Greatest Practices for Shopping for a Secondary Hashish Enterprise License

(This story appears in the April issue of Marijuana Business Magazine.)

Cannabis entrepreneurs who want to sell their businesses on the secondary market are sitting in the kitty’s seat, according to experts.

Multistate operators looking to expand their presence are fueling demand, as are investors entering the market expecting reform of the marijuana federal government.

“With $ 1.6 billion in equity raised in January alone, public cannabis companies now have a lot of money on their books. I think we’re going to see a lot of mergers and acquisitions this year,” said Charles Alovisetti, partner at Denver cannabis law firm Vicente Sederberg.

There is “an optimistic expectation of accelerated federal cannabis reform after the Democrats control the White House and Congress,” added Jade Green, founder and CEO of CannaMLS in Seattle, a statewide listing service for marijuana real estate.

At the request of Marijuana Business Magazine, Green examined the activity of buyers and sellers who contacted CannaMLS in the first six weeks of 2021 compared to the same period in 2020. The increase in activity was “incredible” according to Green .

Buyer interest increased 427% between January 2020 and January 2021, and seller interest increased 500% according to CannaMLS records. In the first two weeks of February, buyer interest increased by 500% compared to the same period in the previous year.

Alovisetti, who is based in Vicente Sederberg’s Boston office and is admitted to the bar in Colorado, Massachusetts and New York, believes special-purpose acquisition companies, also known as SPACs, will play an important role this year and this year when buying private cannabis companies they will make them public.

Know what you are signing up for

While the demand for existing marijuana farms may never have been so high, experts said there are tips and red flags that both sides should consider before agreeing to acquisitions.

For example, it is important that sellers do not rate their businesses too highly.

“Many salespeople think their business is special and deserve a premium price. If other pharmacies in your city sell for 1 times gross sales, be aware that you are unlikely to be selling your pharmacy for 2 times gross sales, ”said marijuana attorney Alex Freedman, founder and Director of Freedman Strategic Consulting in Los Angeles.

For help with pricing your business, interview realtors to find out what your business is worth and how they can help sell. Lawyers and lenders familiar with local, state, and federal marijuana laws will be helpful in screening prospective buyers and closing the deal.

According to Green, buying an existing marijuana license from an ongoing MJ company is especially daunting for newbies.

“For investors looking to get a license in the secondary market, I would first recommend that they are 100% sure that they are ready to get into the cannabis industry in the first place,” said Green. She noted that the industry is a “highly complex, ultra-fragmented, nationwide illegal company that can take years to understand – let alone operate successfully”.

“From IRS Rule 280E (which prohibits tax write-offs) to a total lack of interstate trade, there are many challenges that are not common in any other multi-billion dollar industry,” Green said.

Buying an MJ license can be a time consuming task that includes a criminal background check.

“Most jurisdictions require background checks for new owners,” noted Freedman.

“Often times, the hardest part of buying a license is waiting for a response from regulators,” added Freedman, who previously served as general counsel for the Cannabis Regulation Department and the Cannabis Regulatory Board in Los Angeles.

Buying a turnkey business can have real benefits rather than starting one from scratch.

“When you build from scratch, you face a lot of headwinds in the form of claims, regulators, and build times,” said Christopher Stefan, a Denver-based cannabis broker and principal of Desarollo Real Estate.

“With cannabis, all of these things take twice as long as a traditional transaction, and things tend to drag on,” said Stefan. “Buying a cannabis business gives the buyer the benefit of the bottom line time.”

Heavy thugs arrive

Although some individual investors are trying to get into the marijuana industry, Alovisetti predicted that most acquisitions this year will be made by multistate operators looking to either enter new markets or expand their presence in states where they already operate.

In January, Chicago-based Cresco Labs announced it had entered the Florida market with the purchase of Bluma Wellness for $ 213 million.

“We have determined that Bluma has the right tools and key benefits to grow,” said Charles Bachtell, CEO of Cresco, in a press release, citing the company’s “proven track record” and management team as the benefits of the purchase.

While not all deals will be the size of the Bluma acquisition, experts gave these tips for potential marijuana investors:

Hire a skilled attorney, broker, and even an investment broker who is familiar with state and local marijuana licensing regulations, said Green, founder of CannaMLS.

Do your own due diligence by carefully reviewing state and local regulations for the cannabis sector first. “I often see buyers take the seller’s word for it,” said lawyer and advisor Freedman. “The seller is obviously motivated to make it as easy as possible to close the deal and may not explain all of the challenges associated with the license transfer.”

Stick to basics like growth, profitability and management, said Stefan. And don’t throw “healthy skepticism out the window”.

Don’t assume that you have the “secret sauce” to increase sales than the market allows. “I’ve seen buyers pay twice the market price for a pharmacy license because they think they could quintuple the pharmacy’s revenue only to find out later that such growth is impossible due to the competitive landscape in the city,” said Freedman.

Don’t believe your own PR, argued Stefan. “Too often people who have been successful in other industries believe that their strategy is working on cannabis and has been proven wrong,” he said. This trap can easily be avoided by consulting cannabis industry veterans.

For sellers, advice ranges from pricing your property right to properly disclosing all financial information.

Some of the things to consider before launching your marijuana operation include:

  • Hire a skilled broker who can not only sell your property but also create promotional materials, make it easy to sign documents like nondisclosure agreements, and verify proof of funds, Green said.
  • Insist that potential buyers provide proof of funding before signing a property. “Proof of funds is usually the best way for a seller to avoid agreeing to deals that will never close,” Freedman said. “Many buyers sign term sheets with insufficient funds and then use the term sheet to attract capital.”
  • Have audited financial data available, said Alovisetti, who has structured business with the medical and adult marijuana industries in numerous states. He noted that smaller marijuana companies may have their financial data saved using accounting software like QuickBooks, but this is not acceptable to a discerning buyer.
  • Create a presentation deck that contains detailed financial information for potential buyers to review. Make the minutes of board meetings available, Alovisetti added, so that potential buyers can understand your business strategy.

Broker Stefan emphasized again how important it is to evaluate real estate law even in a hot market.

“Overvaluing and overexposing your assets is a terrible mistake as it will result in longer sales time and potentially less revenue,” said Stefan. “A reasonably priced asset can attract multiple parties and create an auction environment that naturally increases the price.”

Beware of red flags

Both buyers and sellers must watch out for danger signs. Ignorance of license ownership transfer regulations and licenses that are not in good condition are red flags, Green said.

In addition, liens, encumbrances, or litigation can create costly headaches.

“I have seen many buyers discover millions of dollars in undisclosed tax liabilities a year after purchasing the license, or face lawsuits from individuals claiming ownership of the company based on a deal that was closed for half a decade used to be, ”said Freedman.

Stefan said one way to avoid these potential problems is to buy the company’s assets, not the company itself. A skilled real estate attorney or knowledgeable commercial real estate agent should be able to structure the contract to avoid future liabilities, he said.

“You have to know who you are doing business with, what you have done in the past and how your other business has gone,” said Stefan. “I’ve had clients who are charming people with strong public figures, who have a trail of unpaid lenders, investors, and landlords who have never been asked to give a reference.”

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