This story appears in the January issue of Marijuana Business Magazine.

Acquisitions remain a key strategy for companies looking to enter or expand their reach within the cannabis industry, but sellers must be ready to seize such opportunities. 

Owners who would like to exit the hemp space or join larger conglomerates should be ready to: 

• Decide whether to engage a broker. 
• Ensure their financial information is ready for close scrutiny during the due-diligence process. 
• Demonstrate how the purchase would prove valuable to a buyer. 

A would-be acquisition target also must be ready to vet its purchaser and contemplate how the transition will play out—including possible new management—after the deal closes. 

“There’s a lot of prerequisite work that goes into putting a business up for sale,” said Ryan George, founder of California-based 420Property.com, CannabisMLS.com and other sites that list cannabis businesses and assets for purchase. 

Firms should start the process by making sure their books and financials are in order. They also need to gather documentation regarding intellectual property such as patents and marketing materials, he said. 

George’s sites recorded roughly 250,000 views and 30,000 users in August. He anticipates those numbers growing close to 350,000 page views per month and 50,000 users by the end of the year, thanks to new states legalizing cannabis sales and marijuana retailers being deemed essential during the COVID-19 pandemic. 

How Buyers Identify Targets 

New York -based multistate operator Columbia Care announced a deal on Sept. 8 to purchase Project Cannabis, a vertically operated marijuana firm in Los Angeles, for $69 million. The same month, Columbia Care also announced it had completed its acquisition of The Green Solution, Colorado’s largest vertically integrated cannabis operator, for $140 million. The deal was first announced Nov. 5, 2019. 

“The process we go through to determine whether or not (a deal) makes sense is very internally driven,” Nicholas Vita, CEO of Columbia Care, said of the company’s acquisition strategy. “Everybody has to own the outcome, and everyone has to own the integration because, frankly, we all have to work together going forward.” 

Vita said Columbia Care focuses on four primary factors when determining whether a company is a good merger or acquisition target:  

• The operation’s resources and assets 
• Its business strategy. 
• Corporate ethos and financial conditions. 

The firm looks for companies that can help Columbia Care achieve its national goals, such as by complementing its existing operations or adding additional revenue opportunities. These targets also must show they can help Columbia Care “get deeper and more embedded into the leadership position” that it would like to achieve in the markets where it operates. 

Being Prepared 

Thoughtful Brands, a Vancouver, Canada-based CBD and ecommerce retailer, makes similar assessments when identifying companies and brands to add to its operations. 

“We look to acquire e–commerce CBD brands with existing customers and revenue,” Thoughtful Brands CEO Ryan Hoggan said. The company is particularly interested in brands with more than $500,000 in annual revenue. 

“Another appealing factor is if a brand has a unique product or delivery mechanism that, with our resources, we can help grow.” 

Thoughtful Brands, which formerly operated as Mota Ventures, announced in January that it completed the acquisition of Kentucky-based CBD brand Nature’s Exclusive. The company subsequently announced a series of deals, including the September acquisition of Kentucky-based hemp–extraction company American CBD Extraction Corp. 

Hoggan recommends companies looking for a buyer put together a due–diligence folder with critical information about their business as well as a presentation deck showing their unique selling propositions and intellectual property. 

“It’s important for the seller to explain to the prospective buyer who their target demographic is. For instance, are they beginners or advanced CBD consumers? It’s also key to have a lot of data on what customers of the brand/company in question are buying and how the asset can be innovated to meet those demands,” he said. 

Opening the Books 

Buyers will insist on reviewing updated financial information before striking a deal. As a publicly traded company, Thoughtful Brands prefers this information to be audited by an independent certified public accountant, Hoggan said. 

Sellers might be expected to explain how they came up with certain figures. For instance, some firms have different definitions of their earnings before interest, taxes, depreciation and amortization, or EBITDA, Vita said. 

Typically, buyers are looking to see a profit and loss statement and a balance sheet, said Karen Muller founder of Santa Monica, California-based Cannabis Business Brokers. 

The company looking to sell should set up a Dropbox folder or something similar to share all financial records and other documents the buyer will need to study during due diligence, Muller said. The information should include documentation on inventory, leases, licenses, payroll, tax returns and vendor lists. This information is also important for determining the valuation amount. 

“The hardest part of this process—and our secret sauce—is how we price the entity for sale, which is something we don’t publicly talk about,” Muller said. Generally speaking, determining a company’s worth includes looking at its current financials, growth projections, assets and the regulatory outlook in the states where they are operating. 

Valuation enters the conversation early on to make sure the parties are well matched, Hoggan said. “Based on our previous transactions, we have used revenue as the basis for valuation. The discussion is a collaborative process between the seller and our board.” 

Selecting a Broker 

Sellers can enlist a growing number of brokers who work or specialize in the cannabis industry to help to find buyers for their businesses. 

“In a regulated industry, you probably want someone who has some level of expertise,” Muller said. “Most of the people that come to us neither have the time nor the inclination to deal with the day–to–day process of selling a business, which requires that you stay on top of everything.” 

Brokers can help owners navigate the selling process, including marketing the listing to their network and on third-party websites, handling inquiries and vetting/negotiating with interested parties. 

“Under the standard business broker model, people think business brokers charge 10%. That’s only true if the transaction is at $1 million. As the price of the transaction goes up, the commission rates go down,” Muller said. 

Cannabis Business Brokers typically charges a commission of about 6% of the transaction price, but the rate varies depending on the size of the deal, she said. 

After the Deal 

Business owners should think through what role they will play—along with their staff members—once the company is sold. Some executives might want to retain their roles permanently or for a transition period, while others might choose to stay on as investors or advisers to the venture. These details can be worked out during the negotiation process. 

“Employees should be spoken to about the sale,” said Clint Sheer, a broker at Cannabis Business Brokers. “You always hear from these business owners that their employees are like family. Well, in a well-run family, there’s open communication.” 

Sheer recommends sellers notify staff—especially at the point where the buyer’s team might be walking through the business as part of due–diligence efforts. Cautious companies can ask workers to sign nondisclosure agreements to keep potential or imminent deals under wraps. 

A lack of communication could lead to dampened worker morale. Employees sometimes find out about a potential sale via listings or other methods, he said. Sellers can encourage buyers to retain staff or create severance packages when that’s not possible. Additionally, key employees can be offered retention agreements, which sometimes include bonuses, to stay on after the new owners takes over.