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If An Exit Strategy Is Your Ultimate Objective, Try Doing This

What to consider before selling your cannabis company.

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Opinions expressed by Entrepreneur contributors are their own.

The opportunities for exit strategies in the cannabis industry are bountiful, given all the recent mergers and consolidations.

Still, there are essential steps you should take before you launch with plans to sell, especially in a highly-regulated industry like cannabis.

Related: Why Your Cannabis Business Needs an Exit Strategy Even Before You Enter the Marketplace

Start with pre-due diligence

The best time to start planning an exit? When you start your business. You want to position your company and package your story to impress potential buyers with a strong leadership team and the ability to create a profitable business and strong returns.

Putting a pre-due diligence packet together at the get-go maximizes your company's value and sets the roadmap to success. What's more, having a business plan demonstrates you're thinking ahead and knowing your numbers and opportunities in the marketplace.

The amount of time and work you put into a pre-due diligence package will make selling your business less overwhelming when the time comes. Planning is a big plus when considering an exit strategy.

Make a list

There is no standard due diligence list, but potential buyers will require it to assess your company intelligently. The list should include corporate documents, bylaws, retirement agreements, debt, equity, and balance sheet right off the bat—three years of audited financial statements, tax returns, daily, weekly, monthly reports, and a list of assets you are selling.

You'll need to disclose all your insurance policies, seed-to-sell records, inventory, and microbial test results. What kind of binding contracts do you have? Is your lease transferable? Confirm the landlord knows you are in a federally illegal business.

An employee organization chart is also needed, so the buyer understands who does what and to key in on specific people they might want to retain.

Ask yourself: Would acquisitions make your company more appealing for an exit?

You don't want to have too many moving parts, but you are workable if you can roll up multiple companies and have one consolidated set of books.

Is a Cultivation, Dispensary, or Ancillary Business Better Than The Other For A Successful Exit Strategy?

Ancillaries are appealing, assuming they are not plant-touching, because they have an opportunity to go into public companies when they get to a higher valuation. And they're not subject to 280E, which is a big deal when looking at this industry.

Cultivation has some accounting advantages. But, ancillary has the most chance of capturing a wider net of buyers or investors because of fewer restrictions.

Would You Buy Your Company?

Go through all your operations, SOPS, clean it up, make sure everything is fine, prioritize your problem areas and get them taken care of immediately. It's also crucial to leave egos in the trunk to assess all areas of your company. Ask the tricky question -would YOU buy this company?

Know your company's worth, and don't overvalue the company because you think it's worth it. Keep your emotional attachment in check. Make sure you have a way to justify your asking price and that you're in the ballpark of other businesses in the same industry.

Which Exit Strategy Is Best For You?

To answer this question, first, you must think about where you will market your business for sale. Is it through a broker? Your network? How are you going to get the message out there?

You also have to be concerned with telling your employees of pending plans because when they hear rumors of a sale, they will get very nervous about job security.

There are two reasons a buyer is looking to buy a business. It's to scale or to optimize their existing business. Look for multiple buyers to give you more leverage.

Selling to a public company seems very attractive, but in the United States, it can be more difficult because they are not allowed to be plant-touching if they are trading on the NASDAQ. And selling to a public company is a heavy lift that requires multiple years of audited financial reports and specific accounting methods.

Another opportunity is a reverse merger, which is when a company is trading on an exchange, and you reverse-merge by acquiring control of that company. It's a faster process and less money than going the traditional route of an IPO, which is another option.

There is also a special purpose vehicle (SPV) when a company sets up a separate legal entity to isolate the parent company from risk when purchasing another company.

So, those are some of the avenues you have to sell to an existing operator, a public company, a reverse merger, or a special purpose vehicle.

The Transfer Of Business Ownership Can Be Tricky

Hire legal counsel experienced in cannabis mergers and acquisitions, not your local divorce attorney. You're dead in the water if the business license doesn't transfer ownership to the buyer (which can happen) because of inadequate legal representation. It would be best if you had someone who understands the ins and outs of the rules and regulations.

What Are The Steps Needed To Close A Deal?

Once you identify a potential buyer, there's a non-disclosure agreement (NDA )where both parties agree to negotiate confidentially for an initial layer of protection.

Next, a Letter Of Intent(LOI) from the buyer with terms to purchase the business comes into play. An LOI takes the company off the market while discussions are underway to give both parties time to negotiate. There are two elements of an LOI, the price you're paying and the terms offered.

Once you get that finished and move forward, it will be either an asset purchase agreement or a stock purchase agreement.

For an asset purchase agreement, the buyer strictly buys the assets pointed out in the contract and leaves the liabilities behind for the seller to deal with it.

For example, you have $100,000 owed to ABC Company that's not part of the deal because you, as the seller, hadn't paid it off, that would be removed from the purchase agreement because it is not the buyer's liability.

The other way is to have a stock purchase, which means the buyer has all the current and contingency liabilities of the entity.

So that's the two purchase contracts, it's either an asset purchase or stock purchase agreement, and then from there, you move into the closing.

This is where it gets interesting because there are many moving parts for a closing. It's crucial to take the required steps when you form the company that will allow you to sell ownership down the road. Be sure you don't get ABCD steps out of order to ensure no hiccups with the change of ownership.

The biggest challenge comes when the deal is handed over and begins the integration process. A smooth transition is key to a successful merger and acquisition. What does this mean?

Getting the team you acquired into buying into your way is a challenge. As the buyer, you may come up against opposing philosophies or different management styles and employees who have been there 5, 6, or 7 years and don't want to conform to new rules. You may promise they'll be happier and make more money. Whatever it may be, seamless and harmonious integration is absolutely the key to success.

Special thanks to co-author Terry Buffalo, former CEO/CFO of The American Cannabis Company, a cannabis consulting firm he led for over six years until he established his firm, The Buffalo Cannabis Advisors.