3 OWNERSHIP RESTRICTIONS

For the buyer, be sure that the business is one that you qualify to own. A surprising number of buyers do not know who qualifies to own a licensed cannabis business in the state they are looking to buy. For the seller, if the buyer must take certain actions before qualifying as an owner, be sure that you can live with the expected delays. In Colorado, for example, it takes three to six months for out of state residents to qualify to own a licensed cannabis business.

TOP 10 LIST

MERGERS ANDACQUISITIONS

McAllister Garfield, P.C.Cannabis Business Counsel

Mergers and acquisitions, typically known as “M&A” is no simple matter for any business. It’s even more complicated for licensed cannabis businesses and ancillary cannabis businesses. If you are looking to buy or sell a licensed cannabis business or an ancillary business, consider the following issues:

1 TERM SHEET/LETTER OF INTENT

Many prospective buyers and sellers are adamant that any prospective M&A deal have a term sheet or letter of intent, without considering whether one is needed or advisable. In almost all instances, a non-binding term sheet or letter of intent is preferable. A binding term sheet or letter of intent is quite problematic as the parties have now agreed to agree on an agreement, and if there is a dispute how will a court interpret such a document? Best practice is usually the only binding provisions are exclusivity and confidentiality.

2 DUE DILIGENCE

Perhaps nothing is more important in an M&A transaction than due diligence, whether it’s done by the parties (especially the buyer), the lawyers, or someone else. A buyer needs to know what he’s buying, and a seller needs to know that his buyer can and will close. Whether due diligence is done before or after the documents are signed, make sure it’s done correctly.

4 ASSET PURCHASE OR ENTITY PURCHASE

Is this an asset sale (for example, just the license and marijuana inventory), or will this be a purchase of the entire company, including its liabilities? Each has its costs and benefits.

5 ESCROW/NON-REFUNDABLE DEPOSITS

Will the seller require an initial deposit with an escrow agent or a non-refundable deposit? Many sellers in distress will refuse to sell without a non-refundable deposit. Be wary of buyers or sellers who demand that their attorneys hold the deposit in the attorney’s trust account. The attorney represents one side and one side only, and if there is a dispute, the attorney might be ethically bound to take the side of the client, regardless of what the escrow agreement says.

6 VALUATION

How is the company valued? Typically, licensed cannabis businesses are sold based on a multiple of revenues, rather than profits. In many states, an earn-out provision is illegal for licensed cannabis businesses, so many parties agree to seller-carry financing if the buyer is reluctant to pay full price at closing.

7 REPRESENTATIONS AND WARRANTIES

What “reps and warranties” will the parties agree to? The reps and warranties are each side’s statement that facts about the transaction are correct, for example, that the seller owns what he says he owns. Typically, sellers want as few reps and warranties as possible, buyers want more, and this give and take can affect the purchase price. Breaches of reps and warranties can lead to post-closing litigation, so be sure the reps and warranties are correct and exceptions are properly noted in schedules to the agreement.

9 POST-CLOSING ISSUES

No party to an M&A transaction wants problems after closing, but they do occur. Make sure that the documents account for these issues. The sale might be “as-is,” or perhaps the seller must return part of the purchase price if inventory is lower than what was bargained for. Most M&A agreements require each party to indemnify the other for any losses due to a breach of the agreement discovered post-closing. These are often heavily negotiated.

8 CONDITIONS TO CLOSING

Every M&A deal has conditions to closing, such as obtaining the approval of governmental authorities or seller’s obligation to repair a cultivation facility. Each side needs to ensure that the other has performed its obligations before closing will occur.

10 BOILERPLATE IS NOT BOILERPLATE

Every agreement has what is known as “boilerplate.” These are the miscellaneous provisions typically found at the end of agreements, such as which state’s law applies, whether the agreement can be assigned, whether the agreement must be litigated in court or to an arbitrator, etc. There is no legal concept known as “boilerplate.” The miscellaneous provisions are sometimes negotiated just as hard as the purchase price. Be sure that you understand these provisions as much as the rest of the agreement. Telling your attorney that you want to be “protected” won’t cut it.

720-722-0048 Or 866-4-420-law • 501 S. Cherry Street Suite 480 Denver, Co 80246 • www.mcallistergarfield.com