How to Survive the Coming Consolidation Feeding Frenzy

Attorney Julie Herzog sees massive consolidation on the horizon, much of it driven by Big Pharma. Companies that aren’t prepared to eat or be eaten profitably need to get their platters in order now … before it’s too late.

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Attorney Julie Herzog sees massive consolidation on the horizon, much of it driven by Big Pharma. Companies that aren’t prepared to eat or be eaten profitably need to get their platters in order now … before it’s too late.

When Democrats took control of the White House, the House of Representatives, and the Senate in 2020, it looked like a layup for cannabis legalization. And yet, we continue to wait. Despite overwhelming public support and dueling legalization bills from both political parties, America’s world-leading new industry—which has created almost half a million jobs in thirty-eight states—remains banished to a legal gray area that severely stifles growth.


No current or proposed Democrat or Republican bills are expected to go anywhere in the Senate, so speculation continues about what details might finally meet muster. There are, however, a handful of reliable “knowns” companies should heed in advance of something breaking the gridlock.

One known is that once the government gives the consumer-packaged-goods, tobacco, and pharmaceutical companies the green light to safely bank and transport cannabis products across state lines, a fervent period of industry consolidation will begin. To some small or legacy operators, this could be the big exit for which they have been positioning themselves or the moment they raise the hefty amount of growth capital required to compete nationally. But attorney Julie Herzog worries many of these operators are not prepared on paper to get the best deals for their companies, and maintaining good corporate hygiene should be a preemptive act. After all, it easily could make the difference between success and failure.

“These operators have gone from being in the illicit or gray market, where you don’t write anything down, to being in one of the country’s most highly regulated industries, where you have to document everything,” said Herzog, cofounder and principal at law firm Fortis Partners and Full Velocity Consulting. “That has presented a lot of problems for these entrepreneurs.”

As head of the corporate and securities practice, Herzog handles a wide variety of transactions. To date, she has managed more than $4 billion in deals on behalf of Fortune 100 companies, startups, family offices, and venture-capital and private-equity funds. She took on her first cannabis client about ten years ago and was struck by the unique challenges presented to entrepreneurs transitioning to the newly legal market. As she accepted more cannabis clients, the same issues relating to accounting practices, compliance, and human resources emerged time and again. That realization encouraged her to found Full Velocity, which provides experts to assist companies at every stage as they scale.

In her years preparing cannabis companies to raise money, scale nationally, or court acquisition, Herzog has seen it all, and her breadth of experience inside and outside the industry has given her an excellent vantage point for speculating about what may happen when either banking access or federal legalization occurs. Herzog walks us through how companies can prepare for the knowns and unknowns over the horizon. She also offers insight about how companies can ensure they are best positioned to thrive independently in the federally legal market or attract a favorable acquisition offer when the mergers-and-acquisitions madness begins.

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First things first. How about a brief overview of who you are and what you do?

I’m a managing partner and founder of Fortis Law Partners. We’re a boutique firm based in Denver, Colorado. I run our corporate transactions practice, and I’m heavily involved in the cannabis-industry specialty division. I also have a sister company we set up about three and a half years ago called Full Velocity Consulting. We launched this because as we were working on business transactions for cannabis companies, it became very clear many of them needed more sophisticated support than they’d been getting. They may have had someone helping them with the books, but when we’re analyzing them for a commercial transaction or they’re trying to raise money or establish a valuation for [a merger or acquisition] deal, they just didn’t have sophisticated resources in place. These are often entrepreneurs that come from the black market and are not used to having sophisticated resources like legal, operational, human resources, or financial systems to support what the states and investors require.

Engaging in these kinds of legal and accounting best practices must have seemed quite counterintuitive to many transitioning out of the dark.

Over the years, we’ve worked with a lot of people in that situation. They’ve been operating in a certain way for so many years that they are not even aware of how they need to shift to adhere to their state’s legalization requirements. The first step is really making them aware of how they’re operating and what’s required, and that really helps us build the necessary trust.

With your lawyer, it’s kind of like what happens in Vegas stays in Vegas. For some of my clients that are coming from the black market and perhaps haven’t retained an attorney before, I tell them, “It’s okay to tell me everything.” Maybe your investors aren’t listed on the cap[ital] table because they have criminal backgrounds. That’s the stuff I need to know, but that takes a lot of trust, and it always takes time to build it. I always tell my clients I am a business lawyer, and I think of myself as a businessperson first and a lawyer second.

Do you find your background as an entrepreneur and an accountant helps you empathize with the difficulties facing your clients and, in turn, give them better counsel?

Absolutely. As an entrepreneur myself, I have encountered a lot of the same issues my clients deal with. I have an accounting background, and before I went to law school and started my own firm, I launched and grew my own clothing company. So I’ve been a business owner for almost twenty years now. I’m very attuned to things like hiring and firing employees, making difficult business decisions and dealing with the consequences, and the need to always remain nimble. To do an excellent job on behalf of your clients, you really have to put yourself in the shoes of the entrepreneur.

All the advice I provide my clients needs to be useful, practical, and make sense for how they run their business. I always make sure I fully understand the business as much as I can before giving any legal or financial advice. That process really helps build trust because they know we truly care about them.

I find it incredibly rewarding to help people who’ve never run a company and have never dealt with all the laws that come into play before. If I can provide support from a legal and financial perspective—which I happen to find really fun—that enables entrepreneurs to achieve their dreams and focus on what they’re best at. And I get to come along for the ride, coaching them and counseling them through the whole process.

When did you first start working with cannabis companies?

My first involvement was right after legalization in Colorado, and it was with a client that was looking to raise money. At the time, there were restrictions on investors, so we used to craft any investment as a loan document with terms that allow for conversion if and when this investor could be a known owner of a cannabis company. That was probably ten years ago, so it’s been fascinating to be a part of the industry since that time and watch the residency restrictions go away, different states legalizing in different ways, a bigger emphasis on minority ownership, and how those programs are working in a lot of respects and not working in some others.

On the subject of federal legalization, we’ve got dueling bills from Democrats and Republicans in the House right now. Where do you see things at the moment?

I think people thought we would move faster along the legalization path after Biden was elected, but clearly it’s not a priority for his administration. It seems to me the two Senate party leaders appear to be part of the problem. On the one hand, even though McConnell previously indicated some potential support, he’s now using this issue as political football to say Democrats would rather get Americans high than solve other issues, which obviously is not true. But on the other hand, the Cannabis Administration and Opportunity Act from Senators Schumer and Booker and other supporting Democrats has faced a ton of criticism and, in my opinion, will never pass because it is way too complex and is asking for way too much. In my view, it could unfortunately be another five years or more before we see federal legalization happen.

So while it’s great to see momentum and these bills being introduced to the floor, what we really need to do now is push for the SAFE [Secure and Fair Enforcement] Act or SAFE Plus to pass so cannabis companies can function like any other industry without the massive tax and banking consequences. I mean, the SAFE Banking Act has passed the House seven times now! SAFE Plus is a Democratic bill that includes everything from SAFE in addition to additional expungement and other diversity, equity, and inclusion components. However, it is gaining bipartisan support as more Republicans come to the table to try to make something happen, which is great to see.

So assuming SAFE or a federal legalization bill eventually passes, what will it mean for consolidation in the industry, and will those changes in legislation be a green light for some new big entrants into the space?

One thing I personally think is going to happen is we’re going to see Big Pharma enter, and they’re going to be creating products and trying to get patents on particular strains or formulations.

I started my career working at Jones Day, which is one of the top law firms in the world. We represented large companies that were strategic buyers. The internal analysis these companies would do always came back to the same central question: Is it better to build or buy? Most of the time, the analysis suggested it’s better to buy, as long as the price is right. In that instance, somebody else already has run the business for several years, built a customer base, dealt with regulations, and understands the marketing. They know what works and what doesn’t, so it’s usually better to buy than build. I expect a lot of big companies to step in, and I expect there to be a ton of consolidation. I think we’re already seeing it this year, and it’ll probably continue into next year.

But once legalization happens, we’re probably going to see a lot of businesses just get wiped out because of the supply-and-demand curve. Once you get these massive companies that own massive farms in multiple states, they are just going to kill the small farmers. If you’re a smaller business, I think you should look to grow or consolidate before it’s too late.

And what of interstate commerce?

If the federal government is going to regulate any industry, it’s the basis constitutionally that interstate commerce will be involved. I think we’re going to see similarities with the alcoholic beverage industry, which is states’ rights and state laws and states deciding whether it’s going to be legal or illegal.

But here’s a thing to remember about federal legalization: We’re still going to have state and local regulations. So I think it’s smart that companies set up operations in as many states as possible in order to get to know the people in that state, learn the market, and understand how to operate, because things can be very different on all those levels. I think the people who are operating in several states definitely are going to have an advantage over those who are operating in just one.

As it relates to consolidation, do you typically work with buyers or sellers?

I work about 75 percent on the sell side and 25 percent on the buy side. The first eight or nine years of my career when I was at the big law firm, I was mostly on the buy side, but I think it has served me and, in turn, my clients to be adept on both sides of the table and understand both perspectives. It makes me a much better lawyer.

I think it’s important to be aware of the interest on the buy side and the sell side, and my goal as a business person and as a lawyer is to help the clients know what’s market [rate]. I’m a member of the American Bar Association’s Mergers and Acquisitions Committee and the Colorado Bar Association’s Mergers and Acquisitions Committee. Those two groups, along with others in the industry, tell you what market rate is. Our goal is to stay informed and then inform our clients as to what the real economics of these deals are, as well as where the risks are and how we minimize them.

Do you think there’s some naiveté from cannabis entrepreneurs about what an acquisition of their company might look like in practice?

Yes, but I think this is a problem for all entrepreneurs, not just those in the cannabis industry. Most founders are pretty naive about what the acquisition process requires and the extensive preparation a lot of these deals take. For a lot of founders, rather than preparing in advance by hiring sophisticated legal, financial, and accounting people, they wait until they have a letter of intent. Sometimes they even sign the letter.

I tell entrepreneurs all the time it’s about the three Ps: people, paper, and profits. For starters, you’ve got to have the right people on the bus. They’ve got to be incentivized to help you grow the company through the sale and probably to stay after the sale for a while. I’ve seen some statistics that say around 97 percent of investors make their decisions based upon the management team and the people at the company. It’s important that it doesn’t look to the acquirer like it’s the founder doing everything. What if something happens to that person? If the person who knows all the systems and processes isn’t there anymore, the company has lost a significant chunk of its value. Companies are much more valuable when they have a team in place, even if they outsource executive services.

That’s part of the reason why we set up our consultancy, Full Velocity. We saw a need for these companies to hire, for example, an HR expert for five hours a month for $1,000 rather than hiring a vice president of HR. And so when they go to try to sell the company, they’re going to be a lot more credible because they’ve got the right experts in place and they’ve been getting the right advice.

So that’s people. What about paper?

Paper is making sure you’re documenting things properly, you’re following the law, and you’ve got good processes and standard operating procedures you can count on. If you think about it, this is the opposite of what black-market operators had been doing up to this point. They went from writing down as little as possible to having a paper trail for everything. We need a receipt for every transaction, we need to know exactly what you were selling. You can’t just pay a vendor with a bag of cash and say “Oh well, I spent about $150,000 last year on consultants.” You actually need receipts and 1099s for those people.

A lot of what we do on the Full Velocity side is come in and put those systems and processes in place and make sure companies do have paper to back up everything. We’ve got a really sophisticated accounting system that’s capturing everything properly because that’s what the buyers are going to be interested in. They want to know what products are selling and which aren’t selling. You can’t just say “I had $1 million in revenue last year” and not be able to show them where that revenue came from or what it was made up of.

And profits?

This one’s pretty self-explanatory. You have to show that if you’re not making money today, you are a major player in your geographic area or number one in a particular product category to get the attention of buyers these days.

Sometimes clients come to us and they’ve been so focused on building revenue they haven’t even looked at their margins. I’ve had other clients that are just breaking even and basically selling the product for what it costs them to make it. That’s not a viable business model. In those instances on the consultancy side, we really come in and look at every single SKU, how they are producing the product, and where they are manufacturing. For example, it could be that a different manufacturing process could lead to improved margins. Whatever we can do to help them make more money as soon as possible.

I’m reminded of that old adage: “Fail to prepare; prepare to fail.”

Exactly. It’s so important to prepare. If you’re not prepared, you’re just not going to get the experience and the valuation you want, and it’s not fun. It makes the deal incredibly challenging and stressful for the entrepreneur, because this process can take months and months, and during that time we’re creating paper, putting your prospectus in place, and the entrepreneur has to stay focused on selling their product, being the visionary, and running the business.

An analogy I like to give entrepreneurs is that it’s like cleaning your house for when some friends come over. You can’t just run around and throw the kids’ toys and clothes in closets and under the bed. To get a good deal done, you actually have to clean and organize things properly. Because when you give them a tour of your house and they find that messy closet, it can create problems. And if they don’t find that closet during due diligence, and they find it after you do the deal, there are always indemnity provisions that allow the buyer to come back to you saying, “I paid you $5 million, but you didn’t tell me about X, Y, and Z. Give me a million of it back.” A lot of times, entrepreneurs don’t understand that.

It sounds like an extremely delicate dance.

Very much so. I read between 70 percent and 90 percent of mergers and acquisitions fail. So if there’s one thing any business owners should take away from reading this, it’s that if they work with experienced M&A counsel to prepare ahead of time, they have the best chance of not being part of that statistic. They’re going to be able to present potential buyers or investors with a thorough, detailed, and turnkey M&A or investor package, and that will lead to more funding, a higher valuation, and a problem-free closing.

Beyond your obligation as an attorney, it sounds like you’re very motivated to help people succeed and get the best outcome. Where does that come from?

I am, and I think it comes from a couple of places. My father grew up on a farm in upper Michigan and was the first person in his family to go to college. He went into the military, went to college to get an accounting degree, and went to work for one of the top accounting firms in the country. For me, when I see entrepreneurs trying to get their idea off the ground, I think of my father’s journey from the farm to being a partner in a top accounting firm. That’s what motivates me as I’m right there alongside them, coaching them and counseling them through the whole process to defy the odds and realize their dreams.

I’m also a mother of triplets, and one of my children has had disabilities from birth. I was told she may never walk or talk, and yet she’s so passionate about learning and being the best person she can be. That inspires me every single day. And, in a sense, it reminds me of the challenges cannabis operators face. I see these entrepreneurs who are forced to overcome so many obstacles, largely because of circumstances outside their control, and being there to help them overcome these challenges feels very intuitive to me.

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