Marijuana mergers and acquisitions: purchase prices and payment methods

In this article, I want to explore what is arguably the most important part of any cannabis M&A transaction-the purchase price and the method of payment. In these transactions, there are almost countless ways to structure payments, but today we will look at some of the most common structures and problems.

To understand this more fully, I will divide this article into two parts: 1) purchase price and 2) payment and escrow. In my next article, I will discuss ways to adjust the purchase price before and after the market closes.

Part 1: Purchase price

The purchase price of cannabis companies is clearly one of the most intensely negotiated aspects of M&A transactions.I am not going to enter How to value a business Today, but actually look at how the parties determine the purchase price.

First, there are many different ways to structure payments to sellers. Usually, payment is made in cash, stocks, or some combination of the two. We tend to see direct cash purchases of smaller mergers and acquisitions and mixed cash and stock transactions, where larger companies or MSOs are the buyers, or the purchase price is higher. In many cases, it is much easier for companies to avoid paying large sums at the close of the market by issuing shares.

Cash transactions are simpler because they do not involve many of the same securities law issues as stock transactions. Moreover, in stock transactions involving Canadian public marijuana company stocks, all parties need to consider Canadian securities laws, which will make the drafting and negotiation process more complicated.

Part 2: Payment and Escrow

There are many ways to construct the payment method of the purchase price, which may affect the negotiation. Here are some of the ways we have seen:

  • The full purchase price (whether cash or stock) is paid at the time of the transaction. This usually only happens in smaller transactions.
  • Part of the purchase price is paid at the time of the transaction, and the remaining part is paid in installments.
  • In a “seller financing” transaction, part of the purchase price is paid at the time of the transaction, and the buyer issues a promissory note or similar bill, promising to pay the remaining part over time. This is somewhat similar to the concept of installment payments, except that they may be treated differently for tax purposes, and installments usually do not generate interest. Bills can be more flexible, and there are balloon payments, etc.
  • Milestone or “earnings” payments. This situation is common when the seller wants a high purchase price and the buyer does not believe that the business is worth the price, because it is relatively new, has a limited operating history, etc. The buyer will pay a portion of the purchase price at the end of the transaction, and will usually require at least some sellers to insist on helping to complete the operation after the transaction within a certain period of time, and only pay to the business when the business reaches certain pre-negotiated milestones (usually of a financial nature). They pay more money. This is a greater risk for sellers, because they may never get the money, but for buyers, it may be a huge victory, because sellers will be greatly motivated to ensure that milestones are reached and The business performed well.

Escrow also affects how the parties decide to pay the purchase price. If you are not familiar with escrow, it is a neutral third party that holds the purchase price (or other things) until both parties complete the transaction or confirm that certain post-transaction milestones have been met. The motivation for using escrow is obvious-if the purchase price and the stock certificate of the company to be purchased are kept in the escrow, all parties will be incentivized to work harder to complete the transaction.

Escrow is usually used to save initial deposits when signing M&A transaction documents by closing. Many M&A transactions will include an initial deposit of a certain percentage of the purchase price. Sometimes, if the transaction is not completed or the buyer leaves for some reason, these payments will be non-refundable in whole or in part. This prompts the buyer to take action and lets the seller know that the buyer is serious.

Buyers also often negotiate to keep part of the purchase price in escrow after various adjustments are made after a certain period of closure, which I will introduce in the next article on this topic. For now, stay tuned to the Canna Law Blog.

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