20 Tips for Negotiating the Best Mergers & Acquisitions

As the market for cannabis mergers and acquisitions gains momentum, buyers and sellers are hoping to select the right matches to suit their respective business strategies. Amid the frenzy, Cannabis Dispensary asked five industry insiders for insights to help you make the best decision and deal—whether you’re buying or selling.

Jonathan Sandelman

CEO, Mercer Park CB, LP

1. Prepare your business for intense scrutiny from potential buyers. Sandelman’s employee-owned hedge fund, Mercer Park, is affiliated with Cannabis Strategies Acquisition Corp., a Canadian special purpose acquisition corporation (SPAC). “We’re hoping to find world-class assets to buy,” Sandelman says.

According to him, buyers look for dominant players in individual marketplaces—best-in-class owners and operators with growth prospects. Specifically, they are interested in fundamental performance indicators, such as:

• How well do your stores do?
• What are your sales per square foot?
• How are your brands positioned in the marketplace?
• What’s your reputation in the community?
• How do you engage with your community?

Have this information ready and be prepared to show it to potential buyers.

2. Sellers should look for a buyer who has four kinds of talent: financial, cultivation, marketing and manufacturing/operations. “Going forward, the companies that will be successful will have talent in each of those silos,” Sandelman says. Over the next 10 to 15 years, the opportunity to approach cannabis as a craft business may be more limited. Many small companies will need to align themselves with a bigger team in order to compete. Founding owners who want to stay involved after the sale should be especially vigilant about finding a compatible team, committed to longevity, and in possession of the right assets and skills to fuel future growth. Staying visible and active in your industry and hiring savvy legal counsel can help sellers target better strategic partnerships with qualified buyers.

3. When someone shows interest in buying your business, expect to see documentation that describes how the business would run after the sale. Sometimes an acquisition can make life easier for current employees. An acquisition often reduces administrative, financial and regulatory duties for the company being acquired, according to Sandelman, allowing staff to focus on what they do best.

Cannabis Strategies Acquisition Corp.’s buying strategy is to cluster and penetrate a market without destroying a targeted company’s unique traits. “We don’t want to change whatever made them great,” Sandelman says. “We don’t want to micromanage, but at a corporate level, we do want to see if some of the infrastructure and technology we have to offer could make their life easier, leverage them and allow them to focus on their brilliance.”

4. Examine the buyer’s culture. “You should be able to say, ‘I like that culture. These are excellent operators who have a superior culture that cares about people, that wants to build a national brand, and I want to be part of that drive for excellence,’” Sandelman says. Cannabis Strategies Acquisition Corp. prefers to target companies with a strong culture of compliance, infrastructure and control.

Dan Nicholls

Capital Markets Director, MGO | ELLO Cannabis Alliance

5. Have a strong accounting system. “You don’t want a buyer to come in and start analyzing your books and uncover all these issues that you have no idea how to explain,” Nicholls says. If buyers looking at your business immediately find major issues you didn’t know about, they are bound to wonder what other skeletons may be in the closet. “There are so many good businesses out there,” Nicholls says. “If you’re not setting yourself up to succeed, you’ll just get passed on, or you’ll get a low valuation.”

Sellers should rectify any outstanding accounting issues before courting potential buyers. “Sometimes buyers will do their own audits,” Nicholls says. “They’ll do what’s called a Quality of Earnings, which is a slimmed-down audit to verify some of the financials, but—as a seller—you’d really rather do this yourself.”

6. Organize a data room with information buyers will want. Expect buyers to engage in exhaustive due diligence. They may request thousands of documents, according to Nicholls. Financial statements, employment agreements, intellectual property (IP) details and tax returns are merely a few examples of what buyers will want to review. Collecting and organizing these documents can be a massive drain on the seller.

Pulling data together ahead of purchase negotiations gives buyers higher confidence in your business and helps transactions move along more quickly. “I’ve seen a lot of transactions get stalled because the buyer asks for hundreds of items, and it takes the seller months to pull them together,” Nicholls says. “By that point, the buyer has already moved on.”

Perry N. Salzhauer

J.D., LL.M., Green Light Law Group

7. Be professional. “For a lot of sophisticated buyers who come from a traditional business background, something as simple as the fonts used in your agreements can affect their perception of a business,” Salzhauer says. “[Buyers] look at sloppy documents as a lack of sophistication, and if you don’t have agreements, if you don’t have board minutes, if you don’t have all these documents looking the way they expect them to look, then they might not make their best offer. You’re going to be negotiating downward from less than the maximum offer they may have been prepared to make.”

8. Prove valuation. Buyers should substantiate all the data sellers provide to help establish a valuation, according to Salzhauer. If buying, he says, determine how similar assets are performing in the same area. Typically, law firms that specialize in the industry have access to subscription databases that can help uncover this data.

9. Both sides should understand the transaction terms. Read and comprehend everything you sign related to the transaction. Having good legal counsel is imperative, but it’s important to know and understand the implications of every document you sign during the negotiation process.

10. If possible, buyers and sellers should negotiate exclusivity during the Letter of Intent (LOI) stage. Buyers generally don’t want to spend time and resources on a deal only to have another party snatch it first, Salzhauer says. LOIs are comparable to an engagement to be married: They show that both buyer and seller are seriously committed to a marriage. Buyers and sellers can use an LOI to agree on as many possible items before they reach the due diligence phase. LOIs can cover everything from transitional plans to how employees will be handled. “These are all things that are better to think about on the front end rather than to having to deal with them while you’re negotiating a purchase,” Salzhauer says. In some markets, the sale can’t move forward without approval from a licensing board, so it’s important that LOIs are written in concert with rules that govern ownership.

11. Protect your trade secrets and intellectual property. Non-disclosure agreements (NDAs) should be signed before sellers begin sharing confidential information. “There are good NDAs and bad ones, and that’s where legal expertise can come in,” Salzhauer says. In his opinion, a weak NDA is better than none. “You’ll never be able to enforce something that doesn’t exist.”

12. Buyers and sellers should take careful note of non-circumvention agreements. Among other things, a non-circumvention agreement can prevent both parties from using the contacts they learn about during the courtship to gain a competitive advantage if they choose not to pursue a business relationship. “This industry is very small,” Salzhauer says. “If you’re a buyer and you agree to not contact or have any discussion with any third parties on a list, you might already know some of these people, and you don’t want to preclude yourself from continuing an existing relationship by signing an NDA.” These agreements can be modified to help both sides maintain communication with existing clients or vendors without violating the terms.

13. It matters how a business has been operating and who has been running it. Of particular concern to buyers are regulatory compliance and tax history. Calling workers independent contractors when they should be employees, for example, can generate penalties and interest on unpaid payroll obligations. “I know of a couple of instances here in our state [Oregon] early on when some big investors from the East Coast invested in businesses without doing enough due diligence,” Salzhauer says. Such neglect can be quite risky for investors if a former owner goes to jail for tax evasion, loses their license for regulatory infractions or otherwise damages a company’s reputation or its ability to operate. Expert legal counsel can help investors conduct compliance audits and investigate how a business has been operating. They can also construct well-planned purchase agreements that empower buyers to rescind a deal if they later find evidence that a business is substantially different than it was represented during negotiations. If it turns out that the seller misrepresented something about the business prior to signing the purchase agreement, the seller could be liable to the buyer for damages incurred by the buyer that result from those misrepresentations. In most instances that would involve a lawsuit to recover the amounts that the buyer incurred pursuing the transaction, according to Salzhauer.

Christopher Woods

Founder and CEO, Terrapin Care Station

14. Site control can be a big factor, especially for dispensary acquisitions. “With dispensaries, the location is critical,” says Woods. To avoid diluting themselves, Terrapin only buys locations that improve their footprint, avoiding assets that only have a year or two left on a lease.

“Unfortunately, some businesses are on a year-to-year basis with landlords, and that makes it really challenging to try and do a deal,” Woods says. Unless a longer lease can be negotiated in advance, many buyers see a one-year lease as an undesirable risk because there is no guarantee a lease will be renewed.

15. Develop a loyal customer base. Customer loyalty can shape how attractive a dispensary is to a potential buyer. Woods says Terrapin bought Denver Relief, one of Denver’s oldest dispensaries, because of its large and enthusiastic customer base. “We liked the location, and we liked the people, so we did our best to keep and work with consistent management and personnel, adding our own flavor, but at the same time, not gutting what they had built for the last seven years.”

Steve Gutterman

President and COO, Harvest Health and Recreation

16. Determine whether there is a strategic fit. Harvest Health and Recreation wants to continue to grow geographically in three areas of business: cultivation, manufacturing and retail dispensaries. “When we think in terms of acquisitions, we ask if it makes sense strategically,” Gutterman says. “Does it help us expand into new key geographies, or does it complete coverage in existing ones? Does it help build our competency?” Harvest’s recent acquisition of CBx Enterprises, for example, helped the company move into Colorado, where it did not have a presence. CBx also expanded Harvest’s product line and its pool of talent and expertise.

17. Determine whether it makes financial sense. The most attractive targets for acquisition have sound financials and good growth prospects with potential to build on prior success. Buyers also want a good value, Gutterman says.

In a market ripe for acquisitions, there is an inherent temptation to overpay. For that reason, Gutterman says it’s important for discerning buyers to have disciplined practices about their offers. “We like to pay a fair value where the target feels good, we feel good and we both feel like we can continue to grow together,” he says.

18. Don’t overlook cultural compatibility. The fit between personnel can make or break a deal, according to Gutterman. “You’ve probably read the statistics that more strategic acquisitions fail to achieve their financial goals than succeed,” he says. Business leaders are apt to blame disappointing financial results on flawed financial analysis. In his opinion, the more common underlying cause of lackluster financials after an acquisition is a failure to adequately consider the personnel fit.

“It’s really important to spend enough time to determine whether you have the right people who will fit in the right seats, who share the same goals, who have a common vision of moving forward, and most importantly, who you can see yourself working with closely—because that’s what’s going to happen,” Gutterman says.

19. Treat courtship with a potential buyer as a valuable business exercise. When people ask challenging questions about every line item in your financials or your prospects for future growth, it can sharpen your business acumen. “The process itself is often beneficial for business owners,” Gutterman says.

20. Exhibit emotional intelligence about the transaction. “No one likes being told their baby is not quite as good looking as they thought,” Gutterman says. “We’re very mindful that these are people who have put their hearts and souls into business.” According to Gutterman, when the acquiring company is emotionally indifferent, or the target company’s owners are too tied to a business, negotiations are more prone to go off the rails.