Much like big box stores buying small, trendy startups, the cannabis industry is seeing an influx of cannabis companies trading hands. With over 500 retail dispensary licenses in the state of Colorado alone, this is a great time to buy – or sell!
The global legal marijuana market is expected to reach USD $146.4 billion by end of 2025 ¹
The increasing growth of this industry has piqued the interest of investors, entrepreneurs, and savvy startups. With an upward trend prepared to overtake the coffee industry’s explosive growth rates, the window to get into Colorado’s cannabis world may be about to close.
Selling a Marijuana Business
If you were able to get into the industry early, but aren’t looking to stay put, you have a significant opportunity to sell your marijuana business for a steep profit. Valuation is off the charts, with companies being assessed in the 7-figures.
Many of the startups that have since expanded in multi-million dollar chains are looking to expand by buying the competition, while private equity investors are excited to jump into the game; whomever approaches you and whatever your reasons to exit the industry, it’s important to do your due diligence before you sell.
Since many new and varying factors effect the potential value of cannabis businesses, engaging a business valuator and accountant with experience in the cannabis industry can provide the biggest bang for your buck, and also establish a baseline for considering offers of buyers. Sometimes an objective third party can help realign a business owner’s subjective feelings about the value of the business.
Start by getting your paperwork in order. Pull together your state and local licenses, any permits you have, along with your financial statements. Potential buyers are going to want to review a balance sheet, at the bare minimum. If you can also pull together your records of compliance visits, regulatory violations, (though hopefully you have none) and certificates of good standing, your potential buyer will be immensely grateful.
As a seller, completing a membership interest sale or stock sale, depending on your form of entity (LLC or corporation) is preferable. This allows all assets and obligations of the company to be transferred to the buyer, which is ideal for both parties, especially since the buyer won’t have to worry about renegotiating all existing contracts with the seller to the buyer’s new entity.
Documentation is Key
If you’re thinking that a binder of all this information would be useful, then you’re on the right track! Be sure to include documentation on all of your active obligations including employment agreements, consulting contracts, and licensing paperwork, as well as vendor and supplier logs. After executing a comprehensive Non-Disclosure Agreement (see me about this if you don’t have one already), you’re ready to share this binder with potential buyers.
You can even use this binder to highlight your company’s niche as an incentive to buy. Be sure to feature that one special-thing – your USP – that will give your business a competitive, long-term edge, so you can be certain that you’ll get the highest possible price for your business. Like any other business, you'll want to stand out from the crowd to attract high quality buyers.
Create a Turnkey Operation
Create streamlined processes and standard operating procedures to such a degree that employees and managers can function well in your absence, then it will be possible to continue smooth operations after you sell. This means having clearly stated company policies, procedures, and systems to show prospective buyers that you’ll have a smooth transition.
Buying a Cannabis Company
Because the industry is still relatively young, valuation is highly subjective and incredibly variable. Most states have an unique regulatory structure that you’ll need to keep in mind for determining a company’s value. Just as a seller should consider a 3rd party valuator, a buyer can avoid offering an overinflated price by utilizing a business valuator.
Due to the federal prohibition currently in effect, owning or investing in a marijuana business means you’re taking on a great amount of risk. This is why it is so important to work with a lawyer who can help you do your due diligence. Start by assessing the assets and liabilities you’ll be taking on in the purchase agreement.
Before moving onto paperwork, do your research into the city and county requirements for licensing of the business you’re considering purchasing. You’ll want to review the company’s existing licenses (or application), permits, lease agreement, and administrative history with the Secretary of State, state, and local licensing authorities.
Keep in mind, you’re investing into a heavily regulated industry, so you or the seller will have to follow strict disclosure policies for changes in ownership. In Colorado, the buyer must be vetted by regulators before a purchase agreement can take effect. So, you’ll want an experienced cannabis business attorney on your team to ensure that your purchase and sale agreement complies with performance obligations, timelines, and requirements set by Colorado.
Most buyers will want to structure a business purchase as an asset sale in order to avoid taking ownership of the seller’s liabilities. Keep in mind, however, that both parties have to agree on how the deal will be structured and most sellers will want to offload their liabilities as a package deal. If you are purchasing the entire business (and not just its assets), it means you’re acquiring both assets and liabilities.
Work with a licensed attorney familiar with purchase agreements (ideally, in the cannabis industry) to ensure your purchase agreement discloses the seller’s written, verbal, and understood agreements with every vendor, consultant, service provider, and investor – because you’ll become financially obligated to them all.