?

You are entitled to any necessary documentation required to gauge the potential risks and benefits of your investment. A worthwhile business partner will be willing to provide this information up front and in clear terms.

At a minimum, the proponent will offer:

• A comprehensive pitch deck explaining the proposed opportunity, planned operations and desired business outcomes
• Terms of reference further detailing the scope of the business, stakeholders involved (and the roles, responsibilities and assumed risks of each), resource requirements, revenue targets and key performance indicators
• Financial information and projections demonstrating an understanding of the costs to develop the business, expected operating costs and expected revenues with supporting information on the inputs and assumptions driving the projected financial information
• A clear plan for the uses of investment funds
• References and qualifications demonstrating how the business, partners or entrepreneurs have performed previously and their aptitude to deliver on their promises.
• What assumptions are driving the proponent’s financial projections?

Your potential business partner will want to present themselves and their business proposition as favourably as possible. When proponents make specific claims regarding expected costs and revenues, you need to know whether those numbers are reasonable.

In performing due diligence and analysis on the underlying inputs and assumptions, you may also choose to compare their claims to how other similar businesses have performed. For added assurance, however, it is often beneficial to have any projections independently verified by an impartial third-party.

What is the cost to invest?

This goes beyond the initial investment required to get the business off the ground. Consider operational and maintenance costs, management fees, research and development requirements, future capital injections and other hidden expenses required to keep the business running, competitive and profitable.

Before agreeing to any partnership or joint venture, it’s important to ask, “can we afford it?” and “how will our investment be used?”.

What is the return on investment for the project?

The potential revenue a cannabis partnership can generate for an Indigenous partner will undoubtedly seem lucrative. However, a proponent may also feel inclined to present the best-case scenario. In some situations, they may even propose returns that are completely unreasonable and unrealistic.

Do extensive research before moving forward. Learn what is realistic given the outcomes of similar businesses operating in the cannabis industry. Engaging an impartial third-party to measure the range of possible outcomes and assess the likelihood of success will allow you to fully understand the potential risks and negative outcomes of a potential business venture.

Where is the business located?

Where the business will be located may have significant implications – both positive and negative – for how lucrative and beneficial it will be for your community.

If it’s on-reserve, you may have more tax benefits, the opportunity to employ members of your community and increased control over the business.

However, if the proponent is merely seeking a partnership to exploit the benefits of operating a joint-venture business on-reserve with a First Nation partner, they may not necessarily deliver full value in other areas of the partnership.

If the business is located off-reserve, the tax benefits may be less, employment may seem less lucrative for community members due to transportation or status concerns and you may have less control of the business.

However, the proponent may be inclined to offset those drawbacks with other considerations – such as more equity, management authority, or additional financial benefits to you.

Are we active or passive investors?

As with any business opportunity brought to an Indigenous community, you’ll want to understand the level of management and operations involvement available to you. Will you be active in the management and day-to-day operations of the business? Or will you simply be a passive investor in a business opportunity?

Both alternatives come with benefits and drawbacks. The most obvious is the degree of control and input you’ll have over the business operations as an active versus a passive investor. However, you’ll also need to consider include the time and resources required to exercise that control and the liability you want to shoulder in the event of legal or financial turmoil.

Understanding your role with any potential business development in the cannabis sector will further support your decision to move forward with any investment opportunity or not.

Does the proponent have experience in the industry?

The emerging cannabis market will surely produce its fair share of prospectors – amateurs and experienced professionals alike – hoping to strike it rich in a potentially billion-dollar-per-year industry.

It is critical to separate the knowledgeable few from the hopeful majority to ensure your partner is experienced, knowledgeable and qualified to deliver on their business plan. They should be versed in best practices, basic business principles and strategic activities of the cannabis industry. They should also have a prior and demonstrable history of successful business ownership and management. Most importantly, they should be able to provide several reliable references who can testify to their reputation and aptitude.

Have there been issues in the past with the proponent or its directors?

It’s often said that history repeats itself. Nowhere is that truer than in business. If a potential partner has deceived, been unfair or gained a reputation for improprieties in the past, odds favour them continuing that behaviour in their future engagements.

Before committing to anything, perform sufficient due diligence to learn everything you can about the proponent(s). The slightest indication they are not completely legitimate will be enough to pursue other, more worthwhile partnerships.

Are there any strategic benefits to working with this proponent?

Given the growing interest in the emerging cannabis sector, any opportunity will be one among many for Indigenous communities to take advantage of. Tou need to consider the strategic benefits involved to ensure you’re capitalizing on the right one.

Pay close attention to the value any potential partner can offer. Understanding the partner, their position within the industry and the strategic benefits of aligning with them will further assist your evaluation of any potential business investments under consideration.