How To Avoid Failure In Cannabis Mergers & Acquisitions

by Gregory Frye

The past year has proven to be a pivotal one for the cannabis industry. After being deemed an essential service during COVID-19, sales continue to surge. Yet, even before the pandemic, investment dollars were already leaving the space, bringing about a ‘Darwin phase’ where only the strongest organizations will survive.

With the Darwin phase in full effect, one of the important trends during this period is the rise of mergers and acquisitions (M&A) in cannabis. Recent examples include Jushi acquiring Pennsylvania Medical Solutions and Curaleaf announcing their acquisition of Grassroots.

M&A can bring about a lot of prickly challenges – short-term and long-term – in any industry. When certain factors are overlooked early in the process, the rise in failure rates is all but inevitable. In the cannabis industry, companies may be even more susceptible to some of the challenges that arise within the M&A process.

“Mergers are like marriages – complicated processes with long-term commitments. Since what you see isn’t always what you get, you’d better look very hard to ensure this is what you truly want,” says Todd Wheeler, a leadership and management team coach, who has worked with high-profile, billion-dollar organizations.

“You also have to think about questions like what are we really buying? Are we buying market share? Are we buying management teams? Are we buying operational protocols? You need to engage in a kind of courtship to really understand it.”  

The Number One Reason For M&A Failure

Some of the world’s biggest companies have faced substantial M&A failures, such as Ford having to cut their losses with Volvo and Jaguar, or the infamous case where Sprint purchased Nextel for $35 billion in 2005. Eight years later, Nextel had to shut down, and Sprint is also gone after a recent acquisition by T-Mobile.

The key reason why most M&As fail? According to Wheeler, it all comes down to culture.

“When the top-down, process-driven Sprint failed to integrate Nextel’s entrepreneurial, casual culture, the clashes affected everything from operations to advertising strategy to technology, everything,” he says, emphasizing that organizations need to work harder to understand each other before pulling the trigger on a potential merger or acquisition.

The process needs to be more involved than just sitting down with the finance and accounting people, he explains. The challenge is to get a better understanding of what the true baseline cultures are. 

“For example, what happens in organizations is that either you have a traditional, political or power-based, top-down, and very strict culture that merges with or tries to integrate with a humanistic, entrepreneurial or employee-centric culture. Those two types of cultures, if you understand them in advance, can work together fine. But to successfully integrate and realize the expected outcomes, it has to be carefully examined, planned, and executed. Or you can do what so many organizations do and ‘wing it’ and suffer the failures and consequences,” Wheeler says.

“You have to look at them ahead of time, identify any issues, and determine how you can take all the elements at play to create a new culture. You can’t just try to automatically blend the two together and think it’s going to work.”

Addressing The Culture Crisis In The Cannabis Industry

Because culture is a vital touchpoint for successful M&As, it’s important to recognize that a lot of cannabis companies struggle with culture. They are so focused on compliance and regulations that they often overlook this critical factor, and the business along with its people suffer as a result.

One of the biggest starting points when improving any organization is culture, Wheeler notes. “There are many different factors within culture: shared ideologies, shared philosophies, how things get done, how we work, how we behave,” he explains. “To me, culture is very simple. It’s not easy, but it’s simple.”

Essentially, culture is how it feels to work somewhere, Wheeler continues. “How does it feel when you go to work? How does it feel when you do something good? How does it feel when you do something bad? Right? Wrong? How does the team, the group, the leadership, or management react, treat, or deal with you when these kinds of things happen?” All important questions for companies that want to minimize employee turnover and improve employee engagement.

When Wheeler starts coaching with an organization, the culture is one of the first things he works to understand. He utilizes what he calls an organizational ‘CAT-Scan’, which allows him to look deeply into the non-financial aspects of corporate performance. This helps gain a better understanding of factors like culture, structure, strategy, leadership style, and where the business is in the organizational life cycle. “At every stage of development, you have a major crisis which is the thing that’s holding you back. It might be delegation, maybe coordination, or communication,” Wheeler explains. “And then you’ve got a driving force, which is that thing pushing the company forward.”

In the early stage of the business cycle, Wheeler adds, the driving force is entrepreneurship – doing everything we can to keep things moving. “This is followed by subsequent phases, and at a certain point, the biggest, most important thing you need to do is start bringing in professional management, which many cannabis companies are only just now starting to realize.” 

One of the things Wheeler loves about the CAT-Scan tool is that it allows him to achieve a diagnosis – understanding what’s in alignment and what’s not in alignment – at a fraction of the cost and time compared to major consulting firms.

“Imagine you or your children are sick, and you go to the doctor. You don’t want someone who is going to see you for five minutes and say, ‘take two of these and call me in the morning,’” Wheeler says. “You want somebody who is going to spend time asking questions, listening, and really working to arrive at an accurate diagnosis with a precise treatment plan that will get you back to wellness. Only then can we focus on those big goals that differentiate us from the competition – where do we want to be in a year, three years, five years? And what do we need to be doing in 30, 60, 90 days to achieve those objectives? 

Uniting People & Teams Through Culture

Merging two contrasting cultures can absolutely work, Wheeler says of the M&A process. “If you’ve worked to recognize any potential issues beforehand, you’ll be prepared for the inevitable challenges. And at the end of the day, most employees want the same things,” he says. 

This is where other parts of Wheeler’s toolkit come into play while he’s working with organizations that want to improve their culture and inspire their employees. “What you need to do is provide what I call a MAP – mastery, autonomy, and purpose,” he notes. 

“Regarding mastery and autonomy, in today’s business landscape there are a lot of different learning styles, and generally people would prefer to have a coach or a mentor, somebody who can give them different ideas, help them understand where they are and where they want to be with some boundaries that can help them keep moving forward. Humans love boundaries and goals. What they don’t want is a boss or factory manager cracking the whip and telling them what to do.”

The notion of ‘purpose,’ meanwhile, has also gained a lot of importance, especially over the past 10 years, Wheeler says. What are we doing? Why are we here? “We need to have organizations with a purpose. Look at Ford Motor Company. They don’t make cars. They make ways to get from place to place safely. That’s the purpose,” he adds. “In the cannabis space, the only purpose I’ve really seen when we look at it from this perspective has come out of the medical side, where the purpose could be helping people feel better, healthier, stronger, etc. As for the other parts of the industry, you’ve got to come up with a purpose that’s more compelling than just getting people high.”

According to Wheeler, another important ingredient to establishing a winning culture is empathy and emotional intelligence – understanding people from an empathetic perspective. “Empathy is multifaceted. There’s intellectual empathy, emotional empathy, spiritual empathy, physical empathy – the ability to understand the true emotions of where someone is coming from,” he says. “Exercising empathy is what leads to trust, which also has multiple components: credibility, reliability, safety – do you feel safe telling me things that are sensitive and may be deeply valuable and important?” 

These principles of culture have become even more important during the era of COVID-19, when more people are not only working remotely but also facing increasing levels of uncertainty. Emotional intelligence and empathy are both critical components in meeting employees’ needs in times like this, Wheeler notes. They are important touch points for all companies in the cannabis industry, not just those involved in M&A.

Blind Spots & Drowning Are A Threat To Every Organization

At the end of the day, cannabis organizations face a lot of the same hurdles and shortcomings that businesses in any industry face. This is where bringing in outside talent, leaders, managers, and coaches can add a lot of value – instead of trying to reinvent the wheel.

“Organizations don’t suffer because they can’t solve their problems, they suffer because they don’t see their problems,” Wheeler advises. “And they tend to either stick their heads in the sand, or they don’t have the processes in place that allows the employees to bring things up without fear of chastisement, being punished, or getting fired… Unfortunately, that is often typical in the cannabis space than not.” 

And there are different ways of looking at things when you consider blind spots, he continues. “What have we got going on in the organization that we just don’t see? That could be anywhere from the planning, the positions, the right people, the right processes – how are we performing? Are our people clear on what’s expected of them? And if not, do we have processes in place for them to ask, without fear of reprisal? Again, rarely,” Wheeler notes.

This is where businesses can truly benefit from having an outside coach come in to assess and work with their teams.

“Oftentimes in highly regulated industries like cannabis, there is a lot of concern that we don’t know what’s going to happen, so then you need to prepare for it,” Wheeler observes. “You need to carry a ‘pontoon bridge’ with you because you might need to cross a river somewhere in the middle of the jungle.”

Another metaphor Wheeler likes to use involves jumping in the middle of the ocean when you don’t know how to swim. “The odds that you’re going to survive are minimal. What we do is improve survival rates. Because a lot of companies fail.”

Whether you’re merging, acquiring, or investing in an organization, looking at and understanding the key non-financial issues ahead of time can make a powerful impact on achieving your intended results.

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