Part 5: Due Diligence
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, “Part 5: Due Diligence,” is part five of a five-part series.
Completing the first four phases of marketing
your cannabis company for sale including mapping out your strategy, assembling a strong mergers and acquisitions team, identifying profitability and financial trends and confirming deal terms means you are now ready for the due
diligence phase of M&A.
In general, the due diligence process involves
your potential buyer investigating, evaluating and assessing your cannabis company
in as much detail as possible prior to completing a deal. This process examines
whether or not the “marriage” of the two companies is a good fit, and ultimately
impacts the success or failure of any deal.
Due diligence represents a significant portion
of the estimated 1,000 hours of work that goes into selling a company and usually
starts six months after your first meeting with a potential buyer. Be prepared
for this process to last anywhere from 30 days to, in some complex cases, more
than 90 days.
Sellers should do their own due diligence
Most people usually think of due diligence in
terms of a buyer’s analysis of a target company. However, as a seller, it is a
good practice to do your own due diligence on a potential buyer. If your buyer
is not a public company, you won’t have access to their financials, but you
should certainly request them so that you can understand the financial health
of the acquiring business. You should also be sure that your buyer is clear
about their intent. If they won’t share that information with you or if they
can’t take you through the details of their growth plans for your cannabis
company, this is a red flag signaling you should walk away from the deal.
It is particularly important to vet your buyer and all the details of the proposed deal because, in the cannabis industry, 90% of leadership stays on after the sale closes. You should be sure to ask questions about your role, autonomy in business, and strategic plans for the business so that you can feel comfortable in this marriage of companies.
Additionally, make sure you review
documentation that describes how the business would run after the sale. If you’re being given equity in a company now
as an employee or as a member of the leadership team, you need to know: What’s
the potential value of that in the future? Is this worth what they’re saying?
Nuances of due diligence in the cannabis industry
Due diligence in the cannabis industry can be
very complex, and you should be prepared to see your business put under a
microscope by a buyer seeking to understand every aspect of how your cannabis
business works. Some of the nuanced areas of cannabis company due diligence
that, as a seller, you should pay particular attention to include taxation,
licensing and people.
Many M&A transactions in the
cannabis industry are stock transactions, which means tax liabilities can be
carried forward to the buyer after the deal closes. You and your accountant
should review your company’s tax returns and financial information to ensure
that you don’t have any tax liabilities that could be a deal-breaker for your potential
In preparation for due diligence, you
should make sure you have all the required state and local permits your company
needs to operate and are compliant with all state and local regulations.
People are a key asset in the nascent cannabis
industry because there is very little institutional knowledge available. Experience is in short supply, and as a seller,
you should be highlighting your team and their expertise as an asset during the
due diligence phase. Buyers will want to
keep key people and may even make retaining this talent as a requirement to
In marketing your cannabis business for sale, you can successfully navigate the intensive due diligence phase of M&A with preparation. Advance planning of your responses to diligence questions on everything from licensing to taxation to people to financial, legal and market issues can go a long way toward maintaining deal momentum and getting your company sold.
In Case You Missed ItM
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.
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Notify me of follow-up comments by email.
Notify me of new posts by email.
BOSTON (AP) — Excise taxes for marijuana sold for adult recreational use exceeded alcohol excise taxes for the first time in Massachusetts, reflecting growing marijuana sales that reached $2.54 billion, according to the Cannabis Control Commission. Massachusetts collected $74.2 million in marijuana excise tax through December 2021 — halfway through the fiscal year — compared…
It’s been seven years since Duane Dunn opened his cannabis dispensary in Tacoma and he still remembers the feeling of joy he had when it first opened. “It was exciting because it was a new industry, it was challenging because it was constantly evolving and changing, and I was happy that I could do something…
Competing agendas have stifled the effectiveness of the burgeoning industry on Capitol Hill. Marijuana advocates are stuck in the weeds. Cannabis policy has never had a rosier outlook on Capitol Hill: Democrats control both Congress and the White House, seven new states just legalized recreational marijuana, and the cannabis industry has gained powerful new allies…
Delaware lawmakers who support legalizing recreational marijuana are taking a run at it for the sixth straight year, and the lead sponsor says he’s “feeling optimistic.” First introduced in 2017, a bill to legalize weed fell four votes short of passage in the Delaware House of Representatives in 2018 but since then has not reached…