Five Things to Do If You’re Thinking of Selling Your Cannabis Business

Since Washington state started to legalize recreational cannabis, I’ve been advising entrepreneurs and established businesspeople who took a chance on this industry. After nearly 10 years, some owners see themselves facing a decision—set up another round of financing to expand to the next level, or put the company on the market and let someone else try their luck in the dynamic world of cannabis.

Coloring the background is the prospect of a publicly-traded company plopping down millions for enterprises that may have started in someone’s basement a decade ago. That’s not a pot pipe dream, given that Cannabis Business Executive (CBE) posts the stock prices of 50 cannabis-related corporations.

But a big payday, from a public company, or, more likely, from a private deal depends on many factors. Before you post that For Sale sign, consider doing these five things to set yourself up for a successful transition.

I. Figure out who owns your company and who can sell it

You’d be surprised at how many thriving businesses started with a mix of investors and partners, some of whom may have left the business but now want what they believe is their fair share of any sale.

Ideally, your business will have clear corporate records showing exactly what percentage of the enterprise each person or entity owns, like capitalization tables and stock registers.

Once you know that, if you’re running a corporation, check your shareholder agreement; if you’re in a limited liability partnership, look at your operating agreement. Each document should spell out under which circumstances a sale can occur. Some might require a supermajority of owners to consent to a sale, while in others, a simple majority can trigger it.

If these answers are not clear, they need to be resolved before you try to sell the entity. Figuring out who owns what, and what’s required for a sale to occur, may force some hard discussions with current partners (and people you thought were former partners!) that probably should have occurred years ago. But they are doable—and are essential to making the ownership situation clear for your potential sale.

II. Prep your financial paperwork

The cannabis industry is fascinating because it is growing out of a century of criminalization, which means many ventures started in secret with little incentive to keep strict records. Even today, federal regulations keep banks mostly on the sidelines, so cannabis deals are often cash transactions that too easily occur without paper receipts.

But if you want to sell your company, expect that the buyer will demand to see documentation of your revenue, expenses, assets and liabilities. Your books will need to be able to withstand an audit going back at least three years.

If your financial records are a shambles in a shoebox, don’t panic! A bookkeeper or accountant can help you rebuild them. They also can implement processes going forward that will keep your business’ finances properly recorded.

III. Check your leases and IP contracts

If your company depends on a lease for equipment or retail or wholesale property, your potential buyer will want to know the terms. If you’re about to get kicked out of your space for a more lucrative tenant, or you’re about to lose access to a critical piece of hardware, a buyer will find that out and change the nature—or existence—of a deal.

So, make sure you find out and document the status of your leases for these items.

I’ll go over this in more detail in a future article, but cannabis companies’ intellectual property rights need to be organized properly to maximize their value. Coca-Cola and McDonald’s have shown how important logos, trademarks and patents are to sugary sodas and hamburgers, but IP is even more important to cannabis companies. The reason? With the underlying product still criminalized in some states and at the federal level, IP licenses and goodwill are easier to buy and sell.

That means that before you put your company for sale, you need to make sure your intellectual property rights are documented and up-to-date. A lapsed or unregistered trademark isn’t worth very much, and you wouldn’t want to find that out at the deal table.

IV. Resolve any option agreement

Back when you started your enterprise, perhaps as you were gathering seed funds, you may have made deals like this: “You give me $10,000 now, and if recreational pot ever becomes legal in the United States, I’ll let you buy 20% of my company for another $100,000.”

Many cannabis firms entered agreements like that, given how speculative the industry was just a decade ago and still is today. Many states still limit licensed pot producers to state residents, so options like these are floating around the business.

These deals can severely complicate or completely scuttle the sale of your company, as a buyer doesn’t want to have to fight off someone claiming they have a right to an asset the buyer just purchased. So, before you sell your company, you’ll need to buy back those options.

V. Watch out for government pitfalls

If you’re reading “CBE”, you already know that marijuana laws and regulations vary from state to state, and they are often in flux. This goes far beyond whether the end consumer can light up a joint in public and not get arrested.

In some states, like Washington, only state residents qualify to hold an ownership interest in a cannabis license. Most states have criminal background check requirements, such that people with certain criminal histories cannot hold an ownership interest in the cannabis business. Also, some states limit a licensee’s ability to hold a license in other tiers.  So, businesses holding retailer licenses could not sell to people or entities holdings interests in producer, cultivator, processor or wholesaler licenses.

These rules pose significant obstacles to sales, so don’t waste time chasing a deal that can’t happen because the buyer, for example, won’t be eligible to be in the cannabis business in a particular state.

Competent advisors can help you structure your deal to accomplish the buyers’ and sellers’ goals within the myriad state regulations. They can also help you resolve any of the ownership, financial, intellectual property and options issues I’ve discussed before.

As you consider your next move in the cannabis industry, keep these issues in mind. Good luck!

Emily Harris Gant chairs the cannabis practice at the Seattle-based law firm Foster Garvey, where. She advises licensed producers, processors and retailers, along with those hoping to join the industry. She can be reached at Emily.Gant@Foster.com.

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