When's the Right Time to Sell Your Cannabis Company?
Five questions to ask yourself before taking the M&A plunge.
Beer giant Constellation Brands flipped lids last month when it announced a $4 billion investment into pot company Canopy Growth Corporation. This was one of the largest of a series of recent mergers and acquisitions in the cannabis industry that have many entrepreneurs seeing green.
"Right now, the Canadian companies are doing the majority of the M & As," says Dena Jalbert, Founder and CEO of Align Business Advisory Services in Orlando. "A lot of this activity is taking place in what I call the industry fringe businesses -- products like vaporizers, lights, software, and financial services. As regulation lightens across the country, however, Jalbert says, "I think you're going to see more of it happening with plant touching businesses."
Are you ready to sell or merge? Better ask yourself these questions first.
Would You Have a Beer Together?
Jalbert recommends doing the "age-old likability test." When meeting with potential partners, ask yourself, "Would I have a beer with this person?" You have to have a synergy because "it's a marriage," she says. Ask yourself if you feel good about these people when you walk into a room with them.
She tells the story of having a client who went with the highest offer, despite not liking the buyer. She tried to talk him out of it but he was insistent. The deal went through, but within months he clashed with his new bosses, who decided to let him go. "He went from owning his own business to six months later he was out of a job," she says.
Do You Share a Vision?
"When you start your own business, you know what it is and what you want it to be," says Jalbert. "It's your baby." But she warns that whomever is acquiring you "wants to help take your baby and grow it into an adult."
Seventy percent of all M&As fail because companies just focus on just the asset. They want the widget, but that doesn't work because companies are more than just widgets, they're people.
"If you feel like that's all they're chasing, that's a red flag," says Jalbert. Other warning signs: If you aren't given an opportunity to meet all the leadership. "You should be able to have access and have open conversations with leadership," Jalbert says. You should also "be able to articulate freely how you fit into the greater picture." If it's a one-way street, then that's a potential collision.
Is Your House In Order?
Make sure you're really prepared to let a potential buyer look closely at your books. Jalbert says you will feel entirely exposed. They will ask you everything under the sun about your company. Know this might be the hardest thing you will ever do.
"When someone is doing due diligence on your company, it's uncomfortable. I equate it to a colonoscopy," says Cam Battley, Chief Finance Officer of Aurora Cannabis Inc.
Do You Have Access to Financial and Legal Experts?
"Don't do this on your own," warns Jalbert. You need to find attorneys and CPAs who really understand the business. Jalbert says she was once involved in a deal in which a client brought a personal injury lawyer with him to negotiate a contract. "Find an attorney who not only knows cannabis but understands mergers and acquisitions," Jalbert says. Not all firms specialize in both -- so do your research. came with little to no information.
Same goes for financial assistance. No matter how much a whiz you are with numbers, cannabis is a whole different animal. Taxes, in particular, are very complicated -- employer and income -- depending on what state you're in, and so are the laws and regulations around cannabis."
Is The Timing Right?
When it comes to successful M&A deals, timing is everything. Jalbert breaks it down into two factors: macroeconomic timing and business performance timing.
The macroeconomics of the cannabis industry are definitely in your favor. "Cannabis has nowhere to go but up," says Jalbert. Still, you should do your own research and work with consultants like her company to really understand the opportunities in the space.
As far as business performance timing, you want to make sure that someone "you've identified as a good partner has just done something that now makes your merger even more synergistic. For example, they acquire a new big client or they've gained a foothold somewhere that they didn't have six months ago. You have to know what opportunity looks like so that you can seize it when it jumps up," Jalbert says.
As far as your own timing, always sell when you're on the up. Says Jalbert, "You'll know the timing is right when business is going really well and you're just feeling strong about it. You've got that momentum"