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Everywhere I turn, I’m seeing more and more conversations about Mergers and Acquisitions (M&A). It’s true in every vertical, and especially so in the cannabis world, where many businesses grow by buying other companies…or where many people build their cannabis business with an exit strategy in mind.

In other industries, including accounting, M&A is happening because baby boomers (and some Gen Xers) are approaching retirement age, and they’re ready to exit stage left into a (well-deserved) retirement. 

So, why should you care? If you’ve even had a stray thought about buying a business (or selling one), you owe it to your future self to understand what all that entails. 

 

Before Going Further: Can You Obtain a License?

Of course, the number one consideration for M&A in the cannabis space is that all changes to cannabis business ownership and licenses are subject to approval by the governing body. For example, in Massachusetts, this is the CCC. 

Because the rules around licensing are incredibly specific, if you’re on the buying side, you need to be sure you can legally operate the business in accordance with the license (and are named on it) before the ink dries on the agreement. You absolutely must take this step first.

But what considerations do you need to make, assuming you can transfer the license?

Using M&A to Grow Your Cannabis Footprint

If your state has a new cannabis market, this may not be as relevant to you—simply because there aren’t many businesses out there ready to sell. They’re still in growth mode.

However, if you’re in a more mature cannabis market, there are two primary ways to grow—first by starting a new business or new location and growing organically. Second, by buying an established business and using their existing resources and assets to scale quickly.

Starting from scratch often means using limited resources, and hiring (and training) new staff—and in today’s market this can be a challenge in and of itself.

On the outset, acquiring an existing company does speed things up, offer scalability, and make it easier to get into new markets (because they aren’t new to the existing company). On the other hand, this approach is more expensive and also has it’s own growing pains. 

 

Buying a Cannabis Company (Acquisition)

So you’re ready to grow by acquiring an existing cannabis business? Great. Have you asked yourself all the right questions? Here’s what I always recommend asking yourself: 

How will you finance your acquisition?

If you have cash on hand, that’s often the way to go. Taking out a loan is also a common approach for the non-cannabis sector, but since banking is challenging for cannabis businesses now, you may not be able to get a traditional business loan. If you do, you’ll pay at least Prime +3% if not more due to the higher risk of the cannabis industry. 

Working with other investors may be a sound approach, but you’ll definitely need to have your books in good shape and have a capitalization table that clearly defines company ownership.

And no matter what your approach, you’ll want to make sure your books are in good shape. A cannabis accounting professional who serves as an extension of your team can help you ensure that your books are acquisition-ready. 

Do you have resources and cash reserves? 

When acquiring cannabis businesses, it’s crucial to have substantial cash reserves. Not only are you likely to run into unplanned expenses with acquisition and integration, but since additional funding is tough to find, you need to supply your own life raft, because there’s no one (aka a financial institute) coming to save you if you run out of cash mid-stream. 

Have you identified a “perfect fit” acquisition?

Before starting the acquisition process, take some time to get clear on your big-picture strategic goals. What are you hoping to accomplish with an acquisition? Why are you doing it? Then you can look for cannabis businesses that will help you achieve these goals—maybe that means they have a solid customer base or strong industry relationships. Whatever it means, it’s tough to find a perfect fit to take you to a higher level, if you don’t have a way to evaluate perfect fit.

How will you integrate the new company with your existing SOPs and culture?

It’s not just sign on the dotted line and you’re off to the races. When you acquire an existing cannabis company, you need to remember that it already has employees—and it takes time and energy to bring them in line with your culture. If you find a company with a similar culture and tech to what you already use, this is a lighter lift, but a lift nonetheless.

Have you roughed out an integration roadmap?

This step isn’t optional. Sure, it’s tough to do until you have a target company, but you should think through all the areas you’ll need to cover, including operations, culture, and technology—and how you’ll communicate changes and expectations to everyone. Then once you enter negotiations, you can flesh this out with details based on any gaps between the two companies.

Don’t forget due diligence.

This isn’t a question, but it’s a vital consideration. Due diligence is an absolute must and shouldn’t be rushed. It’s one of the places where your finance team will be essential because you’ll be examining the new company’s financials, legal matters, customer contracts, employee agreements, and more. 

How do you choose a cannabis company to acquire?

My team and I have worked with several companies on both sides of the M&A process, so we’ve seen a few different strategies:

Strategy 1: Synergy Driven

If you’re strategically acquiring cannabis companies, you might pair a dispensary with a grow operation. Or you might acquire a company with real estate holdings that’s not technically a cannabis company, but leases space to cannabis companies. Remember, you don’t want to own property as a cannabis business due to the unique tax considerations. Check out our recent video series for more information on this.

Strategy 2: New Markets

While opening a new dispensary or lab in a new market is possible, that takes time and energy. And since cannabis cannot cross state lines, expanding into a new state presents challenges because you cannot leverage existing relationships like you would in non-cannabis industries. Even expanding into a new town means navigating the complexities of local regulations.

On the other hand, if a cannabis business is already established in an area, you can take advantage of the work that they’ve already done to position themselves in the market, including their existing relationships with suppliers.

Ready to Buy a Cannabis Business?

It’s not just about finding any cannabis business to buy. It’s about finding the right one. Here’s a quick overview of what you need to do to be ready:

  • Get clear on your goals. 
  • Review your finances and resources. 
  • Get as much info as you can on the existing employees. 
  • Get help from attorneys, brokers, and finance pros to analyze the new business.
  • Prepare your essential documents and create a list of what you want from the acquisition. 

 

What About Selling Your Business?

If someone is buying a business, there’s obviously a seller. And if this is you, and you’re thinking about selling within the next year or so, the time is now to start preparing for the sale. Contact the Accounting for Green team as soon as possible so we can help you organize your finances and operations and make your cannabis company buyer-ready. 

What does that look like?

Step 1: Consider your buyers. 

What would you want if you were buying a cannabis company? A company with sound marketing practices, solid operations, and healthy finances is far more attractive than one that’s a complete disaster or hot mess. So getting organized makes it easier to demand a higher purchase price.

Step 2: How involved do you want to be? 

Are you done-done? Or do you still want to be involved in the company on some level? (And if so, what level of involvement do you want—advisory, operations, etc.?) Your decision here will affect the sale.

Step 3: Understand cash vs financing. 

Most likely, you won’t be getting a traditionally financed purchase, simply because banking in cannabis isn’t straightforward in any way. Whether you have a team of investors or total cash, however, may change things. 

Cash deals are often straightforward. The more chefs in the kitchen (growers in the field), the more complex the negotiations and due diligence. If a team of investors (or some other type of financing, you can expect a more thorough examination of your business.

Step 4. Get your books in order. 

If it sounds like I’m beating a dead horse here, trust me—I’m not. Cleaner, transparent financial records reduce any red or yellow flags for potential buyers. Taking this step well in advance shows that you run a tight ship and makes the negotiations more likely to go in your favor.

Step 5: Be ready for information requests. 

You may think you have all your ducks in a row, and then your buyers might request something you never thought about having ready. We’ve seen it. Better yet, if we’re working with you on bookkeeping or accounting for your cannabis business, we’ll know your company inside and out. That means we can quickly and easily turn around most requests for additional information, which makes you look good to your buyer and doesn’t send you into a total tailspin.

 

Is M&A Right for Your Cannabis Business?

If you’re ready to grow your cannabis business to a higher level, it’s decision time—and not only yours. Remember, before you sign on the dotted line, you need to make sure you can legally run the cannabis business you’re purchasing. Be sure to check with your state governing body for the rules before you get too far down the road.

Assuming you’re all set from a legal standpoint, now it truly is your decision. Both organic growth and acquisitions have a list of pros and cons—and it’s all about identifying your priorities to find out what’s right for you. 

If you’re in a new cannabis market, an acquisition may not even be an option unless you’re looking at ancillary companies.

Regardless of what you choose, the bottom line is that you need the right professionals at your side and a clearly defined strategy based on your business goals. And of course, exceptional financial records. 

That’s where Accounting for Green comes in. In addition to serving as your cannabis bookkeeper, we frequently serve our clients in an advisory capacity, including helping you get your business ready to buy, sell, or grow organically. Contact us today to find out how we can help.

 

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