Cannabis M&A: How To Prepare Your Company For Sale

Although federal cannabis legalization feels closer than ever before, most would agree it’s not imminent, unfortunately. Senator Charles Schumer (D-NY) has acknowledged he does not yet have the votes to push his federal legalization bill through the Senate. Even if the bill eventually does pass the Senate and House, it remains unclear whether President Joe Biden—who has not expressed support for full legalization—would sign it.

This lack of federal guidance and regulation has contributed to the rapidly growing industry’s scattershot, “wild west” reputation. It’s also a factor in the somewhat erratic valuations for cannabis M&A (mergers and acquisitions), which have slowed over the past three years.

According to S&P Global Market Intelligence, 324 cannabis M&A deals closed in 2018, accounting for $7 billion in value. Those numbers stand in sharp contrast to the 124 deals (valued at $615 million) closed by the end of 2020’s third quarter. It’s not a leap to attribute 2020’s sixty-four canceled M&A transactions to the impact of the global pandemic; however, cannabis M&A activity was already on the rebound by mid-2021, with several substantial merger announcements from major companies like Hexo Corp, Curaleaf, and Trulieve in amounts ranging from around $60 million to $2 billion. Going forward, expect to see continued industry consolidation focused on smaller, more strategic deals as large companies look to acquire synergistic businesses, scale up, and tap into new markets.

Valuation considerations

While all M&A transactions face challenges and complexities, cannabis businesses deal with three distinct valuation considerations and risks other industries don’t, all of which can make them a more challenging M&A prospect for buyers.

Regulatory issues. While twenty-one states and territories have legalized recreational marijuana for adult users, cannabis is, of course, still federally illegal under the Controlled Substances Act. The unknown risks around the lack of federal legalization and the complicated patchwork of laws in each state can deter buyers.

Tax and banking laws. Cannabis businesses face far more complex tax rules and higher levels of tax and banking scrutiny. For example, Internal Revenue Code 280E mandates no costs can be considered tax-deductible except those directly linked to the production, processing, and storage of cannabis. It’s a directive that can lead to low profitability for otherwise successful businesses. Additionally, many companies still operate on an all-cash basis due to a lack of banking options. These tax and banking hurdles make cannabis companies bigger and easier targets for potential theft, fraud, and tax-evasion issues, and they also make conducting the financial due diligence needed to craft a solid and well-supported valuation difficult.

Lack of historical data. Cannabis is still a nascent industry compared to other regulated markets. As such, most businesses are still in relatively early stages with a limited operating history. They may be reporting low or negative profits or have not been in business long enough to derive meaningful market multiples, making it significantly harder to project reliable expected future cash flow numbers. In addition, rules and regulations are different at the county, state, and jurisdiction levels, hampering the types of apples-to-apples comparisons typically used to generate reliable valuations.

Address these issues

In addition to being mindful of these pitfalls, what else should cannabis businesses do to prepare for a merger or acquisition and maximize their value? The most important task is to ensure the business can jump through all necessary legal and regulatory hoops. If a company is not prepared to undergo heavy buyer scrutiny and demonstrate regulatory compliance, any potential deal is likely to fall apart.

Here are the essential items all cannabis companies seeking a future merger or acquisition should begin addressing now.

Quality financials. If this hasn’t been a focus from the beginning, start working on the necessary fixes now. Potential sellers must show buyers consistent, thorough, and up-to-date books, records of short- and long-term debt and payment obligations, lines of credit, cash flow, and how much cash is going toward ongoing operational costs versus debts. Poor financial reporting is the number-one threat to obtaining the highest valuation and purchase price.

Proof of state and local licensing. Research and learn the appropriate state regulations for a sale. A sale will not happen if the company lacks proper and up-to-date licensing and a clear understanding of what is needed to transfer ownership to someone else.

Proof of tax reporting. Ensure the company has proof of all federal, state, and local tax reporting and, most importantly, evidence of compliance with 280E.

Proper record-keeping. Maintain logs of any regulatory violations, compliance visits, employee and visitor access controls, etc.

Strong contracts and agreements. Unfortunately, handshake agreements are still relatively common in the cannabis industry. However, for a successful M&A transaction, the business must have legally binding and written copies of fully executed contracts and licensing agreements with all vendors, suppliers, customers, and consultants. Always have signed employee non-compete agreements on file. 

 Ownership of intellectual property. The company should have contracts for everyone who has worked on or helped develop any element of its intellectual property, including products, software code, website, logo, innovation pipeline, etc. This also entails ensuring that all trade secrets, processes, and proprietary business methods are contractually protected and owned.

Thorough and complete corporate formalities and records. The company’s capitalization table, proof of ownership, ownership disclosures, and executed ownership agreements must all be clean and up to date.

Settlement of litigation or potential claims. If these items can’t be settled before the sale process begins, it’s imperative to be up-front about your circumstances. Do not try to hide anything from a potential buyer; instead, take the bull by the horns and explain the situation at the outset.

A well-prepared management team. Buyers are not just acquiring the company; they also want an experienced, qualified team in place to run the business. In fact, a marketing analytics survey of investors found 97 percent frequently turn down investment opportunities due to what they perceive as a weak management team. That’s why it’s particularly important to prioritize strong leadership, clearly communicate with them about the business’s M&A goals, and properly incentivize them to help grow and prepare the company for a merger or acquisition. A lack of proactive communication or a misaligned, unengaged leadership team can sow seeds of distrust, decrease engagement and productivity, and even kill a deal entirely.

Prepare this information

Once all the above preparation is well underway, the final piece of the M&A prep puzzle is to build out a compelling company growth story and narrative that a buyer will love. It should include an overview of the following items:

The company’s competitive advantage in the marketplace. How does the business rank among its competition in quality, pricing, growth rate, cost structure, and market share? 

  • Revenue growth and profitability.
  • Business model.
  • Market size, share, and scalability.
  • Expertise—aka your “secret sauce.”
  • Passionate, real examples of and testimonials from happy customers.

Until federal legalization passes, cannabis companies will continue to face legal headwinds and M&A complications that don’t exist in other industries. However, well-prepared businesses will stand out to buyers and be far more likely to experience a seamless and profitable sale.

Julie Herzog Fortis Law Partners mg Magazine

Julie Herzog is managing partner and head of the corporate/securities practice at Fortis Law Partners and Full Velocity Consulting. She has handled transactions valued at more than $4 billion for major public companies and investment banks. Before joining Fortis in 2003, she practiced corporate and securities law for more than eight years at major international law firms Morrison & Foerster and Jones Day.

Expand all Collapse all
Is Delta 8 federally legal?

Delta-8 is legal federally, and most state laws don't specifically address it. Due to ambiguities in the 2018 farm bill, which legalized hemp and hemp products, delta-8 is currently not prohibited by federal law.

What are the benefits of Delta 8?

In the human body, Delta-8 binds to the CB1 and CB2 receptors. Because it binds to both receptors simultaneously, users experience a milder cerebral high. When compared to the effects of THC, users describe a more clear-headed, productive, energetic, and upbeat feeling.

Is Delta 8 or CBD better?

Difference Between Delta-8 THC and CBD Delta-8 THC may not be as prominent as Delta-9 THC, but it is still among the predominant cannabinoids with psychoactive properties. However, CBD is NOT a psychotropic cannabinoid. While CBD can have better results in the long run, Delta-8 THC can give you a quick fix.

Can you fly with Delta 8?

Is it Legal to Fly with Delta-8-THC? Often, yes! It is legal to fly with Delta-8 when you are flying to and from areas where Delta-8 is legal, as long as the airline you choose doesn't specifically prohibit Delta-8 products.

Does Delta 8 help with anxiety?

Contains less than 0.3% Delta 9 THC. Good for chronic pain and anxiety relief. It does not cause paranoia or increased Anxiety.

Is Delta 8 a controlled substance?

Delta-8 is considered a Schedule 1 Controlled Substance by the US Drug Enforcement Administration (DEA) because it is known to cause psychoactive impairment to the consumer.

What is the difference between Delta-8 and Delta 9?

Delta-9 THC is a property of cannabis discovered all the way back in 1964. The primary difference between Delta-8 THC and Delta-9 THC is that Delta-8 is just a bit less psychoactive than Delta-9. This means that products with Delta-8 THC have a more gradual, and therefore more satisfying, effect on the consumer.

Does Delta-8 become 11 hydroxy?

Although in an edible form, Delta-8 THC can metabolize into a natural chemical called 11 Hydroxy tetrahydrocannabinol. Since 11 Hydroxy THC can only be absorbed through the liver, the molecule's possible psychoactive effects can last up to 6 to 8 hours during digestion.

Does Delta 8 make you sleepy?

According to the NCI, Delta-8 uniquely binds twice with cannabinoid receptors in the nervous system that play a role in sleep by calming down processes like breath, heart rate, and mental activity.

Does Delta 8 Flower get u high?

Delta-8 THC is one of the hottest topics in cannabis right now. It's a minor cannabinoid that can get you high like traditional THC, but much less so. Delta-8 found in small amounts in the cannabis plant and is often converted from other compounds like CBD.

How does Delta 8 affect the body?

5 benefits delta 8 could offer you According to the National Cancer Institute, delta-8 THC can bind to the CB1 receptor throughout the body. These receptors are part of our endocannabinoid system, which helps our body regulate and maintain homeostasis.

Does Delta 8 contain CBD?

Delta-8 is yet another compound derived from Cannabis sativa or the hemp plant. As you likely know by now, this is the same natural origin that CBD, THC, CBG, CBN, and CBC come from, too. Though all of these compounds are related to some degree, delta-8 is closest to CBD and delta-9 (also often known plainly as THC).

Does Delta 8 cause euphoria?

Delta-8 may not produce intense euphoria, but it will take effect pretty quickly. Depending on your mode of intake, of course, the time of impact will vary. If you vape it, you will experience the effects within 1 to 6 minutes. If you use a tincture, you will get the first effects after half an hour.

Is Delta 8 legal in all 50 states?

The Short Answer: Yes. Hemp-derived Delta-8 THC products, containing less than 0.3% D-9 THC is legal in all 50 states of the USA. But what if the extract contains more than 0.3% Delta-9 THC?

Can Delta 8 help you lose weight?

A research study from 2004 concluded that delta-8 helps increase appetite while promoting weight loss. This effect is certainly very unique, and scientists will do even more research on this subject. These effects might be due to the potential benefits delta-8 has on metabolism.

Does Delta 8 give you munchies?

Yes, Delta 8 can make you feel hungry. Delta 8 is an appetite-stimulating analogue of tetrahydrocannabinol (or THC). Of course this depends on the amount you smoke (vapes) or consume (edibles), but Delta 8 has been reported to stimulate your appetite, in some cases, even more than Delta 9 (marijuana).

Does Delta 8 make you laugh?

Whatever makes you laugh, Delta-8 is a great way to start the fun. In fact, we've developed Delta-8 products because we love to see people laugh.

What does Delta 8 convert to eating?

Delta-8 THC actually converts into delta-11 THC when processed through the digestive tract. Since delta-9 THC also converts into delta-11 THC when eaten, there's no special benefit to eating delta-8 THC. In general, research suggests that delta-8 has about two-thirds of the potency of delta-9.

Does Delta 8 affect your liver?

In the present study, we have demonstrated that Δ8-THCV exerted protective effects against liver I/R reperfusion damage by attenuating tissue injury, oxidative stress and inflammatory response.

Does Delta 8 make good edibles?

Our Delta-8-THC Gummies — Best for Beginners They contain 10 mg of delta-8-THC per gummy, which is a great dose to start your journey into edibles with. It will give you a relaxing buzz, and you can easily increase the dosage as needed. Our delta 8 gummies are made from a broad-spectrum hemp extract.

You May Also Like

About the Author: Delta-8