By Julie Herzog and Mike Goral
The cannabis M&A market was on fire in 2021, and rising hopes for federal legalization and the potential passage of the SAFE Banking Act will stoke further acceleration in 2022. As a result, cannabis entrepreneurs have visions of dollar signs dancing in their eyes. As an M&A attorney and cannabis accountant with several decades of combined experience, we can tell you that those who have prepared for legalization will have a nice, profitable exit. Those who aren’t will get crushed.
Despite being great at cultivation, production, extraction or brand-building, many cannabis business owners are somewhat “green” when it comes to the nuts and bolts of preparing a multi-million dollar business for an exit. In fact, some don’t even know what M&A stands for! (It’s mergers and acquisitions, by the way.)
Why is that? Well, in other industries, someone with an MBA might build a business for many years before it ever hits $5-10 million dollars in annual sales. But in cannabis, it’s not uncommon for an unseasoned entrepreneur’s company to rocket from zero to $10 million in its very first year of operation. And what a less-experienced business owner doesn’t always know is that those types of sales numbers require a much higher level of attention to the legal and accounting details, particularly in the intensely regulation-ridden cannabis industry.
Instead, we regularly have clients come in and say, “I’m looking to sell, or I’ve already received a letter of intent. I know that my books are not so great, and I need you to clean things up so we can close by the end of the month.”
We go in there and find that their balance sheet doesn’t balance, they’ve been commingling their personal and business expenses, and their books and records aren’t accurate because they’re being kept on Excel spreadsheets by a relative who got an accounting degree 20 years ago—but isn’t the most competent. In addition, they didn’t consult with a lawyer when setting up the company, and as a result, their corporate structure isn’t properly set up. They’ve been cute with their licensing requirements and have owners in the company with handshake deals but who aren’t on the cap table, they don’t have signed agreements or contracts, and their intellectual property isn’t protected.
Unfortunately, it’s nearly impossible to get a company in that situation in order for a sale. No buyer wants to take on that level of risk, and the valuation will plummet as a result.
So what are the top five things that an M&A attorney and cannabis accountant want you to know about preparing for an exit? Read Julie Herzog and Mike Goral’s advice at MJBiz.com.
