(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 marijuana industry, but sellers must be ready to seize such opportunities.
Owners who would like to exit the marijuana 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 anticipated those numbers would grow close to 350,000 page views per month and 50,000 users by the end of 2020, 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 latter 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.
As part of the M&A process, Vita’s team also assesses the strength of a target’s leaders and employees as well as its supplier list, customer base and other physical and intangible assets. Companies looking to be acquired by larger conglomerates may position themselves well by creating a presentation deck that includes such details.
“Some companies bring with them real expertise in cultivation,” Vita said. “Others bring specific types of licenses; others bring brands and products.”
Columbia Care also focuses on how a target’s business is being run, such as whether it has procedures in place to follow compliance regulations, pay taxes and fulfill financial obligations.
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.
Thoughtful Brands, a Vancouver, Canada-based CBD and e-commerce 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.
“At the moment, we are looking for traditional direct-to-consumer brands and also brands with retail distribution—usually regionally,” he said of potential acquisition targets. “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 last January that it completed the acquisition of U.S.-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.
Hoggan introduces valuation into the conversation early on to ensure the parties are well matched. “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 about a potential sale could lead to dampened worker morale. Employees sometimes find out via listings or other methods, Sheer said. Sellers can encourage buyers to retain staff or create severance packages when retention is not possible. Additionally, key employees can be offered retention agreements, which sometimes include bonuses, to stay on after the new owners take over.