By Dan Roda, J.D., LL.M.
Demand for medical and adult-use cannabis far exceeded expectations in 2020. The industry was declared to be essential, and from coast-to-coast revenue hit an all time high. In 2021, federal legalization of cannabis is inching closer to being a reality and an unprecedented level of capital is prepared to enter the industry. While reasonable minds could certainly debate the pros and cons of this impending influx of new cash, for many veteran operators, 2021 could be the optimal year to plan your exit.
One of the most popular ways to go public in the cannabis space is an SPAC (Special Purpose Acquisition Companies). Formed by investors or sponsors with market expertise, many SPACs or Blank Check Companies are focused on acquiring and consolidating producing assets in the cannabis sector. For the small business owner, selling a private company to an SPAC can deliver a faster IPO process and increase the selling price point than working with an investment bank.
So, with 2021 shaping up to be a SPAC-tacular year, here are a few key considerations for cannabis operators looking to position themselves for acquisition in 2021:
1 – Lock down your Intellectual Property
You’ve invested your time and passion into building a brand your customers know and trust. You owe it to yourself to protect your valuable brand identity with trademarks. While cannabis companies have sometimes experienced difficulty in obtaining federal trademark registration, it’s not impossible. State law protection may also be helpful, depending on your situation. Always check with your attorneys about what’s best for your company. There are steps you can take to maintain ownership in what you’ve built.
2 – Get your house in order (or at least the data room)
It’s important to have the corporate governance documents (formation documents and bylaws or operating agreements) for all of your entities readily accessible, along with the state or local cannabis licenses pertaining to each. Any prospective acquirer will need to identify how all assets are held – especially the licenses – and the individual people behind each license who have authority to approve a prospective transaction. Depending on the size of the deal, you may also be expected to have a financial statement audit performed by a CPA, but, in certain cases, an accountant’s compilation report or review of your company’s financials may suffice in lieu of a full-scope audit (consult your advisors to discuss the differences). All of these items should be maintained in a data room, ideally on a service such as DocSend or Dropbox, that can be shared with prospective acquirers with the click of a button.
3 – Take it to the bank
If someone is purchasing your business, they’re generally going to base the offer on a few key factors, like your revenue and cash flow. In order for someone to be willing to pay you a multiple of your revenue in exchange for your business, they need to be able to validate that revenue. It’s going to be hard for anyone to audit and validate things – whether that someone is your accountant or your prospective purchase – if you’re still operating largely in cash. Besides, it’s 2021 and everyone knows the majority of the cannabis industry is banked. If you’re in the minority, you’re not just making yourself more difficult to work with – you look suspicious. Don’t stand out for all the wrong reasons. Get your money in the bank, and get that stable revenue down on paper.
4 – Future proof your tech
The 2020 pandemic catalyzed a seismic shift in the way retail consumers expect to be able to do business. The cannabis industry is no exception. Changes in federal banking laws will open up access to leading-edge financial solutions. When that happens, there will be nothing standing between your ability to provide the true omni channel brand experience your consumers desire. But, there will be nothing standing in anyone else’s way either, so you’ll want to be ready or risk falling behind.
SPACs are having their moment in the cannabis industry. This is great news for companies looking to exit in 2021. Interest in SPACs and IPOs confirm that there is an increase in investment capital looking to find its way into cannabis. In limited license areas, the result could be a competitive market for cannabis M&A the likes of which we’ve never seen.