What you need to know when buying a cannabis business, Part 5: Building the buying process

The purchase of cannabis businesses will not happen within a few days, and the transaction fails for various reasons, as we have in part 1 The focus of this series of blogs is on buyers of cannabis M&A transactions.exist part 2, We focus on the regulatory environment and discuss concepts that first-time homebuyers and their lawyers should understand.exist Part 3, We looked at things to consider when hiring your cannabis lawyer.exist Part 4, We discussed brokers-whether and how to use them to get the most out of them. Today, we will discuss how to structure trading and why trading structure is so important.

Transaction structure

Acquisitions of cannabis companies are usually structured as the purchase of (1) assets or (2) equity (including merger plans), including initial and final transactions. Since the target company may have a wide range of known and unknown liabilities, unless the buyer is not allowed to transfer or assume cannabis licenses, asset purchases are rules. For example, in California, equity purchases are almost universally used.

Pace to complete the transaction

The highly regulated nature of the cannabis market creates a generally slow-moving environment for transactions that may not be expected by first-time buyers (or first-time sellers) and their lawyers. Depending on the state, a typical acquisition timeline can range from as little as two months to as long as 12 months after the buyer and seller are ready to complete the transaction.

If the buyer already has a license in the target market and only expands its market share by obtaining another license, the acquisition can end at the shorter end of the time frame. Transactions that last one year or more usually involve one or more of the following:

  • The target company has undisclosed major regulatory violations.
  • The target company’s pattern of violations.
  • The pattern of violations of the buyer’s company or its key personnel.
  • The buyer was unable to meet the state’s licensing requirements, including providing satisfactory proof of funds from legal or permitted sources.

Why is it closed twice?

For regulatory reasons, marijuana transactions are usually settled twice. Although some transaction parties may prefer to wait until the entire transaction is approved by the national regulatory agency to complete the transaction, most buyers and sellers are eager to complete as many transactions as possible as soon as possible.

If the completion of the acquisition will be divided into two parts, the first completion will occur at the following time:

  • The due diligence has been completed.
  • The transaction documents have been fully negotiated and drafted.
  • The buyer’s financing has been properly arranged.

At the first delivery, the seller will transfer as many of the seller’s business assets as possible to the buyer without the approval of the regulatory authorities, usually leaving only the license or licensed entity in the second delivery.

The purpose of this structure is to provide the buyer with all the financial benefits and important responsibilities of operating the business from the initial closure. Once the second and final closure occurs, usually a few months after the initial closure, the buyer will receive all the benefits and responsibilities of owning the acquired business from the date of the initial closure. This is described in the transaction agreement, and a spreadsheet is usually required to list monthly expenses and expected income for settlement at the end of the second transaction.

However, this uncertainty about the delivery schedule seldom slows down the speed of aggressive buyers and sellers, and industry participants and their legal advisors often adjust transactions to suit the facts of a particular acquisition.

In the next article, we will take a closer look at more items to consider when constructing a purchase.

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