Acquiring a company can be a strategic move for businesses seeking growth, diversification or market expansion.
The process involves a series of steps, from identifying potential targets to negotiating terms and completing the transaction.
But in a highly regulated industry such as cannabis, acquiring a company can be tricky.
While the cannabis space has gained broad acceptance in recent years, marijuana is not legal in every state.
What to look for
Even in states where marijuana is legal, regulations aren’t all the same.
“If you fail to do your due diligence, you can have regulatory noise that can shift under you and tank your asset,” said Raj Glover, founder and CEO of High Tide, a Calgary, Alberta-based cannabis retailer that acquired high-end brand Queen of Bud in March.
High Tide, which has 170 brick-and-mortar stores in its portfolio, typically looks at acquisitions as a real estate play.
About 40% of the properties in the company’s portfolio have been acquired rather than built from the ground up.
Brands versus companies
Queen of Bud was the company’s first brand acquisition, which included all intellectual property, trademarks and other assets.
The price of the acquisition was 1 million Canadian dollars ($740,000), of which CA$100,000 will be paid in cash and the remainder in High Tide shares.
“I didn’t have to invest millions of dollars to set up facilities to grow or extract cannabis,” Grover said of acquiring the brand.
“We can take it to the licensed producers.”
Acquisition considerations
Grover said companies contemplating acquisitions should consider:
- Strategic rationale for acquiring a company.
- Whether a deal adds value to the bottom line.
- Regulatory landscape.
“Every brand you acquire should be accretive to your bottom line,” Grover said.
“In terms of valuations, we don’t care about historical data. We care about how the business is performing today.”
Portfolio building
In Grover’s case, Queen of Bud brings an established brand that supports High Tide’s brick-and-mortar portfolio.
Although Grover said he would consider acquiring other brands, he wants to focus on building the Queen of Bud brand before he does.
“I like to walk before I run,” he said.
Major marijuana acquisitions
Chicago-based marijuana multistate operator PharmaCann targets companies that are complementary to its business, said Greg Fodell, chief investment officer and head of corporate development.
The MSO looks for companies that can give it critical mass in a particular market, such as PharmaCann’s finalized acquisition of LivWell Enlightened Health in Colorado earlier this year.
Due diligence is critical, Fodell said: You want to make sure the target is current on its taxes and payments to vendors and that it has kept promises to the municipalities where it operates.
Background checks
Making sure everyone agrees to background checks and fingerprinting also is key.
If not, the acquisition could be delayed.
“Having a local lawyer is helpful because they know the municipality,” Fodell said.
“It’s impossible to know everything, so you have to make sure you properly structure contracts to account for things that come up post-acquisition.”
Growing the brand
Smaller multistate operators such as Colorado-based Native Roots Cannabis also look for opportunities to expand their businesses in the states where they operate.
Native Roots, which has a strong brand presence with 22 locations across Colorado, has a goal of growing to up to 30 stores in the state.
The company has specific criteria it considers before acquiring new retail locations.
An acquisition must add value to the Native Roots brand, but Native Roots also must be able to add value to the store, its budtenders and customers, said Buck Dutton, the company’s vice president of marketing.
Retail locations
Location is the most important factor Native Roots evaluates when considering an acquisition.
The company uses Google Maps to evaluate locations; if a rival cannabis retailer is nearby, it might not make sense for Native Roots to make an offer.
“The customer’s No. 1 reason for choosing a dispensary is the location,” Dutton said.
“It’s really about the convenience factor for our customer: How can we meet the customer where they are?”
Brand recognition
Native Roots also considers a potential acquisition target’s marketing and branding presence and whether it has a strong customer following or loyalty program.
The retailer wants to know how potential acquisitions handle promotions and day-to-day operations.
For now, Native Roots focuses solely on acquiring other retailers, although discussions about brand acquisitions pop up about every six months.
“We’ve talked loosely about acquiring brands, but we don’t have a strategy for it,” Dutton said.
“We have not changed our business model.”
Why acquisitions are available
Avis Bulbulyan, CEO of California-based cannabis consulting firm Siva Enterprises, said the first thing to identify is the criteria you’re looking for in an acquisition target.
It’s also important to know why the owners are selling the company.
“Everybody is going to have a reason why they’re selling it,” Bulbulyan said.
“If it’s distressed, you want to know why it’s distressed.”
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Acquisition investigation
Bulbulyan cautioned against “falling in love” with a company without understanding why and how it will contribute to your business’ bottom line.
It’s important not to let feelings influence the decision-making process.
“You want to treat it like an investigation,” Bulbulyan said.
“You don’t come up with a conclusion and investigate toward it. Go in with a blank slate.”
Red flags
While keeping an open mind is critical, there also are red flags to watch for.
Look for inconsistent information and be wary if there is only one point of contact.
Buyers should be able to talk to several people in the company who have different areas of expertise.
If you have just one point of contact, the company might be trying to control what information is divulged or hiding data that portrays it in an unfavorable light.
Also: Be skeptical of long-winded answers that don’t answer your questions.
“You want answers that get to the heart of your questions,” Bulbulyan said.
Flexible approach
As the cannabis industry continues to evolve, many entrepreneurs and investors are finding that navigating the market requires a flexible and adaptive approach.
Unlike more established industries, marijuana presents unique challenges and opportunities that demand careful consideration.
“In cannabis, there is no cookie-cutter approach,” Bulbulyan said.
“The assets are unique; the regulatory environment is unique.
“In cannabis, you have to go into it with an open mind.”
