How to position your cannabis company for acquisition
Author: Andrejs Bunkse
The cannabis industry is hitting its’ stride, as evidenced by a wave of M&A activity in 2018. Deals like the $1.8B buy in by Altria Group for a 45% stake in Cronos Group has investors feeling bullish, and cannabis business owners thinking about lucrative exits. There is no question that the next few years will be hot with investment opportunities in cannabis.
Which explains why just about every business owner in this space that I talk with is wondering when and how an acquirer will find them. Nothing is more exciting to an entrepreneur than the idea of selling something they created from the soil up. However, before hanging a for sale sign on the window, there’s work to be done.
The truth is, positioning a cannabis company to sell isn’t like positioning any other type of company. Extra, important steps need to be taken. If you’re in the cannabis business, and M&A is on your mind, here’s what you need to know about selling your venture.
Know Your State Laws
I’ve talked about this before, it is imperative that you fully understand the cannabis laws in the state(s) you’ll be opening, operating, and selling your business. This industry is still emerging in the grand scheme of things, and every state (and city/county) that has legalized marijuana in some capacity has its’ own rules and regulations. In Arizona, for instance, if you’re dealing in cannabis you are legally a nonprofit. Rules under AMMA prohibit transferring licenses to cultivate, process, and sell cannabis.
And yet, canna-businesses in Arizona are successfully being acquired. How? Their leadership and advisors took the time to understand the local laws and how to work within them. You simply won’t get anywhere with investors or potential acquirers if you don’t know what your state will and won’t permit.
Don’t Look Green
Investors & acquirers in this space aren’t newbies. They’re getting into this industry because they see the potential and they know how to maximize their investment. They’re also counting on you, the business owner, to be inexperienced and not savvy so they can get the best deal for themselves. Why? Well, because for many cannabis entrepreneurs, this IS their first venture, and they ARE inexperienced when it comes to M&A. So what can you do show buyers you’re not an easy take, and get the most value you can?
For starters, see above. When investors see that you understand the landscape and can navigate it, your value goes up and you’ll be taken more seriously. Second, have advisors with experience in cannabis M&A represent you.
Next, you need to have your business look the part. Most cannabis companies don’t have their business in a tidy box, ready for sale. It’s critical that before you bring in a single investor or potential buyer, you formalize, document, and streamline EVERYTHING. Accounting processes, inventory controls, employee handbooks, third party contracts, and security protocols and related procedures all need to be ready for a rigorous due diligence process. If you don’t do this, the investors will walk away, or discount the purchase price. It can drag out the length of the sale, make it harder, and can even damage your reputation as a company.
Take the Reins on Due Diligence
If you’re looking to sell your cannabis business, and you haven’t yet prepared it with a serious eye towards compliance, you will scare away investors, or worse, set up your investors for legal issues that could be very costly. I’m talking felony charges kind of costly.
Additionally, make sure potential investors and buyers don’t have issues in their background that would prohibit them from having an interest in a cannabis business. Most states look at individual criminal and financial records closely and may prohibit ownership for anyone with difficulties in their past. Each investor has to be open to personal scrutiny because they will be background checked. Make sure they understand this, and allow you to do preliminary checks before too much of everyone’s time is spent.
There is no doubt that it’s a great time to be in cannabis. The industry is booming, and 2019 will be a banner year for M&A in this space. If that’s part of your plan, or even just something you want to explore, know that some work needs to be done preemptively. As with starting a cannabis company, it’s not impossible and it’s not for the wishy washy, but you can make it happen. With the right guidance and preparation, you very well could have an acquisition in your future.