Six Ways Cannabis Companies Can Maximize Their Sale Prices

By Andrew R. Lines, MAI, Principal, CohnReznick; and Beau Whitney, VP, Senior Economist, New Frontier Data

Explosive Growth in M&A Activity
Consolidation is a natural phase of any industry lifecycle, and as legal cannabis undergoes rapid growth, the market is in a new phase of consolidation. Many players are eyeing the cannabis market, including highly capitalized companies in traditional industries looking to enter the market via acquisition, and established cannabis companies seeking to expand their footprints by absorbing competitors. Given such interest, 2019 promises to be an explosive year for cannabis mergers, acquisitions, and expansion.

This month, Verano Holdings was snapped up by Harvest Health for $850 million, reportedly the industry’s biggest acquisition to date, featuring one of the country’s largest cannabis companies, with hundreds of retail and cultivation facilities.

The industry is in a land-grab stage, and the opportunity for Harvest Health to add so many retail facilities and cultivation centers was key. Large multistate players are rushing to capture market share and position themselves for further expansion.

Conversely, the need for cash is driving many smaller cannabis companies to offer themselves for sale. Many mom-and-pop operators needing capital have no access to banking services or business loans. The SAFE Banking Act (HR 1595) offers some solution, but no certainty of adoption.

Many of the acquisitors are publicly traded companies, listed on the Canadian Securities Exchange. As their valuations rise, they gain access to capital, and when they see discounted valuations on small cannabis businesses, they jump at chances to build their brands, increase their footprints, and raise public market values.

Thousands of cannabis companies are potential acquisition targets. Here are six steps for a company to take to make itself more attractive to acquisitors to help seal a successful sale.

1. Enter with an exit in mind

A critical first step when entering the cannabis industry is to develop an exit strategy. In a hypercompetitive environment, any sellers not thoroughly understanding their business structure, cost structure, or where they stand relative to their competition will quickly be out of business. To realize a successful sale, business owners need to have identified their stress points so they can address any shortcomings ahead of a deal, rather than reacting at the last minute and being forced to sell at a deep discount.

2. Invest in branding

Big tobacco, liquor, and pharma are all entering the cannabis market and inspiring many of the existing players to build their brands, raise their profiles, and attract top dollars in any acquisitions. They usually do this by acquiring smaller retailers themselves – strengthening their brand through integration and deploying brands in new states.

3. Sweat the small stuff

Companies that do well and attract top dollar in an acquisition are those that work hard at every phase of their business, whether pounding the pavement to get their products in every dispensary, or working with budtenders to raise their products’ profiles recommended to customers.

4. Get your financials in order

To maintain the accurate valuation of a business, a seller must have sound financials with proper financial statements to prevent any last-minute rush when an acquisitor comes calling.

For example, while there is a focus on federal income tax compliance, local sales and use-tax compliance can also present complications during due diligence. Unknown federal, state, and municipal tax liabilities can negatively impact a company’s valuation.

5. Hire a professional management team

Professionals from other fields are joining cannabis companies, bringing mainstream business practices with them. Companies must choose their management team carefully, as investors and acquisitors often cite management as the most influential factor in their investment or purchase decisions. On the flip side, management teams are also increasingly thought of as the most important points of exposure and liability in a company’s operations.

6. Build a data room

A data room is an online warehouse of business documents to help buyers best evaluate a company. A data room enables a seller to provide valuable information in a controlled manner, which can speed the M&A process. It should include key documents, including contracts, intellectual property information, employee information, and financial statements. Due to the nascence of the industry, even the largest of deals is not always based entirely on proper metrics, where offerings may not be supported by actual projections. The reality is that sale prices in this industry are still based on somebody’s best guesses, due to a lack of metrics upon which to base prices. Full visibility into a company’s data room can help buyers and investors feel confident about their acquisition target, and positively impact a valuation.

As the green rush accelerates, there are great opportunities for small, independently held companies ready to sell. The most attractive acquisition targets will be those that are professionally managed, have clean books, and well-documented operations. By setting a clear strategy from the start, a cannabis company looking to sell will be better positioned for a smooth process and to maximize its price.

For more information, contact CohnReznick.com.

This content has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances, and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.