What You Need to Know When Buying a Cannabis Business, Part 1: Overview

Cannabis businesses are unlike typical businesses in large part due to the significant tension between federal and state laws and regulations. This tension creates some uncertainty for every licensed cannabis business and every other business and individual involved in the marketplace: owners, financiers, employees, ancillary service providers, and even accountants and attorneys.

In this forthcoming series of blog posts, I will provide guidance to attorneys and first-time cannabis company buyers who need to understand how cannabis M&A work differs from normal M&As and even M&As in other highly regulated industries.

How Soon Can We Close?

The state and federal interplay uncertainty and the highly regulated nature of the cannabis marketplace create an often slow-moving environment, which is something first time prospective buyers and their attorneys may not be expecting. Depending on the state, a typical acquisition could range from as few as three months to as many as twelve months after the buyer and seller are prepared to close the transaction.

A closing could occur on the shorter end of the time range where the buyer already owns a license in the target market and is merely expanding its market presence by acquiring another license or licensed business.

Why Do Transactions Fall Apart?

Transactions that stretch to a year and beyond often occur due to one or more of the following: (a) significant undisclosed regulatory violations in the target company; (b) a pattern of regulatory violations in the target company; (c) a pattern of regulatory violations in the buyer company; or (d) buyer’s inability to satisfy the state’s licensing requirements, including providing satisfactory proof of funds from legal or permitted sources.

Deal Structure Permutations

This uncertainty regarding the closing timeline rarely slows down a motivated buyer, and the industry players and attorneys routinely adapt transactions to fit the facts of the acquisition and the needs of the parties.

Generally, in an asset purchase, this means structuring the transaction so that at closing the buyer can take immediate possession of all business assets except the license, which will be retained by the seller until the governing regulatory body has approved the license transfer.

In a stock or membership interest acquisition, this means that all assets other than the license will be transferred to another seller entity, and the buyer will first acquire the ownership interests of the non-licensed target company and then acquire the licensed entity after regulatory approval.

Transaction attorneys counseling buyers and sellers should prepare their clients for lengthy transaction timelines and a significantly higher number of transaction agreements than a typical transaction. Buyers and sellers should expect their operational and transactional costs will increase in proportion to the complexity of the transaction.

Where Do We Go From Here?

In the following post we will do a deep dive into these parts of a cannabis acquisition:

  1. Understanding the Target Market’s Regulatory Environment
  2. Preparing to Represent a Cannabis Client for the First Time
  3. The Letter of Intent and Transaction Structuring
  4. Conducting Due Diligence
  5. The Transaction Documents
  6. Initial Closing and the Final Closing

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