Front Page, Industry & Investment

How To Prepare Your Cannabis Business For Mergers And Acquisitions

December 14, 2017 / By 3C Team

Just like any other industry as cannabis companies mature, valuable collaborations become apparent and big businesses enter the space. Mergers and acquisitions (M&A) are already happening in the cannabis industry and more cannabis business mergers and acquisitions are inevitable in the near future. Case in point, in October, 2017, Constellation Brands purchased a 10% stake in Canopy Growth Corporation for $191 million. Constellation Brands owns Corona and other beer brands. Canopy Growth Corp. sells medical marijuana in Canada and is planning to sell it for recreational use as soon as it becomes legal there in the summer of 2018. According to a recent article, “Canada’s cannabis players are looking to mergers to scale up and stave off competition.”

There is strong interest among pharma, agricultural and tobacco businesses to enter the cannabis market. In the U.S., however, federal law is currently keeping the majority of these large businesses on the sidelines. Cannabis businesses in the U.S. have a unique opportunity to prepare for potential mergers and acquisitions that will certainly get underway as soon as federal regulations allow.

Mergers and Acquisitions

Plan For M&As From Day One

To increase the likelihood of this potential exit strategy, you need to do some careful planning. Properly structuring your cannabis business from day one, being meticulous with data tracking of all types, compliance, meeting or exceeding safety protocols, and conducting internal audits will help prepare your cannabis company for mergers and acquisitions.

Become the best at what you do and look for others who are experts at what they do. Many successful cannabis business will be formed as partnerships (mergers) of people who provide complementary products and services. Successful partnerships like this can potentially attract more M&A interest.

Form strong partnerships with customers and vendors and treat everyone you do business with well. The company that is interested in acquiring you will want to maintain as much of your existing customer base as possible. Furthermore, both your customers and suppliers can serve as business references for you.

Adhere To Highest Standards Of Worker & Product Safety

Even though cannabis is not currently regulated by the federal government it will be at some point. Following FDA, USDA, and OSHA regulations from the beginning will help you maintain a clean safety record as a company.

Hire managers with agricultural experience (especially if you are a commercial cannabis cultivation operator). For example, someone who has a masters degree in agriculture and is experienced with best practices. Use certified personal protective equipment and ensure worker protection standards are met. You may consider hiring a Certified Crop Advisor with experience managing large scale four-season greenhouse poinsettia operations.

Agricultural operators like this are much more qualified and experienced with this scale of cultivation and team management than master cannabis growers. The specifics of the cannabis plant can be taught quickly to someone who already has the skills and years of experience working in industrial agriculture.

Stand on the shoulders of those who came before you. Learn all you can from other industries. Many companies operating in the agriculture industries have extensive experience in the mass production and distribution of agricultural products.

Best Practices For Commercial Agriculture

Utilize production practices that are healthier for your consumers, employees and the environment. Many best practices will also cut costs and maximize your bottom line.

For example, cultivating in four-season climate controlled greenhouses utilizing organic cultivation methods and OMRI certified inputs reduces production cost and produces cleaner cannabis. It’s also easier on our planet’s environment.

Designing your cannabis facility with these things in mind from the beginning will make your business favorable for potential future M&As based on your financials and product safety record all while having a positive impact on the environment.

Consider Your Corporate Structure

Develop a strong corporate and legal structure as the foundation of your business.

Creating separate entities for each distinct aspect of your cannabis company is essential in the cannabis industry for legal protection, scalability and tax purposes. Without doing this you may have a more difficult time getting acquired or merging with another company to form a larger entity.

These separate business entities can include an intellectual property (IP) company, a hands-on cultivation company, a real estate company that owns the assets and leases them to the business on a triple net lease, a dispensary and any other part of your vertically integrated cannabis business.

Being able to scale your business into new markets by utilizing your well developed IP is one key factor that a potential buyer might use when deciding whether or not to purchase your cannabis business.

Hire An Expert Mergers and Acquisitions Team

Hire expert cannabis business consultants to vet the company who you are merging with or being acquired by. Your expert team of consultants might also include an investment banker, an attorney and a CPA who specializes in tax and audit. Having your M&A team in place and doing your due diligence on the company you are merging with or being acquired by will help to ensure your M&A goes as smoothly as possible.

According to Forbes, maintaining a well-drafted Disclosure Schedule is one key in preparing for a smooth M&A process. Disclosure Schedules involve disclosing key contracts, intellectual property (IP), litigation, equity stakeholders and more). Also maintaining accurate records regarding everything from employee issues to processes and procedures will enhance your company’s attractiveness to potential buyers. Ensuring that all of your financial statements are in order and that all of your taxes have been paid makes good business sense regardless of whether or not you plan for your cannabis business to be acquired one day.

Learn From Mistakes Of Cannabis Business Pioneers

Many of the industry’s pioneers have experienced costly facility overhauls, lawsuits, product recalls from pesticide contamination and regulatory fines. These cannabis business are much less suitable for mergers and acquisitions due to the risk associated with previous legal action and their tarnished brands.

Proper planning and learning from the mistakes of industry pioneers will allow your cannabis business to start with a clean slate. From there you will be able to maintain your business properly through well crafted standard operating procedures.

A couple of other business mistakes to avoid are:

  1. Don’t expand into too many offerings or markets too quickly.
  2. Stay in your lane. Know what you and your team are good at and focus your energy on that.

Investors Love An M&A Exit Strategy

From an investment standpoint, a successful M&A offers an exit strategy. When prospective investors learn that there is potential for a nice payday upon exit, that is attractive. When potential investors are comparing several companies with similar products, having an M&A exit strategy will give them one more reason to tip the scales in your company’s favor.

Due Diligence Goes Both Ways

As Panos A. Panay writes in Entrepreneur.com, “Spend time considering what the ideal acquirer’s profile would be and what corporate culture and values would be most desirable.” These factors may affect your career and your company’s brand after a merger or acquisition.

If your company is going to be involved in an M&A in the very near future, you’ll want to keep everyone on your management team informed and involved in preparation for the actual transition period.

Transparency with your board and your management team is a good habit to get into from day one.

What’s your opinion on mergers and acquisitions in the cannabis industry?

 

Contact Us

Get in touch for a free initial consultation.
303-542-7199

*Required