As the cannabis industry matures, you are seeing many mergers and acquisitions…with big public companies and even the smaller operators.
Cannabis business licenses are being bought and sold every day, but the window for sellers to get a solid ROI is short because the supply of licenses is increasing dramatically.
In this episode, Jim will walk you through how to navigate this marketplace including:
- Why NOW is the time to transact
- Cannabis license buying tips
- Creating an LOI (Letter of Intent)
- Buyer due diligence tips
- Cannabis license selling considerations
- Additional licenses selling tips
If you are looking to sell your cannabis business or licenses, then please reach out to us today or call 800-674-9050.
Hey there and welcome again to our webinar. Today we are going to be talking about buying and selling cannabis business licenses. My name is Jim Breese, the chief marketing officer here at GreenGrowth CPAs and a little bit about us. So GreenGrowth CPAs is a cannabis only firm with hundreds of active clients across 12 legal States that have some type of cannabis businesses, whether that’s the medical market or the recreational market. Now, yes, we do tax preparation and things of that nature, but we also do audits, business valuations to help with M and a deals as well as compliance, all the financial compliance things to help you keep your license in good standing as well as the outsource CFO service where we help you create a smart plan for managing your finances day to day, month to month, quarter to quarter, year over year, as well as IPO readiness.
So if you’re thinking about going public in Canada, potentially in the States, we can help you with all the technical accounting and all the little nuances that come with that. Now we serve all the different verticals in the cannabis industry from testing, cultivation, distribution, manufacturing, retail, everything top to bottom in the cannabis industry. So we have a lot of experience with all these different clients working in all the different aspects in different States. We’ve seen it all from the small operator making $100,000 a year all the way to the large operations doing 50 to $100 million a year in revenue. So we have the ability to help you carve that path towards your success. Now, before we dive into the topic, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional, legal or tax advice.
And further, it does not give any personalized legal tax investment or any business advice in general. So without of the way, let’s review what we’ll cover in today’s presentation. So first I’m going to talk a little bit about the cannabis market context and the industry overall and why we’re actually talking about this and why this is a very special time in the cannabis industry. Then we’ll review things about buying a license, the steps and considerations when you’re doing that, as well as some deeper dive into buyer’s due diligence tips. And then we’ll talk about selling your license in steps and considerations building on that buying portion. And then we’ll talk about some additional licensing selling tips. So first, why are we even talking about this? Well, if you look at the current state of the cannabis industry and how we got here, right? So there was a rush of money that came in in 2015 to 2019 that was a very large period of capital investments and people wanted to take advantage of what we call this green rush.
Well, once you start to get in there, you realize there’s not really that big of a rush. There’s a lot of building blocks that need to be laid down first, and many cannabis businesses failed or they ran out of cash, essentially failing. If you have no money, you have no oxygen for the business. And many of these businesses is cannabis businesses are drowning in debt and they cannot continue to operate. They may have gotten all the way through, you know, licensing in some way, even got as far as licensing the whole build out, but they couldn’t even afford to operate. So bankruptcy is not available for cannabis businesses since it’s a federal protection and cannabis businesses are illegal under federal law. But there is this thing called receivership, which we’ll cover in our next webinar, which is one option for you as a cannabis business operator.
If you are one of these that are drowning in debt to untie yourself from many of your cannabis business obligations. Not all of them taxes will not be able to be dropped off in most cases. But receivership is a way to sell off your assets, including your licenses. So in an industry that’s got these ever-changing regulations, the deeper your pockets, the longer you can stick things out and straighten out your business so that you can go forward. But where we’re at today is that a lot of people overextended themselves, either with too much debt or they invested too heavily in too many markets and now they need to get rid of assets. But what you see is that many assets have depressed values. The supply of licenses is going to increase significantly for two factors. You have more licenses coming online and then you have people that are exiting the industry for a multitude of reasons and that supply is going up, which then depresses down the price of licenses.
There’s also spaces out there, real estate where some businesses haven’t paid rent in months, so you could potentially take over leases when you start to buy these licenses and buy entire business units. So this is a buyer’s paradise and we have a very small window as a seller to have a great opportunity here. So you’re seeing new market entrants come in, they want to buy licenses, you have to strike while the irons hot, while there’s still this hype and this excitement around the industry and before supply goes up too much in the number of licenses. Now what you saw a real-life example of this was that med men started to sell some of their licenses. What they did essentially was had a fire sale on their Arizona licenses and their Illinois licenses, some of them, which means potentially they can’t find cash anywhere else or maybe they want to, you know, take non-core assets that they don’t believe is going to be the best markets and focus and double down maybe their California or their New York operations.
At any rate they had like a 50 or $70 million sale for licenses. So it’s not just the small operators. You’re also seeing large operators take advantage of this small window of opportunity to sell licenses at their max value. So now that you understand a little bit about the market context and why we’re talking about this right now, let’s talk about buying a license, some steps and considerations. Now these steps are pretty much in the order you want to go, but things can be moved around as you progress down your buying path. So first and foremost you want to check local and state regulations because not all licenses can be bought and sold. So at the city level, certain cities do not allow license transfer. An example of this is West Hollywood. If you attempt to transfer a license, it becomes null and void, but there is a possible work around that.
I will get to later in this presentation. So if you see it’s all good at the city level, then you go up to your state licensing body and you say, all right, well, can I sell my licenses? How do I transfer licenses in California? This is called the BCC, the Bureau of cannabis control. In first and foremost, it’s important to understand that state licenses are not transferable or assignable. In other words, a state license in the state of California is not an asset that a business can just transfer in assigned to another buyer. Instead, the buyer must actually purchase the entity or company that holds the state license. For example, company X cannot buy company-wide state license. Instead, company X must buy company-wide. The end result is that company X is the owner of company Y, which holds that state license. Now, this is why having each license in its own entity is so important.
So once you do that, you’re going to make the transaction. You’re going to notify the BCC within 14 days. Now there’s essentially three phases to this process. The buyer will call company X, takes 80% of company Y with 20% of that remaining equity retained by one of the original owners. Then again, you submit that information to the BCC along with the required live scans and all the things that go along with that and you continue to operate your business while the BCC vets that buyer. Now phase three of this process is it after the BCC clears the new buyer, right? The new owner, the original owner will be free to transfer the remaining 20% interest to the buyer. Now upon transfer of that remaining 20% to the buyer, the original owner provides a sign written statement to the BCC confirming that they have transferred all of their interests.
You may say, how long does this take? There’s no hard timeline to when the BCC must complete phase three. It could take them two weeks or two months. Who knows to actually do that vetting of the buyers. So it’s going to take a long time. I’ll talk about this many times throughout the presentation. Don’t expect a quick sale. Now once you have gone through and saw all right, I can sell or transfer some type of license in some capacity in some way you need to double check with the local and state licensing bodies that there are no points against the license for any disciplinary action. Now typically these actions come in tears. In California, it’s in three tiers. Now tier one being the least severe, tier three being the most. Some examples of those things are tier one fees not being paid or not complying with any regulations.
The smaller ones or not confirming the age of your clients. Tier two is considered, you know, things like sale or delivery of cannabis to a motor vehicle or selling to minors. And then tier three this is the most harsh penalties or the most harsh level and these are things like working with non licensed cannabis businesses, you know, intermingling white market versus black market product or selling returned goods to new customers. Once you figured out how many points, if none, that’s better. If there are some, you know, you look at the severity and all the different nuances to how they got into that situation. If you want to go forward, the next step is going to be researching the legal entity that holds the license. Now again, I brought up earlier, we would suggest that you consider having each license in a different entity so you can keep those entities as clean as possible.
Don’t try to roll over an entity from a business previously that may have some issues or some baggage that you bring along with it. Now things you want to look into are making sure that the state filings are up to date with the secretary of state statement of information, all the things of that nature, making sure their fees are paid. Now also you want to ensure that there are no back debts or any prior obligations. Now you can look into services that will do this for you. There are many of them out there and you want to do this because you will potentially inherit these back that’s or prior obligations or all these issues. Now your deeper due diligence we’ll talk about in a moment is where you really, really go deep into this. But if you can find any public information about issues, that’s what you really want to do at this step.
Now once you’ve completed those, you want to do an initial financial dive into the operations and ensure that all the back taxes were filed accordingly and accurately. Now you want to make sure that, did they actually do two 80 E tax calculations? Did they take deductions that they weren’t supposed to take? Did they take things that they were supposed to take? Things of that nature. Now this is quite involved and could take some time and you will likely need to engage a cannabis-specific CPA or someone that’s very intimate with all the nuances to cannabis tax filings. Now this is where you’re going to have to probably sign some agreements with the seller. You know, they’re going to exchange some very intimate information about their business. So you’re pretty far along in the due diligence process at this point and you’re going to want to, you know, really peel back all of their tax filings.
Maybe they might share an income statement or a balance sheet with you as well at this time, and we’ll talk about that a little bit further in the buyer’s due diligence slide. Now, if you like what you see through these first four or five steps here, then what you’re going to want to do is create an LOI, so creating an LOI which is a letter of intent to purchase. You’re going to work with your lawyer to create this LOI and it’s essentially a quick high-level term sheet saying, all right, these are what the terms are of the deal. You know, barring that, we go through all of this due diligence and things work out fine or things look right now I’m going to hit on a few things you want to put into your LOI, but this is not a comprehensive list of all the terms.
So first and foremost, you want to put a purchase price on the business. Now this could be a range. This could be the a dollar amount specific. It’s really up to you how you want to phrases. Now in 99% of cases as a buyer, you want to include an earnout for your seller. What an earnout is, it refers to a pricing structure that in most MNA deals where the seller must earn part of the purchase price based on the performance of the business. Following the acquisition is this kind of aligning incentives and making things, you know, future base, not just, Hey, I brought it up to here. You know, if the business is great and you can see it’s catapult, it’s growth and there’s a lot of good things going on, maybe don’t take that earn out, but at least always ask for that. Now earn-outs are often employed when the buyers and sellers really disagreeing about the expected growth or future performance of the company that they’re buying.
Let’s just be clear here and we really Frank, this is a very common thing in the cannabis industry. Sellers really think their stuff is worth a lot of money when it actually isn’t. You know, this is just part of negotiating. I’ve made several videos on negotiating an M and a and things of that nature, so you can, you know, watch those videos and get a little bit deeper into that. But you know, you want to just essentially structure to say, Hey, if a business hits a certain sales figure, then it’ll pay out accordingly to that seller. Lots of different considerations there. But in your LOI include at least a purchase price or range. Then you want to talk about what type of consideration you’re going to take as a seller or give as a buyer for that purchase price. Now is it going to be a stock, right?
Is it a bigger company buying a smaller company up where you’re going to give that smaller company some stock in the large company? Is it going to be a cash deal? Is there going to be some financing? And we’ll go into this a little bit later about, you know, stock versus cash. You know, it could be a combination of stock and cash, but I would really say as a seller you want to get as much cash as possible. I’ll talk about that a little bit later. Now the next thing you want to include is closing conditions or certainty to close. Now what this does is spell out specifically what items need to be done to close things like agreements that need to be signed or reviewed due diligence on ABC or X, Y, Z appraisals, things of that nature so you know exactly what needs to be done to bring this deal to a close.
And then as a buyer, you may ask for what we call an exclusivity window if you can get it, do it. And what that says pretty much is that Hey, we get 45 days to make this happen. Don’t shop this deal around to anybody else. We had the first right of refusal to make this deal happen. You know, kind of pairing onto that exclusivity window is having a target close date. And what this does is makes everyone move a little bit faster. It can be 15 to 45 days after all closing considerations are met or whatever you think is good for you and the team and everyone involved in this. The next step after you created your LOI is doing that due diligence as a buyer. Now you’re going to start off with doing a deep dive on the financials, the people of the business, the agreements, the licenses in many other things.
Now you do this pretty much to prove the legitimacy of the business that you’re buying and the word of the people that said, Hey, this is like true and this is true, and that’s true and this is what it actually is going on. You want to make sure that that’s actually true. Okay? Now for taxes, if you do find anything fishing or simply just to protect yourself as a buyer from audits later down the road because we know that they are coming, this is a new industry. What you want to do is get an indemnification of tax liabilities for prior acts. So for example, if you get it audited for a past year before you own the business, that potential tax ramification will lie with the seller. You may not always get it, but you should at least ask for it. And to explain further on this deep dive with the financials, people’s agreements and all that.
Now I already covered a lot of due diligence items in our M and a due diligence video, so you can look that up. Just Google M and a due diligence for cannabis businesses. You’ll see our video up there. It’s got a nice orange bar, you can see the word due diligence on it, check that it goes through all the different items and why each item is important and what to look for, what are some red flags, orange flags, yellow flags, things of that nature. So really watch that video. It really pluses out the whole due diligence process, but additional items that you want to look at when you’re doing a license purchase for sure. And if I didn’t really cover them in that video, I want to spell them out explicitly. Right now you really want to do a background check on all of the owners right now.
Cannabis? Yes. It started with what we call the legacy players or ex-drug dealers. Now you want to make sure you’re not working with extremely shady people. Things you know. Have they had any major criminal charges? Is there anything fishy that comes up in their background? Have they been part of any kind of fraud cases? Are there any, you know, what’s going on with these people? You can do a formal background check, quick Google searches, things like that. Then you also want to look into the banking and merchant processing for the business. You know, go and interview the bank, see how the relationship is with the bank and the business called the merchant processor. Make sure there’s no issues on that end. Things you want to look for is the deposit frequency. Are they doing it once a month, once a week, twice a week, every two weeks?
What amount of the depositing, what are the terms for the banking arrangement? You know, are they getting charged one point for all their deposits up to a certain amount and then higher as it escalates for higher deposits? Is it 4.6 points? Two points? Find out what those terms are because you want to try to keep that banking relationship intact if you don’t already have one on your own. Now, one of the most important things for a retail business, if you’re buying a cannabis license, is to do what we call a trade area analysis. Now what you’re going to look at is the demographics of who make up that trade area and the amount of traffic, either car traffic and foot traffic is a lot of companies out there that can do this traffic analysis for you or that have the data that you can just, you know, buy or peel into and create that and just really look at some good statistics about what is your potential grab and market share or potential market that you can grab at, right?
It’s called the total addressable market, TAM. Another one to build onto. This is a competitive analysis. You want to look at the other businesses in your area, the licensed businesses as well as the unlicensed businesses. You have to understand, no matter how many regulations and how many law enforcement officers, the black market still rules cannabis on a dollar for dollar compared to the regulated legal market. Now you also want to consider how many licenses are in the area and how many licenses are going to be coming up for the next two years, three years, one year, right? We call these licenses that are coming online and typically cities have a rollout plan or States have a rollout plan. You know, we’re going to be adding another hundred retail licenses, 25 delivery licenses, eight more manufacturing, 10 more distribution or whatever it’s going to be. You know, really look into that.
And once you find all the currently operational businesses, you want to do what we call window time and essentially sitting out in front of the business and count the number of patrons that go in and out of the this tells you, all right, they’re doing 35 transactions an hour or 75 transactions an hour or maybe 200 an hour. You want to go into each of those businesses and see what the setup is potentially. You might see, Hey they use this POS system or that or you know, you look at some of the things that are going on in the business to explain the anomalies in the window time data. So if you see one dispensary is putting a lot more people through the actual business per hour, then go inside, see what’s going on, see what the operation looks like compared to a shop that’s relatively the same size that does maybe half the amount of people.
Is it that they have bad, you know, Weedmaps reviews or is it that they have just better processes and you can kind of glean what those processes are so you can integrate them into your business once you buy them. Now, some key statistics when you’re looking at this competitive analysis would be population per dispensary. Now it’s like, all right, how many people are there per dispensary in this market? You want to do it at a one-mile radius, a three-mile radius, and the zip code of the business. This pretty much tells you how many people are being served by each dispensary in the area. And then lastly, you want to dig down into the brand relationships. Who are they working with? Do they own any brands? Are there going to be any relationships that you lose? Because there are, you know, it’s best friends and homies that work together and they get great deals because they’ve known each other in the industry for 10 years or five years or three years.
You really have to look into that because some of the numbers you may find in your financial due diligence, you say, wow, the cogs are really low for this top shelf, high-grade cannabis. Then you buy the business and the person that was selling that cannabis to the business says, Hey, I’m not giving you that deal. That was a sweetheart deal for Frank. I like Frank. I’ve been working with him for three years. I’m not going to do that. Same thing for you and a little bit more just peeling down into the terms of the deal. Is it Cod? Do you get 15 days, 30 days to pay things back? Things of that nature. Now this applies to, you know, all the different types of businesses. Great. Yeah. As a retail person, you may be looking at other things or a manufacturer. You’re not looking at, you know, foot traffic, but just consider and look at some of these things and how they can potentially apply to your business that you’re buying as a new cannabis business operator or as someone who’s expanding their portfolio.
Now that we’ve talked about buying, I want to talk about selling your license and additional steps and considerations. So again, first starting off with the local and state regulations with the city. Go ahead and see, Hey, does the city even allow me to sell my license? Right? And if it doesn’t like the West Hollywood example, then maybe you don’t want to open up in that city. So if you’re pre license and you don’t have a place and you’re just kind of in the beginning stages, maybe look at some of the local regulations. Say, all right, well if we intend to exit the industry in five to seven years, are the regulations good so that we can sell our license or sell our business later down the road. Now, you know, we already talked about the BCC. It’s all those three different phases. Just look into that for your particular state.
When you’re selling your license, are there any limitations or things that must be done before you saw your license? Now let’s expand the scope in the steps of selling your license. There’s a few things as a cannabis business operator that you want to really know. So you want to know why you are selling the license, how much you want for that license and you know, how did you get to that number? You really need to know how you got to that number, not just some pie in the sky. There has to be some neat, you know, under this whole thing. And then what you’re going to do with the proceeds. Cause it’s gonna dictate some of the deal terms, strategic buyers and things of that nature. So there are many wise to selling your cannabis business or you just want to focus on a specific vertical.
Maybe you have a cultivation and a retail space and you just want to get out of retail and you want to focus and triple down on cultivation. That’s one way. Or you just want to get out of medical and go only to recreational. So you’re selling off all your medical licenses. Are you exiting a state due to certain tax reasons? Maybe you’re like, wow, the state here is not very good for cannabis businesses. Let’s just go to another state or cut this arm off and focus on the other operations that we have. Or are you like med men and in need of cash and you want to drop some of your lower-performing assets? That could be it too. When you take that money or those proceeds to invest in your business in other ways, or do you just not want to be in the cannabis industry any longer?
All of these are valid. You just need to know your why and you want to know what you want and how much do you want in how you got there. You know, do you want eight point $5 million in cash and then another million dollars in stock because you’re looking to be acquired by a large, large operator. Maybe someone that’s public or someone that has, you know, very deep pockets Knudson understand how much you want in the reason for why that is a good price because the business that’s buying you is going to be doing due diligence and they’re going to check all of those reasons and it can’t be like, Oh, it’s a huge industry. And it’s growing rapidly and it’s a green rush. Trust me, licenses are not that big of a deal compared to they were two years ago and in four years it’s not gonna matter as much as States start to see how much tax revenue they can generate.
They’re going to open up the floodgates and the States in the cities are going to give out a lot of licenses and they’re gonna let the free market dictate who wins and who loses. Now after you figure out how much you want, you need to know what are you going to do with the proceeds from this sale. Now you’re pretty much are going to want to work with a CPA to determine the potential tax liability when you make this sale and you want to make sure that that actually influences the timing of when you sell your company or sell your asset or sell your license. For example, if you have a lot of profit in 2020 you may not want to sell your company, you know, in 2020 at all or at the end of the year because that may increase your tax liability for the year. So you may want to push it just you know, 10 days or two months out to January, 2021 assuming that you’re on a typical ordinary calendar year.
Now if you have an alternate calendar year and you end your business year on June 30th then you know, pay special attention to those dates. All about timing, all about tax planning, right? When you start to deal in the large numbers, the millions, the tens of millions, it can be a big deal and it can have huge implications for you. And you also want to know what are you going to do with that money when you get it, are you going to put it into a 10 31 exchange? Are you going to put it all into, you know, just a regular account or are you going to do some investments with it? It’s all very important and you just need to have at least a plan. You may not need to stick to it because things change, but at least be thoughtful about how you’re moving forward. Now, if you are in a good enough position where you know you’re planning an exit and you can really be thoughtful about this, try to work on the numbers of your business, right?
If you’re planning an exit, see how you can trim or pad the numbers of your business. Things like cutting unnecessary costs, ramping up or optimizing production so you can get more dollars per square foot out of your cultivation or more grams per square foot out of your cultivation. You know, things like minimizing waste in, you know, reducing shrink within your operation. Creating an offensive tax strategy where you’re not just thinking about taxes in April when it comes up. You being thoughtful every month about either, you know, planning for the obligation, reducing certain costs or increasing certain costs. You can offset things. Doing a cost segregation study, working with different tax codes to help you back in some indirect costs into cogs, things of that nature. Another thing you may want to do is implement an accounting and inventory software system. This will improve the value of your business and the value of your deal.
Once you get to that due diligence stage, the cheaper the due diligence is or the better the information they find around the business to prove that legitimacy of your business, the better things will be for you in the higher number you’re going to get later down the road. Now, once you’ve worked on the numbers of the business, you want to work on the operations of your business and the kind of setup of the business will say, so one term you may hear is a key man discount. Now when you’ll see this more often is when the business relies heavily on the contributions in any form of one or two key people in the business. Now, why that’s important? What if that person goes away, right? They get out of the exit the business or they die or they get hit by a truck, right? There’s this thing called key man insurance so you can look into that a little bit more.
But the way to, you know, mitigate that risk is to start documenting your business processes so that new owners can come and understand how to repeat your business success. You want to implement strong internal controls and documentation, which then helped make this due diligence audit easier and they can really see, all right, this is a replicable business model. We should buy this business because everything’s documented. The path to success is paved. It’s not, you know, blazing our own trail. And if you have a business that is tied to a person’s name that consider changing the name of the business and you know, it may even be a trademarked kind of infringement situation where it’s too close to another existing business. Maybe you are an edible company and it’s very close and you kind of played off the name of a very popular candy brand. For example, I saw one of these when I worked at an intellectual property law firm.
They were being given cease and desist letters. The, you know, candy company was harassing them a lot. They ended up having to change the name of the business. But if they had to do this in order to make a sale, it could have gone to a heavy discount in that purchase. So just be thoughtful about these kinds of things. And as a seller, one last thing you want to do is to perform due diligence on your buyers. Now you’re watching this video. Hundreds of people are going to watch this video. Thousands of people are going to watch this video. Everyone wants to be in the cannabis industry. It’s not a secret anymore. Everyone thinks there’s a lot of money in here and there is if you do things right, you know you have people like family offices, PE firms, private investors, angel investors, venture capital groups, you know, cannabis enthusiasts.
And yes, even some real business operators that maybe run a liquor distribution business or they may run a food distribution business, they want to get into cannabis distribution. What you want to do is separate those smart and good people, whoever those are from the tire kickers. You want to find who the true buyers are and the people you really want to work with. Things you want to look into are what deals have they done? Who are they representing? If they’re not representing themselves right? There may be agents out there going to buy cannabis businesses for family offices. You know, they may be buying it for their children or they may be buying it to get into alternative assets so they have some non-correlated assets to maybe the stock market or their core business, things of that nature. Find out who they’re representing and do due diligence on the people that they’re representing.
Also, find out why do they want to get into cannabis? This will help you in two ways. First, do they even understand the dynamics of the industry right now? How we got here, as well as it will also dictate how you tee up the deal to them. If they say they really want to be cannabis business operators, they love the industry, then you play up certain aspects. If they’re looking for pure cash, financial arbitrage, then you play up the financials, you know what you have to pad and things you need to really put forward as these are the aspects of why this business is worth a lot of money. We’ve covered a lot of ground here. I just want to go over some additional license selling tips. So the first one here is if you’re selling your business, never pay for due diligence fees. You never ever want to take on that burden because it might be trying to scam you.
So for example, we had two cases this last year in the, one is going to be most important of this and it illustrates this example. So you see scam artist out there all the time. They do all these crazy things. But what happened is that, you know, a new client of ours reached out and told us a story about how a buyer reached out to them and said, Hey, we want to buy your business for $15 million. That big number, it gets the business seller all excited. They weren’t even really considering a serious sale, but they were like, okay, well we’ll entertain the offer now. This potential buyer said, Hey, we’ll buy it. You know, but you have to pay us $30,000 to do the due diligence fees and if everything checks out, smells right, Oh, we’ll buy the business. Now what these scams are essentially is just a business that’s going to go ahead and take that $30,000 in cash and due diligence fees peel into your business.
They will never buy the business. They were never intending to buy the business. They were just looking to get that $30,000 off of you. So throughout the due diligence process, make sure each side of the deal is paying for their own due diligence fees. It’s putting some skin in the game for both sides of the deal in helping to move things along in aligning incentives. Now the next thing is as a seller, avoid stock purchases. You know, I talked about this earlier. What type of consideration are you looking for? Cash, financing, stock sale, things of that nature. I would say really only take cash. So what you’ll see sometimes is a company will reach out to you, they’ll make a thoughtful offer, it’s the right number, but they’re going to say, Hey, we’ll purchase your company for $5 million. But that consideration is going to be stock of our company, our big parent company.
Now, unless it’s highly reputable. But even then you’re seeing these large cannabis companies, the public ones, you know, even the large private companies, their valuations are getting slaughtered and who knows if they’re going to be around in 12 to 18 months. It’s just too risky. Your money is not safe when you start to get into the stock market of cannabis businesses. It’s just getting crushed right now. So I would say as a seller, try to get most, if not all of the money from the sale in cash. You can potentially take some of that, you know, sale in stocks, you know, have some potential upside limit your downside. You know, just really look for cash. Cash is King in this industry and in every industry. Now the next point, expect these deals, these MNA deals to take six to 12 months, right? And it could be even longer depending on the taxes.
You know the implications from it. If you have to go through any kind of regulatory oversight, reviews, things of that nature, you just plan for these to be long. They don’t take 30 days, they don’t take just 60 days. They could take quite some time and if you have that thought process, then you’re not in a rush to sell. And when things take a while, you’re not getting too frustrated. But Hey, any M and a deal, there’s going to be frustration built-in. It’s par for the course now I brought up that you may run into ownership issues like in West Hollywood where you can’t transfer a license or it becomes void and null. So what you could do is enter into a management service agreement with the buyers. So you’ll say, Hey, the buyer has a management company and whereby all of the income and profits from the acquired dispensary or from the manage dispensary is ownership of the buyers management firm.
Essentially you are just designating that all the proceeds and benefits and income and you know the losses are assigned to that management company. Now you need to check with your legal team on this to make sure that everything is done according to local regulations and laws and things of that nature. But that is potentially a way around this licensed transfer in business sale issue is a management service agreement. Now the next point here for multi-license holders, I brought this up earlier and I want to reiterate this, break every license into its own legal entity. So if you’re at the beginning stages, every license that you get, if you’re not going to be, you know, a microbus license, if you’re going to go get a cultivation, a manufacturing, a distro, and a dispensary and a delivery, you know, make sure that each license is housed in its own entity in makes us MNA process so much easier to deal with.
You know, the buyers can do clean checks, you know the entities are fast, you can fracture and break apart your business easier as a seller and the buyers will pay a premium for those clean entities with a license. You know, you may run into an issue with your distribution company. You know, you may get into some excise tax issues and you want to sell off the distribution business or you want to sell off the dispensary that’s just kicking butt. Well, they’re not going to buy that in a whole kit. You know, with the distribution issue and the, you know, the dispensary. If you have that issue. So by housing that retail license and its own entity, you have the ability to sell that operation off in part and you know, not be impacted by the issues from your distribution business. If you’re going to be selling your business for more than $5 million, I would say even, you know, North of $3 million, you want to get audited financial statements by an independent CPA firm, audited financial statements, really move deals forward and create confidence on both sides of the deal.
What’s you’re going to notice is that when you get into the realm of M and a in the cannabis industry, you know there’s a lot, a lot of crappy deals out there, but when you get the stamp of a CPA firm that has audited financials, so many more doors open up, it’s kind of that stamp of approval CPA, you know, a national designation. It really helps give confidence again on both sides of that deal. So if you’re going to go for a larger sale, trying to get your financials audited before you go for that sale. So we’re in 2020 go get your 2019 or 2018 get both years fully audited so that you can move that deal along quicker. You get a higher number on that LOI from your buyer and your due diligence will move along much quicker. And lastly here, if you’re using an agent to sell your business, just be thoughtful and understand that you know, the commission percentages range from anywhere to six to 10% in.
Sometimes it can be even higher depending on the circumstances of the sale, especially if you’re doing a fire sale. And you need to offload it quickly and you’re really tapping into their network. It could mean know range all the way up to 15 or 20% you know that can be quite egregious but it all depends who has the leverage in the selling situation. And it also depends on how much the agent is selling your company for. In most cases the higher the sale of the business, the lower the percentage is going to be. But also if you have like a hurdle, you know, say you want to sell the business for $4.2 million and they get a higher price. If they get $5 million, that differential of 800 K maybe the agent gets a higher percentage of that differential compared to the base of the 4.2 million.
It’s all to you. And how you structure that deal. You can always say no to the agent, you don’t have to use agents. But in many cases, having someone who is familiar with the industry and you know kind of plugged into the M and a network can really help out and move that deal along quicker and get you access to higher quality buyers. And as well in a buyer situation you will likely pay some fees as well. So it’s not just all on the seller. Buyers may be paying fees as well. And that can again range from the two to 7% you know, sometimes at a six to 10% it all depends. It all depends. Every deal’s unique in its own right.
We’ve covered a lot of ground here talking about both sides of the deal, the buy and the selling. Now I just want to review a few key takeaways of buying and selling cannabis licenses. So before you apply for your own license and go and get one, consider looking at the resale market again. I told you at the beginning the supply of licenses increasing significantly and you have a lot of businesses that either want to exit, are failing, are struggling, you know, they want to get rid of their license. You don’t always have to go and do it yourself. Potentially look into buying a business that is in a very depressed state. Now the next point, keep each license in its own entity for smoother transactions down the road. If you’re going to get multiple licenses, you know, make sure you break each license into its own entity like its own LLC, its own S Corp, it’s own C Corp, work with your CPA to figure out what entity type is best for each license.
Next buyers should always ask for an earnout from the license sellers. Now you may not always get it, but you should always ask for it. Next due diligence is critical for buyers to knowing what they’re actually paying for. Don’t take any seller for their word. You want to make sure you have your team. Pay the money, pay the 25 to 75 K to do a full deep dive in. Audit the financials, audit the operations, you know, meet with all the key people in the business. Review all the licenses, review all these things, all the due diligence process wash, that video I did on M and a deals, the due diligence side of it. It’s the first part of all this MNA process. Watch that video. It’s a lot of good information to help you actually break apart. Peel back the layers of the onion so you know what you’re buying. And then lastly, if you cannot buy and sell your licenses, you know, then really consider entering into what we call a management service agreement where you designate all income and profits to, you know, the buyers management company. So you can still retain the ownership of the business, but you sign away all claims to income and profits of the business. So that’s a kind of a work around in those cities or States where it’s prohibited to transfer or sell licenses or businesses that are in the cannabis industry.
Now thank you for taking the time to learn about buying and selling cannabis licenses. I really appreciate you learning and listening with me here. And if you need help with selling your cannabis business license, and please reach out to GreenGrowth CPAs today by visiting our website at GreenGrowthCPA.com or give us a call at (800) 674-9050 we’d love to help you get the most for your license, help you through the process. It’s not easy to do when you’re doing it by yourself, but when you have an experienced team, we’ve helped sell three businesses that I think had probably between or nine licenses last year. Some of them had multiple verticals per business. We’ve been down this road. We kind of know what you’re going to be walking into. You’ve also helped to buy licenses for some of our clients that want to open up in other States. So if you need help with selling your license and please reach out to GreenGrowth CPAs by visiting our website at GreenGrowthcpas.com or give us a call at (800) 674-9050 have a great day and we’ll talk to you soon.
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