When business becomes consistently static, it is no longer a business. It is a dead weight. With careful consideration, growth and change can be the best thing to happen to an industry. While the cannabis realm is no different in this aspect, dynamics as a topic of discussion is often related to regulations, however, cannabis mergers and acquisitions are not to be glossed over. Mergers and acquisitions of multi-state operators (MSOs) nearly doubled from 2020 to 2021.
Cannabis industry activity is tied to various factors such as new market expansion, political reform, investor favorability, economic pressures and high-profile failures. All of these aspects should be on the mind of anyone looking to enter the market. Also, a uniquely cannabis industry-related challenge lies in the lack of precedent. With so many states and areas creating their own rules, what is helpful and legitimate in one place can be all wrong for another. Recognizing the right opportunity can take a full-time staff dedicated to review and analysis.
One strategy independent licensees seldom consider is a merger or acquisition with a similarly positioned independent licensee. Legally speaking, cannabis mergers are a combination of two business entities into one, whereas cannabis acquisitions involve a company taking ownership of another company’s stock, equity or assets. The benefits to these less common entries into the market are many, including potential to increase revenue faster, wider brand distribution, establishing a stronger buying position and an instant addition to market shares. Further, in many cannabis mergers and acquisitions, the aim is to achieve a tax-free reorganization. This is when the involved parties ‘acquire or dispose of the assets of a business without generating the income tax consequences which would result from a straight sale or purchase of those assets.’
A word of caution: recognizing the ideal situation for a merger or acquisition is just the beginning. Handling the steps of absorbing a cannabis business does not tread a traditional route. For example, due to no federal banking legislation, any financial markets servicing the industry work solely within a debt financing model. The upside, however, can be found within the downside, as differing markets by state also means a range of options. Don’t forget to investigate potential loopholes!
Those on the side of selling have special considerations as well. Motivations and goals should be established going in. For example, sometimes parties want to stay involved, while others prefer to fully walk away. Next, finances must be settled. Debts, liabilities, tax records and any other financials are all information needed by the interested party. Then, have the story ready to go. As the deal becomes more official, involving high-level managers and employees is key to assisting the process and preparing for change. Other parties will need notification as well, including growers, processors, transporters, and other vendors. Cluing them in with motivation or plans for the future will quell confusion down the line. Mergers and acquisitions can be completely behind the scenes or a very visible process in which clientele are privy to the changes occurring. Best procedures are for the involved parties to decide.
Looking toward the current market for insight? Some of the new upcoming mergers in cannabis industry are actually tied to banking. Northern Lights Acquisition announced in late September it had completed its merger with Safe Harbor Financial, which provides banking and financial services for the cannabis industry. At its original announcement in February, the deal was valued at $327 million.
Acquisitions in cannabis industry include Cresco Lab’s acquisition of Columbia Care Inc. Due to the complexity of acquisition, which entails complex regulatory hurdles and rests on the sale of overlapping assets in states held by the two companies to obtain regulatory approval by state regulators, other industry insiders are keeping watch, such as Morgan Paxhia, the co-founder and managing director of San Francisco-based Poseidon Investment Management.
“If that is proven to be successful, I do think that does open up opportunity for other situations like that to emerge. Because there’s confidence that there are buyers for those spun-out assets — creating basically a new MSO, as a result, then maybe whoever that new group is or the new groups are could go and do a similar thing with some other operators that could free them to make other moves,” Paxhia noted.
Interested in the optionality of cannabis mergers and acquisitions? Concerned your cannabis business may be within the ‘deadweight zone’? In addition to specializing in commercial cannabis real estate and providing financial, architecture and construction consulting, Canna Real Estate Group assists clients with cannabis merger and acquisition advisory services. We’ve helped emerging verticals grow into multi-state operators through business and real estate valuation and investment. Let’s talk about your project goals and get a free consultation.