Marijuana Business Magazine

In short, there are right ways and wrong ways to execute a deal – whether you’re the buyer or seller. A merger or acquisition, for example, must fill a need – such as allowing your company to operate more retail outlets – and mesh with your firm’s business model. It also helps if the two companies have similar corporate cultures and missions. Sellers, meanwhile, need to structure the transaction to ensure they aren’t grossly overpricing the company. There are also some red flags buy- ers and sellers should be aware of. Warning signs might include falling revenue, shoddy bookkeeping or pend- ing lawsuits. You don’t want to buy a proverbial lemon or sell your business to a company that can’t fulfill its end of the bargain. “If you find two or three or four things, there’s enough risk and uncertainty that you might not want to do that deal,” said Hadley Ford, co-founder and managing director at iAnthus Capital Holdings, a New York-based marijuana investment and operations company which owns U.S. cannabis businesses. Below are tips and advice from industry veterans about the right and wrong ways to structure an M&A deal. Structure the Sale Carefully If you’re selling your company, your goal should be to get as much cash as possible up front, accord- ing to Scott Greiper, Viridian’s president and founding partner. Cash is king, so to speak. By contrast, stock deals – in which you receive shares in the acquiring company – require more scrutiny. “If we are taking back stock, we have to make sure that the stock has value and that the buyer is on a growth path so the stock has a chance to increase in value,”Greiper said. In addition to stock and cash, sellers could have the option of taking a so-called earnout, in which a seller can get added money down the road in lieu of a higher upfront price. For example, an earnout might equal 5% of your company’s gross sales in the three years following its sale or an additional grant of stock or cash contingent on the achievement of some predetermined milestone. But that can be risky, especially if it’s unclear how the business will perform under new ownership. In general, the more experienced and well-capitalized a buyer is, the better it is for the seller. If the buyer has completed other acquisitions, the seller should be able to talk to those companies about their experiences. “If a buyer has to raise capital, that pre- sents enormous risk to the seller,”Greiper said. “We always look for buyers who have cash on hand.” To help expedite any sale, be sure all your documents are in order so a potential suitor can more easily see what he or she may be purchasing. Such documents might include operating agreements, board consents, corporate contracts, loan documents and stockholder information. In short, you want to make it easier for a potential buyer to get a clear grasp of your company’s financial and legal health. “Generally, a buyer is going to want to review all of this information, and if it is not in order or incomplete, the buyer will view the seller’s business as not as valuable or will pass on the deal entirely,” said Steve Levine, who established the cannabis practice for the law firm Husch Black- well’s Denver office. Have a Clear Purpose A merger or acquisition must fit into your company’s business model. “A merger without purpose is a disaster,” said Steve White, the CEO of Harvest, a multistate medical marijuana company based in Tempe, Arizona. In July, the company merged with Modern Flower of Guadalupe to create what Harvest billed as Arizona’s largest MMJ operator – one with more dispensary licenses and cultivation facilities than any other in the state. “I see a lot of people acquiring an entity or an asset because they think it’s cheap,” White added. “But it doesn’t end up fit- ting with what their company is trying to do and it can be a problem.” In Harvest’s case, the company realized it needed more outlets to sell its products, according to White. Previously, Harvest had invested heavily in cultivation and production capacity. It operated two dis- pensaries, in Tempe and Scottsdale. But when White and his team saw more companies entering cultivation and processing, they wanted to ensure Harvest had retail outlets to sell what the company produced. So they started searching for a partner that could provide a platform to increase sales.With six dispensary licenses,Modern Flower fit the bill. “It was identifying a need based on market conditions and finding an appro- priate partner that could address that need,”White explained. EXECUTIVE SUMMARY Mergers and acquisitions are sweeping through the cannabis industry – and there are right ways and wrong ways to do a deal. Here is advice for buying a company or selling your business: • It helps if the two companies have similar corporate cultures and missions. • If you’re selling your company, your goal should be to get as much cash as possible up front. • Be aware of red flags at the company you’ve targeted for an acquisition or a sale, including falling revenue, shoddy bookkeeping or pending lawsuits. • During due diligence, buyers should be sure to scour through documents supplied by the acquisition candidate, including litigation matters, employment agreements, customer lists and insurance policies. Scott Greiper, president and founding partner at Viridian Capital Advisors. 38 • Marijuana Business Magazine • November / December 2017