Guide to Buying and Selling Cannabis Businesses

Buying a Cannabis Business

Purchasing a cannabis business involves a series of steps that are slightly different from buying other types of businesses due to the industry’s unique regulations and legal status. Here’s a general overview of how the process works:

 

Research and Planning: As with any business, before buying a cannabis business, you should conduct thorough research into the industry and the specific market you’re interested in. Understand the legal status of cannabis in your area, and the rules and regulations that apply to cannabis businesses. This includes zoning laws, licensing requirements, tax laws, and more. Determine the type of cannabis business you want to purchase, whether it’s a retail dispensary, a cultivation operation, a processing facility, or a combination.
 

Locate Potential Businesses: Use a platform like 420 Property to search for cannabis businesses that are currently for sale. You can also engage a broker experienced in the cannabis industry to help you find suitable businesses.
 

Due Diligence: Once you’ve found a potential business to purchase, conduct a comprehensive due diligence review. This includes examining the company’s financials, operational procedures, legal compliance, licenses, real estate agreements, and more. It’s highly recommended to work with an attorney and a CPA experienced in cannabis businesses during this process.
 

Negotiate the Purchase: If the due diligence review is satisfactory, the next step is to negotiate the terms of the purchase with the seller. This includes the purchase price, payment terms, transition support, and more. Once both parties agree on the terms, a purchase agreement is drawn up and signed.


Apply for Transfer of Licenses: Most jurisdictions require approval from the state or local regulatory body to transfer cannabis business licenses. This process can be time-consuming and complex, so it’s crucial to start as soon as possible. Consult with an attorney experienced in cannabis law to guide you through this process.

Closing: Once all conditions of the purchase agreement are met, including regulatory approval for license transfer, the sale can be finalized. The buyer pays the agreed-upon purchase price, and the seller transfers ownership of the business.
 

Transition Period: After the sale, there is typically a transition period during which the previous owner helps the new owner understand the operations of the business, introduces them to key customers and suppliers, and assists with any other necessary aspects of the transition.

 

Purchasing a cannabis business can be a rewarding investment, but it’s not without risks. It requires a deep understanding of the industry and regulatory environment, a thorough due diligence review, and potentially complex licensing procedures. Therefore, it’s highly recommended to work with professionals experienced in the cannabis industry throughout the process.

 

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Selling a Cannabis Business

Selling a cannabis business or license is a complex process due to the unique legal and regulatory landscape of the cannabis industry. If you’re considering selling, here are the general steps you might follow:

 

Planning and Preparing for Sale: Before you even list your business or license for sale, you’ll need to prepare. This can include organizing financials, business operations, and other records to present to potential buyers. It’s also important to ensure your business is in full compliance with all cannabis laws and regulations, as non-compliance can be a major deterrent for potential buyers.

 

Business Valuation: Understanding the value of your cannabis business is a crucial step in the sale process. This may involve a professional business valuation. The value of a cannabis business can be influenced by factors such as profitability, market position, the value of physical assets, and the value of the cannabis license.

 

Listing the Business for Sale: Once your business is prepared for sale and you have a good understanding of its value, the next step is to list the business for sale. This can be done through a business broker or on a platform like 420 Property, which specializes in cannabis businesses and licenses.

 

Fielding Offers and Due Diligence: After the business is listed, potential buyers will start to make inquiries. They’ll typically want to conduct a due diligence review, which can involve scrutinizing financials, compliance records, business operations, and more. It’s important to cooperate with buyers during this process while also maintaining the confidentiality of sensitive business information.

 

Negotiating and Accepting an Offer: Once a buyer has completed their due diligence and decided they’re interested in purchasing, they’ll make an offer. Negotiating the sale price and terms is a critical step, and it can be beneficial to have an experienced attorney or business broker assist with this process.

 

Transfer of Licenses: If the sale is proceeding, one of the final hurdles is transferring the cannabis business license to the new owner. This process will depend on the specific regulations in your jurisdiction, but it will generally involve an application to the relevant cannabis regulatory authority and may require the new owner to undergo background checks.

 

Finalizing the Sale: Once all terms are met and the license transfer is approved, the sale can be finalized. This typically involves the buyer paying the agreed-upon price and the seller handing over ownership of the business.

 

Selling a cannabis business or license can be a complex and time-consuming process, but with proper preparation and professional assistance, it can be a profitable endeavor.

 

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How Cannabis Businesses Are Valued

Determining the value of a cannabis or hemp business can be a challenging task, necessitating the expertise of a seasoned cannabis business broker who possesses a proven track record in evaluating and facilitating cannabis business transactions. To accurately assess the value, it is recommended to obtain a Broker Price Option (BPO) or a comprehensive evaluation from such a professional.

 

The valuation of a cannabis business can often be simplified by establishing a fair-market multiple based on gross revenues or EBITDA (earnings before interest, taxes, depreciation, and amortization). However, in many cases, the value is influenced by a combination of various factors. Some of these factors may include:

  1. Transferability: The ease with which ownership or control of the business can be transferred to another party.
  2. Business Structure: The legal entity under which the business operates, such as a sole proprietorship, limited liability company (LLC), or corporation.
  3. Gross Revenue: The total revenue generated by the business, if applicable.
  4. EBITDA: The profitability of the business, measured by earnings before certain expenses.
  5. License Type: The type of licenses held by the business, such as cultivation, manufacturing, or retail licenses.
  6. Rarity of the License(s): The scarcity or demand for the specific licenses held by the business.
  7. Real Estate: The value of any real estate included in the sale, lease terms, and permits related to its use.
  8. Fixed Assets: The value of equipment, fixtures, and tenant improvements owned by the business.
  9. Proprietary Technology: The worth of any unique technology or intellectual property owned by the business, including cultivation techniques or digital assets.
  10. Brand Equity/Goodwill: The reputation, customer loyalty, and intangible value associated with the business’s brand.
  11. Current Inventory: The value of the inventory held by the business at the time of evaluation.

 

Once the BPO is obtained and the decision to sell the cannabis business is made, potential buyers, upon signing a non-disclosure agreement, will typically conduct a due diligence process. During this phase, they will review various business documents to gain a comprehensive understanding of the business’s operations. Documents that potential buyers may want to examine can include:

 

  1. Organization Formation Documents: Official documents such as Articles of Incorporation that outline the legal structure of the business.
  2. License Information: Details pertaining to state and local license approvals obtained by the business.
  3. State Seed-to-Sale Tracking Information: If applicable, records related to tracking the movement of cannabis products within the supply chain.
  4. Profit/Loss Statements: Financial statements that provide insights into the business’s revenue, expenses, and profitability.
  5. State & Federal Tax Filings: Tax filings made with both state and federal authorities.
  6. Business Plans/Proformas: Documents outlining the business’s strategic plans, financial projections, and forecasts. 

It’s important to note that the cannabis industry is highly volatile, and as a result, the value of cannabis businesses can fluctuate rapidly. Factors such as changes in regulations, market dynamics, and industry trends can significantly impact the value of a cannabis business over time. Regular evaluations and staying informed about market conditions are crucial for accurately assessing the value of a cannabis or hemp business.

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Using Legal Counsel During a Cannabis Business Transaction

Using Legal Counsel During a Cannabis Business Transaction

 

Utilizing an attorney during cannabis business transactions is a smart move, given the industry’s intricate regulatory landscape. Attorneys who specialize in cannabis law can help guide businesses through the complexities of local, state, and federal regulations to ensure compliance and minimize legal risks. Here are several ways attorneys can help in cannabis business transactions:

 

Understanding Regulatory Compliance: Cannabis is one of the most heavily regulated industries, with unique challenges due to its conflicting legal status at the state and federal levels in the U.S. Attorneys can help navigate these regulations and ensure that your business operations are compliant.

 

Contract Drafting and Review: Whether you’re buying, selling, or starting a cannabis business, you’ll likely encounter numerous contracts. These could range from lease agreements to partnership contracts, supplier agreements, and more. An attorney can help draft, review, and negotiate these contracts to ensure they serve your best interests.

 

Licensing: Obtaining and maintaining a cannabis business license can be a complex process. An attorney can guide you through the application process, help maintain compliance with licensing requirements, and assist in the transfer of licenses during a sale.

 

Due Diligence: If you’re buying or investing in a cannabis business, an attorney can perform due diligence to ensure that the business is compliant with all regulations, that all assets and liabilities are accurately represented, and that you’re making a sound investment.

 

Dispute Resolution: If any disputes arise, such as those concerning contracts, compliance issues, or partnerships, an attorney can provide valuable advice and represent your interests in any necessary negotiations, mediation, or litigation.

 

Business Structure and Taxation: A cannabis attorney can also provide guidance on the best legal structure for your cannabis business to meet your needs and minimize tax liability. They can also help ensure that all relevant taxes are correctly paid, which can be particularly complex given the tax restrictions placed on cannabis businesses by federal law (such as the limitations imposed by IRC Section 280E).

 

Given the unique and complex nature of the cannabis industry, having a competent attorney can be invaluable in ensuring your business is legally protected and able to operate smoothly. They can help avoid potential legal pitfalls and can also save you time and resources, letting you focus on running your business.