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  • Writer's pictureErik Ott

Brand Market Expansion: What’s Involved Part 2

Part 2: Initial Partnership Engagement and Analysis

In Part 1 we discussed the key components of a brand’s preliminary due diligence effort prior to engaging a market. In Part 2 we look at initial engagement with prospect partners and provide a roadmap to making an informed partnering decision. This phase is a continuation of the preliminary due diligence phase but gets more granular in its analysis.

As noted in Part 1, there are two types of partners in any given market: co-manufacturing partners that may work with dozens of brands and provide a host of services a brand can leverage (or not), and brand partners that have established distribution for their own brands and are willing to take on others.

Choosing which partner is the best fit for any given brand is a combination of art and science. The art is in selecting an organization that you trust, that has a similar philosophy, and that possesses synergistic competencies. The science is in the development of the business plan and the mutual due diligence to ensure both parties have the operational capabilities to execute against the objectives.

The partner engagement process requires is driven by three key objectives:

  • Partner SWOT Analysis

  • Product-Market Fit and Business Plan Development

  • Mutual Financial Due Diligence

Partner SWOT Analysis

The foray into a new market requires a diligent process designed to vet a partners’ capabilities. Brands should create a template to capture the information most relevant to their desired approach and get feedback from each prospective partner with regard to their core competencies as well as possible areas of weakness.

Nothing drives this process forward more effectively than a site visit. Incorporating and sharing the desired outcome of a site visit helps all parties prepare and align on the initial objective. Brands will certainly have nuances that are specific to their needs, but at a high level a brand needs to think about selecting a partner in the way an investor vets a potential investment opportunity. After all – what bigger investment can a brand make than to put its intellectual property into the hands of a third party?

While a SWOT analysis has many components, a few obvious ones are:

Company overview: Get to know your partner by going back to Day 1:

  • Why did they start their company?

  • How have they been funded?

  • What has their journey been like? What pitfalls have they encountered, and how have they handled those situations?

  • What is their strategic roadmap? Where do they want to be in three to five years (including thoughts around an exit strategy)?

This deep dive on the potential partner is the best way to ascertain if its values and the culture align with yours.

Core competency: What is the organization best at? Cannabis entrepreneurs are famous for wearing many hats, but everyone has a few things they believe they excel at. What are those strengths, and what are the areas of less competency? Finally, what are potential partner’s operational needs going forward, and how do they plan to accomplish their objectives?

References: Understanding both the successes of partnerships as well as those that failed is a hard but important discussion when vetting a partner. There is no better way to learn about a partner than to speak with their current portfolio of partners. If possible, this should include a discussion or two with brands with whom there may have been a falling out. The goal must be to begin a relationship with “eyes wide open” and to create an environment where no discussions are off limits.

Product-Market Fit and Business Plan Development

While internal analysis regarding product-market fit was done in the initial evaluation phase, now the real work begins. The first step in these preliminary discussions is to share the assumptions and conclusions from the internal analysis, to get feedback from the prospect with in-market experience. Recall, the definition of Product-Market Fit is “being in a good market with a product that can satisfy that market”. That requires a deeper dive into the specific characteristics of a market, the state of the supply chain, and an evaluation of competitors and their current price points. A good partner can support this analysis and help ascertain product-market fit. This analysis should lead to the development of a business plan that reflects both sides’ viewpoints on the potential in a given market.

What are the essential components of this analysis?

Total Addressable Market (“TAM”): How large is the total addressable market in the specific category being considered? How is that market being “satisfied” today?

Startup costs: What do both parties need to invest in before attacking the retail market?

Margins: What is the gross margin both parties need to run a profitable business, and how will both parties achieve their goals? This needs to start with an assessment of how brands should price to be successful in the market; once pricing levels are established, it will be easier to determine how each party can achieve their profit margin targets.

Launch Portfolio: Practically speaking, a brand will launch with a small SKU set and not its entire portfolio. Therefore, the selection of launch products is critical to long term success as those products will establish the brand’s market position.

Projections: What are all the assumptions that go into the development of projections that both parties can align around? Developing a set of 2 year projections will help the parties establish their relative margin profiles, determine the capital investment requirement, and estimate the time when the partnership becomes cash flow neutral.

Continuous vetting and validation of assumptions will continue throughout the course of the relationship, but this initial deep dive, with each unique partner’s assets, will result in a number of different go-to-market execution approaches. Evaluating those options in a pro-forma that the company’s management has bought into will go a long way towards reducing the investment risks associated with new market entry.

Mutual Financial Due Diligence

The reality in today’s cannabis market is there are many companies that are losing money and/or are severely undercapitalized. Having an open and transparent financial disclosure with your partner prospect should be nothing but a welcome exercise by both parties. While the requirements of disclosure will vary depending upon the distinct partner profiles the bottom line is this is a “mutual” exercise and the information shared should be reciprocated. At a minimum, the critical documents are a balance sheet (how much debt is on the books?) and a high level P&L going back at least 6 months and out the next 12 (is the organization profitable?). With this data, a number of “what-if” discussions will need to take place to address any corporate issues on either side that could affect the organizations’ ability to work together successfully. The extent, nature, and likely resolution of these issues will help determine whether a deal can move forward.

These discussions will pay dividends during negotiations as both parties will be clear on each other’s ability to fulfill commitments. All risks that are identified during this financial review will become key points relative to potential dissolution of the relationship. Anticipating failure scenarios, while not a fun discussion to have when dreaming of success, is critical to the overall health of both businesses. Picking the wrong partner is very difficult to recover from, especially post-launch when the brand’s reputation has been exposed.

In summary, the initial partner engagement phase requires a deep analysis of multiple types of partner prospects as well as a granular understanding of each market’s nuances to find the “right” partner to successfully scale your brand into new markets. Cutting corners or not doing the proper due diligence only increases the risk of failure, something no one has time for in the cannabis industry. In Part 3 we will look at the Agreement Negotiations and Closing.

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