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

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

Cannabis companies differ in large part from typical companies as there is significant tension between federal and state laws and regulations. This tension creates a degree of uncertainty for every licensed cannabis company and every other company and person operating in the market: owners, financiers, employees, ancillary service providers, and even accountants and lawyers.

In this upcoming series of blog posts, I’ll be providing guidance to lawyers and first-time buyers of cannabis companies who need to understand how cannabis M&A activity was heavily regulated from normal M&A and even M&A activity in others Differentiate industries.

How fast can we close?

The uncertainty of state-federal interplay and the highly regulated nature of the cannabis market create an often slow environment that potential buyers and their attorneys may not expect for the first time. Depending on the state, a typical acquisition can take anywhere from three months to twelve months after the buyer and seller are ready to complete the transaction.

A closing could take place at the shorter end of the period in which the buyer already has a license in the target market and is merely expanding its market presence by acquiring another license or another licensed business.

Why do transactions fall apart?

Transactions that extend over a year and beyond often arise because of one or more of the following causes: (a) significant, undisclosed legal violations in the target company; (b) a pattern of regulatory violations in the target company; (c) a pattern of regulatory violations in the buying company; or (d) the inability of the buyer to comply with state licensing requirements, including satisfactory evidence of funds from legal or authorized sources.

Deal structure permutations

This uncertainty about the closing schedule seldom slows down a motivated buyer, and industry actors and lawyers routinely adjust transactions based on the facts of the acquisition and the needs of the parties.

In general, when purchasing an asset, this means that the transaction is structured so that upon completion the buyer can immediately take possession of all business goods except the license, which is held by the seller until the relevant regulatory agency approves the license transfer.

In the case of an acquisition of stock or membership shares, this means that all assets except the license are transferred to another seller company and the buyer first acquires the ownership interests of the unlicensed target company and then acquires the licensed company after regulatory approval.

Transaction attorneys advising buyers and sellers should prepare their clients for long transaction deadlines and a significantly higher number of transaction agreements than a typical transaction. Buyers and sellers should expect their operating and transaction costs to increase in proportion to the complexity of the transaction.

What do we do now?

In the following post, we’ll dive into these parts of a cannabis acquisition:

  1. Understanding the regulatory environment of the target market
  2. Preparing to represent a cannabis customer for the first time
  3. Letter of intent and transaction structuring
  4. Perform due diligence
  5. The transaction documents
  6. First closing and final closing