We wrote recently about the flurry of MME acquisition activity in Nevada. Washington State’s market for business acquisitions has been heating up lately as well. There are a few different causes for this. Now that we are getting to the two-year anniversary of the original licensing period for marijuana businesses in Washington, successful producers are starting to distance themselves from those that are less successful. Because our licensing window for producers is still closed, however, even those businesses have something with inherent value — the license itself. Retail is in a different position, as the state is currently accepting applications for new retail operations, with preference given to those businesses that have a background in providing medical marijuana under the old state system and paid all of their state taxes and otherwise complied with state laws.  Still, most people are predicting that the state will eventually cut off the number of retail licenses as well, so those medical businesses with the highest priority are themselves becoming acquisition targets.

Marijuana Business Acquisitions Long story short, we are seeing a lot of business purchase activity throughout the practice, so today I am writing on what the process of purchasing a small, closely-held cannabis LLC or corporation looks like.

Right now, about half of the marijuana business acquisition deals we see are originally put together by the buyer and seller in close contact. Word of mouth, Craigslist, and the fact that the business community is still pretty small mean that it’s not that difficult for buyers and sellers to connect with one another. The other half of the deals tend to be put together by brokers. Though many of the brokers that we have worked with are absolutely professional and are worth every penny they charge, we warn everyone to be cautious, as there can be many pitfalls. Brokers earn their fee when they actually connect a buyer and seller in a successful deal. They don’t earn their fee when you sign an exclusivity agreement with them, and they demand money for a deal that you put together yourself because the broker wasn’t doing his/her job. But their contract with you may say otherwise, so be warned.

Once the parties are in contact, that’s where you see the primary negotiation. At the non-attorney level, the focus is primarily on price, as it should be. But there’s a lot more to it than that, and it sometimes doesn’t come out until attorneys are hired to draft the deal. In general, a purchase contract is quite a bit like every other contract we lawyers draft. As legal counsel to a party in a cannabis business acquisition, my primary goals are usually the following:

  • Define the obligations of the parties
  • Define the due dates for each of those obligations
  • Define any conditions that modify or cancel those obligations
  • Define any representations or warranties that the parties are making to each other to induce the other to enter into the agreement

If you look at any type of purchase agreement that clearly lays out the above points, it’s probably a good document. If anything about the above points is unclear in the agreement, it’s likely not a very good agreement and something you probably should not sign.

In the acquisition context, the obligations of the parties are generally easy: one side hands over money, and the other side hands over LLC membership interest, stock, etc. Timing, though, is a heavily negotiated point. Buyers don’t want to give over any money until they are sure that they actually have the cannabis business, and sellers don’t want to bear the risks of buyers’ screw-ups. Additionally, state cannabis licensing agencies play a key role here, as they generally need to approve all new cannabis business owners, via background checks, etc.

The key moment on which timing of payment is generally based is when the state agency officially gives its blessing to the new owner by approving it to take over the marijuana related business. This means that the parties usually must pursue the parallel jobs of finalizing the purchase while also seeking regulatory approval for the license transition. And this is where conditions come into play. The idea is that both parties sign the agreement and become bound, but their obligations are conditioned upon some other events happening. So, you add regulatory approval for the cannabis licenses transfer as a condition of the obligations. If you don’t get state approval to transfer the cannabis license, then the deal dies. The same thing happens at the national level with antitrust approval. AT&T and T-Mobile had a contract written and ready to go, but when the federal government said no, the parties went their separate ways.

Finally, you have the representations and warranties. These are absolutely key and they must be thought through by the parties. By way of examples, standard representations typically include the following

  • Each party is authorized to enter into the agreement
  • Each party is duly formed under state law
  • Each party has disclosed any and all current or pending litigation
  • Each party has disclosed its financial situation, debts, etc.

Without these representations and warranties, the buyer may think it is getting a good deal on a licensed business, but it may end up with a company riddled with debt, or whose assets are secured by others, or a company with third party claimants who believe they are the rightful owners of the business. Far too many cannabis companies have come to my firm’s cannabis business lawyers after having bought far less than they believed that they would be getting.

Even more so than with non-cannabis business deals, due diligence is key when buying or selling a cannabis business or license.

The above is a tremendous oversimplification of how we run a cannabis transaction. And frankly, a lot of the deals that we see closed lack a lot of these basic protections. Parties worry that if they go to attorneys, the deal will blow up. This is sometimes the case, where attorneys find holes that the parties didn’t initially see. For a successful and sustainable acquisition, though, some variation of these steps is pretty necessary.

Good luck to everyone in the market right now, and happy shopping.