Step 2: Put Your Team in Place
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 2: Put Your Team in Place,” is part two of a five-part series.
After mapping out your strategy for selling your cannabis business – which involves determining your vision for post-sale outcomes, identifying the characteristics of the ideal buyer and analyzing industry market trends – the next step in marketing your cannabis company for sale is to assemble your mergers and acquisitions (M&A) team. This is the most important step in the process, as your M&A team will be the chief architect of the deal-making process.
Cannabis companies typically fall into the lower middle market (companies with annual revenue between $1 million and $100 million) due to the industry’s youth. Therefore, a small, experienced, highly nimble M&A team is the best fit to handle deal planning, a process that includes initial screening, legal structure and finance. Two major considerations for selecting the right M&A team should be their level of experience in, and understanding of, the cannabis industry and their ability to execute the deal while staying true to your company’s core values.
A typical deal takes more than 1,000 hours and around six months to execute. However, there is nothing typical about the cannabis industry. These hours include everything from researching the market, reaching out to potential investors and buyers, fielding and advising on offers, determining the best offers, negotiating with potential buyers and executing the contract process.
Because the cannabis industry is a new and highly specialized industry, it is important to select members of your M&A team who are knowledgeable about the many nuances of this rapidly developing industry. Key members of your M&A team should include:
The main role of your M&A advisor is to prepare and help execute your selling strategy. This function ranges from designing the overall exit strategy to ensuring your business is capable of executing due diligence. Your M&A advisor is involved in every part of the deal, and helps keep the company owner and executive team updated on all developments. On the front lines of any sale talks, your M&A advisor will also help you navigate the consolidation of your company’s culture and internal systems with that of the buyer. Most deals in this space move rapidly, and a good M&A advisor can help you do the necessary vetting that will keep deals on pace close as seamlessly and quickly as possible.
Your M&A team should include an attorney well-informed of the nuances of the cannabis industry and with a deep understanding of M&A. Not all firms specialize in both — so do your research. For example, an attorney who knows the cannabis industry can help you determine if your buyer has the right licenses, is a buyer who you will be able to transfer your license to, and can help you with the transfer of licenses. Each state has different regulations around the who, the what and the where of licensing, and a legal advisor with cannabis industry experience should be engaged early in the deal to evaluate the ability of licenses to transfer seamlessly.
The CPA on your M&A team ensures that your financial statements fit within the generally accepted accounting principles (GAAP), and makes sure your tax compliance filings are complete and accurate. Beyond these accounting functions, your CPA will need to be nuanced in the cannabis industry. Taxes, in particular, are very complicated — employer and income — depending on the state where you are located. Your CPA will also need to be with familiar federal tax code related to the cannabis industry. This includes section 280e of the Internal Revenue code, which forbids state-legal cannabis businesses from deducting otherwise ordinary business expenses from gross income associated with Schedule I substances.
When selling your cannabis business, you should never go it alone. As a business owner, you likely don’t have 1,000 hours or more to devote to executing the sale of your company, and need the support and guidance offered by a strong M&A team. The work of a good M&A team does not end when the deal closes. Your M&A team should also provide support for integrating entities after the sale closes, which is when the hard work of combining two businesses really begins. The integration of a seller’s team with an acquirer’s team to work together to grow the company is common in the cannabis industry due to the newness of the industry and the difficulty finding people with industry expertise.
The cannabis industry will continue to grow and then likely consolidate, making 2019 another big year for industry mergers and acquisitions. As part of this trend, companies will continue to explore buying or selling opportunities and look for the best fit to create new companies with higher valuations. This year will also see some big players, including food, tobacco and pharmaceutical companies, enter the market, forever changing the current small, independent business characteristics of this industry. As more deals are executed in this space and you look to sell your cannabis business, make sure you put the right team in place so that your deal is not one of the 70 percent of all M&A deals that fail.