Marijuana Business Magazine October 2018

3. Know Your Worth Knowing your company's value and the price you would accept to sell it is critical, said Patrick Rea, co-founder and CEO at Colorado-based business accelerator CanopyBoulder. “It sounds simple, but it takes a lot of work,” he said. Rea suggests factoring in the following when considering your firm’s valuation: • Price out the opportunity. What is your firm’s potential cash flow? It’s the line item acquir- ers are often most interested in. Accountants and business brokers can help you crunch these numbers using common ratios that take into account the pos- sible revenue multiple or profit multiple to price your company, depending on the particular busi- ness sector. • Compare other deals. If your firm is a hot M&A target, it’s likely others in your sector are, too. Take note of deals involving com- panies comparable to yours. • Build a network of investment bankers and brokers that are actively engaged in deals in your sector or market. • Network closely with other entre- preneurs and business owners in your sector. • Talk up your company’s valuation on a regular basis when speaking with investors and executives at other businesses. “The big mistake is to never talk about your worth and valuation and then surprise stakeholders when you bring it up,” Rea said. 4. Implement Good Governance For companies actively seeking a buyer, having corporate governance basics in order is a must, Rea said. “You want to make sure your lawyer is engaged if there are any votes, actions or adjustments to your finan- cials. And make sure everything is well documented,” he said. “If not, it’s a signal to an acquirer that something may be out of line.” A potential acquirer will likely pause if the following controls or considera- tions are unaccounted for: • Updated audited financials: Avoid creating headaches for your potential acquirer by having your financial house in order; that includes updated balance sheets and audited financials. • Corporate governance controls: Be prepared to show that you have strong controls in place, includ- ing updated board minutes and documentation of all board votes and decisions. • Good shareholder communica- tions: Whether you have a wide shareholder base or a large share- holder, be prepared to show that you’ve been in regular contact with your key investors or shareholders. 5. Hire a Broker Beyond the team of auditors, accountants and attorneys needed to help craft your deal, a business broker can be an invaluable asset, Rea said. He noted that tapping a broker as the chief point person can be especially helpful for founders who may continue to want to play a role in the business after it’s sold. “Think of it as a sports agent nego- tiating on your behalf,” he said. “It’s always good to have someone else be the tip of the spear, so you can avoid any bad blood post-deal.” Be particularly choosy when hiring a business broker. Cannabis has legal and regulatory baggage that makes it differ- ent from any mainstream industry. “Cannabis is not a normal market. It’s 30(-plus) markets across the U.S. that all have different laws to abide by,” Greiper said. “You really want someone that has significant experience in the space and understands the challenges of buying and selling companies in this industry.” When choosing a broker, Greiper said: • Ensure the broker is licensed by the Financial Industry Regulatory Authority, which governs best prac- tices and regulates broker-dealers. • Seek experience. Consider the number of deals any broker has completed in the cannabis space but be sure to ask to speak with past clients. • Keep an eye on cost. Be aware that most brokers require retainer fees that can range from $25,000 to $75,000, depending on the size of your firm.That can be in addition to “success fees,” which are paid out once the company is sold.Those costs can range from 2% to 5% of the price paid for your firm. Beyond creating competition among buyers, brokers are critical in helping carry out the due diligence needed to ensure the potential acquirer is the right fit and helping outline the deal structure to ensure you get the best price, Greiper said. “Cash up front is the most important factor,” he said. “If they’re offering stock: Is it public or private? What carries the most value to you?” Many buyers will push to work in certain benchmarks that trigger pay- ment to a seller at the end of the deal, Greiper said. “The structure of those considerations is critical,” he said. “Is the bar that the seller’s business has to double in a year to achieve the earnout? That’s probably not a great deal.” ◆ Patrick Rea is co-founder and CEO at CanopyBoulder. Photo courtesy of CanopyBoulder 44 • Marijuana Business Magazine • October 2018