2019 The Year Of Mergers And Acquisitions Of Cannabis

2019-The-Year-Of-Mergers-And-Acquisitions-Of-Cannabis

2019 The Year Of Mergers And Acquisitions Of Cannabis

A lot of Cannabis Mergers & Acquisitions take place in Los Angeles, San Francisco, Seattle and Portland offices. Over the years, it’s become pretty evident that in robustly regulated cannabis states, the secondary market for buying and selling businesses really peaks (after initial legalization) as local and state governments finally begin to settle their local control entitlement processes, and once the state rules governing cannabis businesses are less volatile. In California specifically, cannabis business attorneys have worked on a good amount of cannabis Mergers & Acquisition deals since the implementation of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)– especially in Los Angeles, Long Beach, Santa Ana, Santa Barbara, San Diego, San Francisco, the Emerald Triangle, and Oakland.

2019-The-Year-Of-Mergers-And-Acquisitions-Of-Cannabis-1

Below is an outline as to why a massive uptick in Mergers & Acquisition is happening for Cannabis Seeds businesses.

1. Limited number of licensed businesses

Securing a cannabis license in any state is not your regular walk in the park. Apart from the federal illegality of cannabis, their licensees not only have to deal with the shifting state regulatory landscape, but they must also constantly navigate local authority from city to city and county to county. Strict local and state requirements for licenses with respect to their location, daily operations, finances, owners, financial interest holders, true parties of interest, and their employees. Most states in the east coast face huge amounts for activation charges, as well as complicated process on limited number of licenses to be issued. The barriers to licensing are very low on the state level, the majority of cities and counties still ban commercial cannabis activity.

All of these human, political and regulatory factors have had one practical effect on industry, just by virtue of holding a license, your cannabis business holds inherent value to strategic and financial buyers.

2. Survival plan

Despite the process of getting a cannabis license is not an easy task, your entity now faces the far greater challenge of securing revenues and turning profits. Many licensees underestimate the licensing part, and they truly believe that cannabis will just sell itself with no strategic thinking or business process implementation. Sometimes, licensed businesses go belly up before operations really commence due to lack of business knowledge or no proper allocation of finances.

At this stage many license holders are looking to wrap everything up to avoid these stressful times. Looking at the market, they may find buyers willing to pay hundreds of thousands or even millions for their newly-minted cannabis businesses that’s slowly becoming distressed. Whereas on the other hand some might look for like minded people and conclude on some sort of percentage, this will help them increase their cannabis portfolio and survive this startup phase.

3. Growth plan

After managing to survive the start-up phase, cannabis businesses should start evaluating themselves against their competitors, thinking about ways to increase their market share. At this stage, businesses may begin thinking about acquiring a competitor or an entity that can add to a vertical integrated structure, improve supply chain, add brand portfolio, ultimately expanding the geographical reach of the business and brand. Purchasing an operational entity would help increase revenue quicker. With operations going well there is major chance of an acquisition to take place. With a larger corporate player entering there is a likely chance of mergers, smaller brands would like themselves to be linked for liquidity.

4. Exit/Liquidation plan

The holy grail of most entrepreneurs is an “EXIT.”  The basic formula is: Create it, build it, grow it, capitalize on it, rinse and repeat.  It’s no different in the cannabis industry. The goal is to sell the business off to a larger corporate player. Many licensed cannabis businesses will likely go through some kind of Mergers & Acquisition transaction in the next year or two. Because of the clear race to the bottom for cannabis on pricing, we have no doubt that bigger companies will quickly start to eat up distressed cannabis operators.

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