Cannabis businesses for sale

The first step is to answer the question, “is selling a cannabis business license legal in this market?” Each market or State has unique laws and regulations on selling or transferring cannabis licenses.

To determine if buying a cannabis business license is legal, begin by finding and reading the Act that legalized the cannabis industry in the market of interest. More specifically, find the section of the Act regarding the sale and transfer of ownership in cannabis licenses. Our cannabis mergers and acquisition consultants recommend reviewing the governing body’s frequently asked questions (FAQs) page on their website. You can typically find language in the FAQs describing the sale of cannabis licenses.

Once you’ve identified sellers, you will want to request more information on the cannabis business for sale and the proposed deal. Enter the Offering Memorandum (aka information memorandum). The Offering Memorandum is a document sellers present to potential buyers that summarize the cannabis business license for sale and the opportunity at hand for potential acquirers. Put differently, the Offering Memorandum is a piece of marketing used to advertise the sale of the cannabis business. As such, there are a few critical pieces of information you will want to see as a buyer.

The offering memorandum should include the following information: Executive Summary; Market Opportunity; History of the company (if applicable); Business Overview; Current Ownership Profile; Property, plant, and facilities; Competitive landscape; Management Team Overview; Risks and Litigation; Historical Financial Information (if applicable); Projected Financial Performance; Future Growth Opportunities; and Supplemental Material. As shown above, this Offering Memorandum communicates the cannabis company’s key attributes and potential profitability. However, it is up to you as a buyer to investigate and verify the information regarding the cannabis business for sale.

Once you’ve identified sellers, you will want to request more information on the cannabis business for sale and the proposed deal. Enter the Offering Memorandum (aka information memorandum). The Offering Memorandum is a document sellers present to potential buyers that summarize the cannabis business license for sale and the opportunity at hand for potential acquirers. Put differently, the Offering Memorandum is a piece of marketing used to advertise the sale of the cannabis business. As such, there are a few critical pieces of information you will want to see as a buyer.

The offering memorandum should include the following information: Executive Summary; Market Opportunity; History of the company (if applicable); Business Overview; Current Ownership Profile; Property, plant, and facilities; Competitive landscape; Management Team Overview; Risks and Litigation; Historical Financial Information (if applicable); Projected Financial Performance; Future Growth Opportunities; and Supplemental Material. As shown above, this Offering Memorandum communicates the cannabis company’s key attributes and potential profitability. However, it is up to you as a buyer to investigate and verify the information regarding the cannabis business for sale.

The next step is determining a fair valuation for the cannabis asset for sale. For cannabis companies, an estimated valuation can be derived from comparable transactions or a discounted cash flow analysis.

The former is preferred due to the ease and quickness of arriving at a valuation. On the other hand, the latter requires more work, financial expertise, and access to relevant data. However, the discounted cash flow method allows you to arrive at a valuation when no other comparables are available. We recommend using both methods to cross-check yourself and arrive at a more accurate valuation for your cannabis companies. Keep in mind macroeconomic conditions and how they may factor into your valuation.

Since valuations are not an exact science, our cannabis M&A consultants recommend arriving at a range for the cannabis company’s valuation. Unless you have a background in finance, your best option is to engage a professional to assist with the valuation of the cannabis business for sale.

Once you’ve determined a rough valuation of the cannabis business for sale, it is time to draft and sign a Letter of Intent (LOI). As the buyer, your legal counsel will prepare the LOI, and the seller’s legal counsel should review it. The LOI is an agreement that will govern the conduct and activities of the parties up until the closing of the deal. The Letter of Intent includes binding and non-binding terms that will act as a road map for selling the cannabis business or license.

Alternatively, the parties can skip the LOI and enter directly into a definitive agreement. However, based on our cannabis M&A consulting experience, parties prefer having a written document that will govern the process.

At this point, the buyer should conduct a deep investigation into the cannabis business for sale, otherwise known as Due Diligence. The goal of due diligence is to determine the cannabis company’s assets and liabilities, as well as analyze its commercial potential.

As the buyer, you’re essentially looking under the hood of the business and making sure that the value proposed is indeed reflected in the company’s price. The seller must organize all documents related to the purchase and make the data available for review to the appropriate parties. Additionally, while selling a cannabis business license, the seller must remain open and willing to answer all of the buyer’s questions during due diligence.

Structuring the deal is an art and a science. The number of ways to structure a deal is infinite. However, one thing remains true: the deal’s structure must be fair and meet the objectives of both the seller and buyer. Often, creativity is needed to achieve a particular strategic goal. In short, here are a few key issues impacting the deal structure:

• How will assets be transferred from seller to buyer? What price the assets will be transferred at? What are the terms governing the transfer of assets?
• How will issues uncovered during due diligence impact the price?
• What liabilities will the buyer assume?
• How will taxes affect the buyer and seller?
• What will the seller’s role be in the business upon sale?
• Does the buyer have access to the total funds needed for the purchase or does the buyer need to raise funds?
• Will the buyer be purchasing the stock or the assets of the company?
• Will the buyer pay the price all upfront or payable overtime on an installment basis?
• What will the payment consist of (e.g. cash, notes, securities, etc.)? Is the purchase price fixed or is it contingent upon certain events, such as revenue milestones?

The key here is to ensure the seller’s and buyer’s needs are met. Work with our cannabis M&A advisors to help you find and acquire the right cannabis business for sale.

Upon completion of due diligence, the buyer and their team (attorneys, cannabis M&A advisors, etc.) will draft the purchase agreement, which is the legal document that will finalize the deal. The Purchase Agreement will outline key terms of the transaction involving the sale of the cannabis business or license. Similarly, the purchase agreement will include the plan and rules for each team’s (i.e., buyer and seller) involvement in the future of the business. Additionally, the purchase agreement will include:

• the seller’s representations and warranties;
• the terms of the seller’s indemnification of the buyer;
• the responsibilities of the parties during the time period between the execution of the purchase agreement and the actual closing (if not simultaneous);
• the terms and structure of payment;
• the deferred or contingent compensation components; and
• any predetermined remedies for breach of the contract.

The seller will want their legal counsel to review the purchase agreement. If both parties agree and sign the purchase agreement, then you are one step away from legally owning the cannabis business for sale.

Upon executing the purchase agreement, the buyer will apply to the State’s cannabis regulatory department to transfer ownership of the license. Each State is unique in its rules regarding the transfer of cannabis business licenses. Most commonly, the State will want to run a background check on the buyer to ensure no criminal background. Additionally, the State will check to see if the buyer would exceed any license ownership limitations.

The buyer may have to pay a license fee to the state and any outstanding debt that the license holder may have with the State. Similarly, if the seller was a Social Equity applicant and the buyer is not, then the buyer will have to pay any previously waived fees under the social equity program. Once transferred, you are officially the owner of the cannabis business or license for sale.