As mergers and acquisitions are rapidly occurring in the Marijuana industry on daily basis, if you have a facility or operation and you are being courted by a larger conglomerate that is interested in either acquiring your business or is commencing talks about a merger and acquisition, there are some key points that you should keep in your outline for consideration and talking points during negotiations. In our experience, the tips outlined below are the most common considerations that clients must analyze in order to make a determination about whether the deal presented is truly worth materializing.
Do you get along with the potential buyer?
This consideration is the same one we make when we are assessing whether to get into a personal relationship with another person. This rings true in the marijuana industry as well. Whether you have built your business from scratch or you bought a small operation from someone and put capital, time and sweat equity into building something larger, if you are in talks with an individual or an entity to either buy your business or merge with you, you have to like the individuals sitting across the table from you. If you do not like them, you will not trust them. If you do not trust them, you will play the coulda, woulda, shoulda game with yourself. Also, keep in mind that we are in the Marijuana/Cannabis/Hemp industry’s infancy. Everything is so new and is changing on a daily basis. There are few true industry “experts” with decades of experience. Keeping true to the mission you started with and the institutional knowledge you have gained will only enhance the organization’s long-term viability. If the buyer across the table is dismissive of your experiences, thoughts and knowledge, that is a true sign of a lack of symmetry between you and them, and should give you pause.
Don’t go into this venture alone.
We say this at Hunter Green Consulting Group, because we work with people who are great business innovators every day. After all, some of our clients have poured hearts, resources and souls into their cannabis businesses. They have gone without paychecks, job security and 401K or retirement plans to make the dream a reality. Most of our clients have built a business, but never sold one. In many of the deals we see, Hunter Green Consulting Group is negotiating stock options, equity stakes in the newly merged business, as well as bonus structures involving quarterly, semi-annual and annual payments as well as restricted stock units and additional equity shares down the road, if the business succeeds and meets certain metrics. How do you know whether the numbers presented to you, often in a somewhat convoluted manner, are really going to pan out? How can you determine what metric triggers another payment or additional shares being granted to you? How do you know that the business making you the offer is actually making money? The Performa that was provided shows a line graph with unlimited growth potential, but how do you know if what the company is doing now will sustain the kind of growth projected in the company’s materials devised to present a certain picture? All of these considerations should be running through your mind. If you do not have the institutional knowledge or know-how to make an accurate determination of these questions, we at Hunter Green Consulting Group do. We are versed not only as marijuana/cannabis industry experts, but we have been involved in corporate negotiations of complicated employment contracts, where deferred compensation, executive pay packages and golden parachutes are par for the course.
Know your goal: At the start.
What do you want to accomplish with this deal? Do you want to be part of the new organization in the day-to-day activities? Do you wish to be a central part of the new management team? Do you want to receive a check and simply ride off into the sunset? Or do you
want a cash out to immediately turn around and start another cannabis venture? Perhaps you want to move from processing marijuana to processing hemp? You need to have a clear picture of your individual goal(s) in mind prior to negotiating and entering into any agreement. If you do not have goals in mind, this may be a trap that you are unknowingly setting for yourself. You may ask how so? If your desire is to convert from processing marijuana/cannabis for your line of tinctures and face creams to processing hemp and producing a similar line of products using CBD, will this new venture violate the all encompassing non-compete clause that the acquiring body placed in the contract you signed? This cannot be overlooked, because if it is, you could be looking down the barrel of a gun in the form of large civil lawsuit that will be nearly impossible to defend if there is any argument that
new venture violates the non-compete clause you signed as part the deal reached to sell your marijuana/cannabis business.
Demand total transparency.
This may appear obvious, but when presented with a team of corporate attorneys and executives across the table, sometimes the details get lost or requests for information get minimized or forgotten. You have to determine what if any role you will be playing in the new organization. Are you going to have management responsibilities, be a Board of Directors member, or does the offer have you being a consultant on a limited or long-term basis? Do the metrics to initiate you earning additional money, compensation or stock options seem achievable? If you are going to be playing an integral role in the business, who will you be reporting to? Who will report to you? What does the management structure look like? What other companies is the acquiring entity currently looking at for opportunities? What is the acquiring companies mission statement? Has the company fulfilled that mission statement?
Make sure your accounting and books are up-to-date and are organized.
Just as you want to have full transparency, so too will the buyer. If you do not have accounting staff or an outside firm doing your books, get one. You
are in the business of compliance now. Hunter Green Consulting Group suggest using the same accountants we send clients to for an initial attestation to gain state licensure for the books once our client’s marijuana/cannabis/hemp businesses are opened and operating. Why? Because when a large player comes into the market and is vetting potential opportunities in the marketplace, our clients stand out as being legitimate business opportunities. In every acquisition, there is a discovery period. It is much the same as the discovery period when one is a party in a lawsuit. Both sides have to turn documents over so that the other side’s team can review, question and ascertain what is really going on. The biggest red flag Hunter Green Consulting Group has found in the process of M & A discovery is when the other side cannot produce up-to-date, clear records in its accounting procedures. This lack of having books in order also sets one up for potential audits from government agencies, which can be deadly to a business.
Be a team player, unless you sell your business outright.
Obviously, if you are in the marijuana/cannabis/hemp industry, you are a self-starter with an entrepreneurial spirit. You have built your business up, made sacrifices to maintain your business and you do not want anyone to come in and take the blood, sweat and tears that you have invested away. Realize that if as part of the acquisition deal made with the company buying your business, you are asked to stay on for your institutional or market expertise, you will be taking a backseat in your new role. You can negotiate to play a key role in the new organization, but it will not solely be yours from here forward. Other key individuals in the organization may have a different take on how to vertically integrate in the marketplace or your advice about which market players should be acquired may not be followed. Scaling up and being a team player go hand- in-hand. Scalability in the marijuana/cannabis/hemp industry is the overarching trend in this industry today. To survive, you must be part of a larger team.
Treat others as you wish to be treated.
Although this sounds cliché, it is all too true. If you can understand the common motivations you share with the business looking to acquire you or the business you are looking at buying, this will be invaluable in the process. Why? This not only facilitates the ability to merge segments in the industry, but also promotes leveraging those strengths to become an even larger player in the industry.
Be critical: The first offer is not always the best offer.
In the marijuana/cannabis/hemp industry, capital is what keeps the bills paid. You know this. The question to really ask yourself is: do I want to partner with this person or group for the amount of money being offered? Some equity relationships are made in heaven, some are erected in hell. Looking down the road two to five years is imperative when making the call about whether you believe having someone as an equity partner in your venture is really worth it. Certain investors’ terms will simply be too prohibitive and some investors will want to much of a percentage or day-to-day say in decisions being made. Is the amount of money being offered today worth the risk of getting sued, getting non-stop harassing emails and phone calls at all hours of the day or being served with a restraining order really worth it?
Do not get lost in the mire of your proprietary knowledge.
If you did not know, the marijuana/cannabis/hemp industry reflects that most people believe they are the best “grower” or “processor” in the local industry. Given the amount of time and resources it takes to get one’s business to a place where you are speaking to an entity about acquiring your business, you are rightfully entitled to have pride in your accomplishments and your product(s). However, the industry, although still in its infancy, does not place huge emphasis on your special skill. The more critical valuation is in leveraging and valuing your business in the buyer’s portfolio. In other words, how is your facility, or model, or business plan or customer base going to enhance the buyer’s business structure? Stay focused on leveraging the symmetries of the two businesses, the mission of the unified business moving forward and stay away from your significant expertise in growing or processing or retailing.
Utilize your marketability.
In the current mergers and acquisitions marketplace for marijuana/cannabis/hemp operations, if you have multiple buyers looking at your business, use that to your advantage. Most times, when there are multiple offers extended to you for your business, you can utilize the lower offers to substantially increase the best offer. In other words, if you can create leverage to raise the purchase price, do it! Do not ignore this tool in negotiations.
Think outside the box.
Most often, true contenders in this industry do not put themselves out there as looking to acquire businesses. They do not run advertisements in the newspaper or place an add on FaceBook or send an Instagram message to their followers. The true contenders in the industry are found by professional firms who offer services in the industry, such as Hunter Green Consulting Group, through trade shows, and through family and friends who may know of individuals looking at getting into the industry, but lack the knowledge to start up a business. Do your research, know your market and stay involved in the industry events to ascertain who might be interested, have the capital and the grit to purchase to your business.
Solid business practices only enhance your ability to negotiate.
This has already been addressed in this list of tips, but it bears repeating. You must have a solid understanding of your business’s financials, performance metrics and market viability in order to negotiate the best deal possible. If you do not have these fundamentals, the other side will either look at these as deficiencies, see fractures in your business and walk away, or take advantage of your lack of institutional knowledge and offer you far less than what your business is worth. In either of these scenarios, you lose. Shady business deals made early on in order to get capital to keep the business going can also be an inhibitor long-term. Corporate documents are a must. You cannot present a contract written on a bar napkin to a buyer who has facilities in multiple states and wishes to acquire your marijuana/cannabis/hemp business. You absolutely must have all documents in order, presented in a pristine fashion, with books that are up-to-date and organized, as well as Pro Formas and up- to-date revenue projections to even begin negotiations in an earnest fashion.
Hunter Green Consulting Group can provide you with the tools to present your business in the best manner possible, so that you can obtain the best possible outcome. First impressions are lasting impressions.
Make an accurate and honest assessment of how much money you will
need out of the sale.
Do not be fooled by the number of stock or vested or unvested stocks or restricted stock units or deferred compensation amounts listed in the offer. These numbers can be enormous or at least present themselves as that. However, when the details line out, far more often than not, what Hunter Green Consulting Group finds is that these enormous numbers have all sorts of contingencies attached to them. What do we mean when we say this? Perhaps you are given an offer including 100,000 stock units now with a strike price of $1.00 and a cash pay-out of 3.5 million for your retail outlet. The 3.5 million dollar portion is the cash offer. You have three other equal equity partners that you started your provisioning center with, which means you will be entitled to $875,000.00 when the contract is signed by all parties. You also have 25,000 stock units at a strike price of $1.00. What you don’t know is if the company acquiring you will ever go public and if so, what is the initial offering price on the day the company goes public? Do you sell your 25,000 shares when the stock climbs from the 1.00 strike price to $6.00 the following week totaling $1,000,000.00 or do you prefer to wait and see? If you take the wait and see approach and sell when those 25,000 shares have climbed to $32.00 per share resulting in total sale earnings of $1,650,000.00 for you, what are the additional tax burdens? What is the stock price never climbed past the $6.00 mark and it is running stable at $2.02 per share, meaning you netted on your stock sale a total of $30,000.00 to add to your $875,000.00 for a grand total of $905,000.00. As this example illustrates, the margin between possible results can be widely different. Pay attention to what immediate gains you can realize without outside forces being in play and capitalize on those.
The bottom line for any business owner in the marijuana/cannabis/hemp industry today is that you are in the compliance business. The more transparency and good business practices you can implement now, the more marketable your business will become through the passage of time. Hunter Green Consulting Group can help you navigate the dynamic and exciting world of owning, operating and scaling or purchasing other marijuana/cannabis/hemp businesses in this marketplace. With know-how and the right tools, you can achieve more than you thought possible.