Among the first considerations when you're looking at potential acquisition targets in the cannabis industry is regulatory approval.
Jamil Taylor, COO of The Village Brands, says regulatory approval is very challenging. Medical or adult use licenses are issued through government approval and through a licensing process. There’s typically an annual fee as well as a deadline you must hit to be operational once your license is awarded.
Because of that, one of the challenges when looking at buying a cannabis business that's either pre-revenue or has not been up and operational, is the pre-approval extension process — where is that business or company at in their life cycle of building their operations out? Additionally, if a business has to change its location, there has to be consideration for the timing of that, factoring in going back to the government regulatory body and getting an extension on the process.
Real estate also has to be considered because typically if you have a facility or a cultivation or processing site, there’s often real estate attached to it. That means you are negotiating the LOI for real estate and possibly an LOI for the business.
“Those are some things that I look at initially to make sure that we're following the path to make sure we can actually do the deal,” Taylor says. “And then once the deal is done, we have enough time to build out operations and potentially still be able to be compliant with the regulatory body.”
Kevin Slaughter, a partner at Levenfeld Pearlstein, says another regulatory component to keep in mind as you enter into an LOI is that all these states have some change of control feature in these licenses. So if you're looking at a target, you have to keep in mind the disclosure requirements, the ownership requirements, and depending on the threshold that the particular state is using to measure a significant interest — for example, in Illinois, it's 1 percent; some states it's more than that — you have to look at your cap table for your investors and may have to look into multiple entities. And administratively, if you do trigger one of those disclosure requirements, not only the key management team but also some of your investors may be subject to disclosure requirements that may include fingerprinting.
Slaughter says in the pre-approval process, when an entity is awarded the license, there's a time period that they have to either hit milestones or become operational. When the company is at the end of that lifeline, he says you need to pay close attention to what's the procedure to get an extension. And in that process there are softer issues to consider. For instance, what's the political climate? Is the commission likely to do this? Have the principals of your target angered the commission for any particular reason? Is it hanging on by a thread?
“So some of these things are your typical, everyday blocking and tackling,” Slaughter says. “And it requires an extra layer of investigation, if you will.”
Taylor adds that in some of these states, you typically cannot sell your license within a certain time frame. So sometimes they want you to hold on to these licenses and operate and do what you said you were going to do in your application for a minimum period — sometimes it's two years, a year, three years or even five years. And even if you were to purchase the business within that time frame, there still has to be blocking and tackling with the agreement to make sure that original entity still has that license in hand.
“So those are some things you have to work out with your attorneys and make sure that they're crossing the ‘T’s and dotting the ‘I’s,” Taylor says.
Thomas Vance, director at ORBA, led the conversation with Taylor and Slaughter at the Chicago Smart Business Dealmakers Conference where they discussed the unique considerations that need to be made when buying businesses in the cannabis industry. Hit play on the video above to catch the full conversation.
