3 Ways a Company with MSO Aspirations Should Approach M&A

And the potential pitfalls to avoid.

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As multi-state cannabis operators (MSOs) have grown over the last few years, companies have achieved their scale through M&A activity. Due to the fragmented nature of state-by-state cannabis licensing brought about by federal illegality, M&A is one of the only ways to scale outside of the arduous process of applying for and winning licenses in each state where you want to operate.

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This state of nature has led to M&A's frenetic pace in the regulated cannabis industry since its creation. Not all M&A is equally effective, but some companies have thrived due to substantial acquisitions while others have paid dearly for their missteps.

Here we offer some tips on how a company with aspirations to be an MSO should approach its M&A activity and potential pitfalls to avoid.

Related: M&A Is Coming to Cannabis. And That's a Good Thing.

1. Focus on core markets and states, not the land grab

During the early days of the MSOs, most companies focused on the idea of the "land grab." There were splashy acquisitions left and right as the major operators on the map, focusing on eye-popping statistics like "total addressable market" based on their states' combined population.

Eventually, the excitement of the land grab wore off, and reality hit. Some operators found themselves with a collection of assets scattered across the United States instead of a unified operating company.

As cannabis operators build through M&A, it is crucial to set your sights on a collection of critical states and locations. This allows the company to focus on strategic markets with the potential for short- and long-term growth while allowing its operations team to execute a cohesive strategy.

2. Capture margins through vertical integration

One of the most genuinely unique aspects of operating a cannabis company is the potential for vertical integration. Vertical integration is typically unheard of in other industries and incredibly difficult to pull off successfully, but cannabis offers a clear path towards achieving it with the right M&A strategy.

This becomes especially crucial when considering the lack of interstate commerce, which does not allow cannabis to cross state lines. Even in a post-legalization environment, those walls will likely remain up and make it important for operations to capture value in the supply chain through vertical integration.

When developing an M&A strategy, it is essential to keep this in mind — acquiring vertically integrated licenses, while more expensive upfront, allows you to control your supply and recapture that value and then some over time. This can also be accomplished by purchasing disparate assets and combining them under a single operation, particularly if you are looking to acquire distressed or undervalued assets. Still, it is paramount to have a strong operations team to execute on the vision in this case.

3. Align with the target company

While this one may seem like a no-brainer, it is often one of the most overlooked aspects of M&A in the cannabis industry. The people who built a single-state operator know their market better than anyone, and it's essential to bring them into the fold along with the license and other assets being acquired. Therefore, relationships and alignment are crucial.

The best target companies are the ones that want to partner and become part of an experienced and scaled operator. Once you determine this is a part of the due diligence process, you're aided by existing relationships with the operator or other industry operators that know them.

When companies accomplish this, it solves the big issue of finding somebody to run that particular operation. And if existing management is capable of continuing to lead that market and willing to do so under the umbrella of a larger operator, that makes your life considerably more manageable.

Many other components factor into a sound acquisition strategy and they will continue to evolve as the cannabis market continues to mature. In the interim, though, the three buckets laid out in this column provide an excellent starting philosophy and allows companies to learn from what has already worked and what hasn't.


Joe Caltabiano

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Joe Caltabiano is a cannabis entrepreneur and co-founder of Cresco Labs, a Chicago-based multistate operator where he served as president until he resigned in March 2020. He previously was senior vice president of mortgage banking at Guaranteed Rate, a Chicago-based residential mortgage company.