In the series “Marketing a Cannabis Company for Sale,” Dena Jalbert walks through the nuances and intricacies involved in preparing a business for sale in the cannabis industry. This article, “Step 1: Define Your Strategy,” is part one of a five-part series.
Whether a company is looking to sell immediately or five years down the road, it is never too early to start the process of preparing for sale. As legalization continues to spread, the cannabis industry will see increased mergers and acquisitions (M&A) activity in the next few years. The first, and arguably the most important, step in the process of marketing a cannabis business for sale is to clearly and thoroughly define your strategy. The answer to the question “What do you want from this sale?” should be the motivation that drives the entire process.
Vision for Post-Sale
When preparing a cannabis business for sale, it is best to start where you would like the process to end. Think about your optimal position after the deal closes. Some business owners want to make a clean break and step away from the company entirely post-sale, while others desire to stay with the new entity as a part of the executive or advisory team. Understanding how you want to come out of the other end of the deal will help get the process started and help you find the right buyer.
Determining the level of involvement post-sale is a personal decision and one of the only parts of the process that a founder cannot be advised on, not even from an M&A advisor. Cannabis founders, in particular, have a strong connection with their companies because they have likely jumped through many hoops to get their business to a successful position. As a result, these business owners may find it difficult to completely walk away or accept a non-leadership role with the new entity post-sale.
Identify the Ideal Buyer
Understandably, many entrepreneurs are protective of the company they’ve worked hard to build. Regardless of the level of involvement post-sale, no business owner wants to leave their company in the wrong hands. Mark Zuckerberg famously turned down an acquisition offer for $1 billion from Yahoo! at a time when the company was not profitable and making $30 million in revenue. One of his reasons for turning down the offer was because he felt the acquirer did not have a clear vision for company.
Once you know the desired outcome of a sale, it is important to take the time to determine the characteristics of an ideal buyer. M&A deals fail 70 – 90 percent of the time; and one of the leading causes of a deal falling through is a lack of synergy between the two organizations. On the buyer’s end, it is easy to focus on the acquiring asset, but many different factors go into the success of a product or service, and the company overall. A product or service is only as good as the people, technology and company culture behind it. If a buyer does not understand the value of entire brand, the company should not be afraid to walk away from an offer.
Every cannabis company with an ultimate goal to sell or be acquired must take a deep dive into its own strengths and weaknesses. The perfect buyer will be the one who provides the most operational synergies when the two companies merge. When equipped with a clear understanding of the brand’s strengths and weaknesses, you’ll be able to recognize the traits in a buyer that can further strengthen the company. Remember that “weaknesses” in your company are really opportunities for growth that can be addressed once the business gains access to the buyer’s resources, like HR support and suppliers.
Because operational skills are not widely taught or trained yet, people are one of the most valuable assets for cannabis companies. Keep your people in mind when defining the ideal buyer. If a pivotal part of a company’s success is the open-door policy for employee issues, then possibly merging with a company that has an extensive chain of command and a lack of similar policies could cause friction when the companies merge.
Analyze the Industry and Note Market Trends
For any company, but especially cannabis companies, an understanding of the current market is vital in defining your strategy. The industry is truly unique, with no other industry even remotely similar in nature. Additionally, the cannabis industry is young, as the legalization of recreational and medical use has only existed for a few years.
Timing can be a determining factor in the success of a sale, as the cannabis industry is constantly changing and evolving. The legislative climate will weigh heavily when a brand is deciding whether it is the right time to sell or buy. As U.S. states continue to legalize marijuana, the markets will continue to open up.
Cannabis business owners should understand how an exponential growth in the market, or additional legal restrictions, would impact its company. Even if a company is based in the U.S., it should note how markets in other countries react to legalization. The response in Canada after its nationwide legalization of recreational use is a good indicator of how U.S. markets may respond if similar legislation passed.
More than 145 cannabis mergers and acquisitions were announced in the first half of 2018, almost double the activity seen in the previous year. Additionally, the largest cannabis acquisition to date occurred in July when Aurora Cannabis acquired MedReleaf for CA$3.2 billion ($2.3 billion in U.S. dollars). While 2018 was a huge year for M&A in the cannabis industry, 2019 is set to be an even bigger year. Every cannabis company looking to sell in the future should begin the process now by defining its strategy.
Dena Jalbert is founder and CEO of Align Business Advisory Services, a mergers and acquisitions (M&A) and business advisory firm based in Winter Park, Fla. Align was founded in 2010 with a mission to break the mold of the traditional advisory firm, and is built on the core principles of service, diversity, innovation and value creation. Align leverages its deep industry and business knowledge to provide innovative solutions and align its clients’ business results with their objectives to create value. The company offers management consulting, business strategy, finance and M&A services to holistically serve the middle market.
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