United States: The Ins And Outs Of M&A In The Legal Cannabis Industry

Consolidation will accelerate with federal legalization

The combination of two or more businesses, whether by merger or acquisition, can present owners and managers with a new range of opportunities and threats. Nowhere is this truer than in the cannabis industry, where rapid growth and a complex patchwork of regulations combine to create a challenging business environment.

There are two major types of business combinations. An acquisition is the purchase of one business by another. This can take the form of either a stock purchase or an asset purchase. With the former, the buyer acquires the business entity, including all assets and liabilities. With the latter, the buyer chooses only those assets and liabilities that it wishes to purchase and leaves the rest with the seller.

A merger, on the other hand, involves a combination of two or more businesses. In some cases, one of the companies continues as the surviving entity. In other configurations, a new entity is created.

M&A Goals

Managers pursue business combinations, whether by merger or acquisition, for a number of reasons, including the following:

– Synergistic growth: Simply put, the product is expected to be larger than the sum of its component parts. This should not be the sole objective; by itself, it is not always in the best interests of the companies' owners.

– Consolidation and economies of scale: Sometimes, functions can be consolidated for a net cost savings. This is especially true of general and administrative expenses, such as human resources, research and development, insurance and accounting.

– Integration: This can be for either strategic or financial gain. Horizontal integration involves M&A across the same level of production, such as grow facilities, testing labs or extraction facilities. This is often done to eliminate competitors or to realize the economies of scale described above. Vertical integration involves M&A across different levels of production, such as a grow facility with an extraction facility, etc. This is often done in order to consolidate separate levels of profit centers.

Cannabis categories

All of these drivers and more apply to the cannabis industry, and we can expect to see activity in a number of segments.

– Cultivation, storage and processing: It may come as a surprise to anyone who has speculated in commodities to learn that the commodities futures markets were originally conceived as a mechanism to reduce risk to their original participants, the farmer-producers. All crops are risky, and cultivators can suffer from either bad climate or soil conditions, which reduce their saleable output, or good conditions, which increase competitive supply. Unfortunately, so long as marijuana remains illegal under federal law, cannabis growers will not be able to lock in prices for their crops by means of futures sales. Considering also the ease with which home growers can add to supply from their backyards or spare rooms, cultivation may be the riskiest stage of the industry. Just as other types of agriculture have fallen victim to Big Agra, the cannabis cultivation business will likely be subject to consolidation, and the process will only accelerate with federal legalization.

– Extraction and testing: Extraction facilities and testing labs have seen rapid technological advancements in recent years, and owners of businesses in both sectors complain of the same thing — a lack of continuous supply of product. Without an increase in cultivation, this idle capital will be also be subject to consolidation.

– Retail: Some of the larger players in the cannabis space such as MedMen have expanded largely through acquisitions, particularly at the retail level. Some locales, such as Los Angeles County, have adopted "social equity" programs, where preferential treatment is accorded to applicants who may have little ability to commercialize their licenses without assistance from a larger business and financial partner.

On a less sanguine note, many have observed an overexpansion in all sectors, and financial distress could drive less competitive players into the arms of buyers — and at less-than-stratospheric prices.

M&A Transactions

There are certain issues that appear in all M&A transactions, including the following:

– Valuation: There are three basic valuation methods: discounted cash flow (DCF), which attempts to put a present value on anticipated, future income streams; book value, based on the owner's equity part of the balance sheet, and closely related to replacement value; and liquidation value, the expected value of company assets that might be realized in a fire sale. For a profitable company, DCF usually produces the highest price.

– Integration: Forbes magazine has estimated that at least 50% of M&A deals fail — meaning they fail of their intended strategic purpose or fail to produce the anticipated increase in revenue. Often this is due to failure to appreciate differences in business culture, overestimating synergies or underestimating the amount of overlap and duplication that results from the business combination.

– Overreaching: Buyers often rush into an acquisition without first adequately establishing the necessary overhead to accommodate the combination.

– Undue influence: Shareholder activist Nell Minnow has famously said, "Investment bankers are like the geishas of the business world. They sit next to the CEO, laugh at all his jokes and talk about how much fun it would be to go out and buy something together." The sad reality is that many advisers who are indispensable to the acquisition process have a vested financial interest in seeing that the deal closes, after which they have no responsibilities whatsoever.

– Competition: Following the close of a deal, redundant employees are typically shed, especially from the acquired company. In addition, when M&A deals begin to show signs of failure, employees of the acquired company may start to desert on their own.

Cannabis-specific concerns

In addition to these, a number of issues may arise that are specific to the cannabis industry, including the following:

– Licensing: In some states, such as California, the fact that the enabling statute left licensing to local authority was originally hailed as a triumph of local autonomy over centralized power. Unfortunately, this has produced a byzantine patchwork of regulations that tends to frustrate efforts to realize economies of scale.

– Interstate commerce: So long as cannabis remains illegal at the federal level, any transportation of product across state lines will be a federal offense. That's just the bad news. The worse news is that any transportation, even between two ports within the same state, that involves either air or sea transportation, is within the purview of federal regulation. This will continue to be a lethal "gotcha" for expanding cannabis businesses.

– Valuation: The valuation methods described above have limited applicability to startups with no operating history. We've seen this story before in the dot-com era. Illegality makes for uncertainty on steroids.

A new phase of consolidation in the cannabis industry will inevitably be upon us in the near future. Even if legalization occurs at the federal level, many challenges will remain. It's an era of caveat emptor ... and vendor.

Originally published by Marijuana Venture

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions