Business of all sizes are trading hands amid a flurry of mergers and acquisitions activity in the cannabis market. The sheer pace of market consolidation keeps the M&A discussion at the forefront of cannabis business strategies.
If a business management team is interested in pursuing a strategic acquisition—being bought by a larger company—how should those executives start the process?
Zachary Venegas, CEO of Helix TCS, says that a successful M&A deal begins well before the terms are written out. Like any undertaking in business, a clear goal must be articulated.
“From the acquiree’s perspective, the real sort of ground-zero place to start is to have a super honest conversation with themselves … to understand that their business truly has a competitive advantage,” Venegas says. This advantage must be something that goes beyond simple market share. “An acquirer is going to want a business that’s durable. They don’t want to acquire a business that, just by … throwing in an equal or larger amount of money, they can just catch up or have the same business, right?”
The point of the honest conversation is to identify the unique aspects of a business and the value that can be added to a potential buyer. M&A advisers in the cannabis space should be “forcing” business executives to have this sort of conversation with themselves and with their team, Venegas says. Advisory firms then set the stage and frame the business’s pitch around those competitive advantage concepts.
A business’s relationship with its advisory firm is a key component of how that competitive advantage is conveyed to buyers. That’s where the “super honest” part of the conversation comes in. Firms need to know exactly what sort of direction a seller is interested in taking—and what qualities that business can bring to a deal.
“They're advising you, but they're only going to sell you once,” Venegas says. “They’re going to sell you to their long-term clients; they’ll do many deals with their buyers. They’ll only sell you one time.”
Be honest with yourself and be honest with your firm.
“There are certain technological trends that are happening in the market,” Venegas says. Take compliance, for example: The regulatory demands in the cannabis marketplace force technological innovation in seed-to-sale tracking or customer relationship management. Companies that are working in verticals like those can find themselves in a position to advertise their competitive advantage and growth prospects to a buyer.
“If you’re just a CRM—no compliance, no productivity—well, aren’t there other CRMs out there? You should be aware of that,” Venegas says. “Then, compare yourselves to other mainstream CRMs, so you can evaluate whether or not you have something unique. If you’re just a CRM that markets exclusively to cannabis and you have an interface that’s tailored to cannabis, that’s awesome—but there are CRMs all over the place for specific industries.”
What’s unavoidable in the broader cannabis M&A narrative is the impending entrance of major consumer packaged goods companies in the space. The last six months have seen a surge of interest from massive corporations like Constellation Brands and Altria, companies that are lining up acquisition prospects for a not-so-distant future of legal cannabis markets in the U.S. and elsewhere. “Once [cannabis] comes off Schedule I, they’re coming,” Venegas says. “So, you have to identify your technological category and compare that to the mainstream … because that’s your value to the cannabis market.”
That’s the broader point: A cannabis business must understand its competitive advantage, and then grasp how that function will meet the needs of a more mainstream environment. When big-box retail gets into the cannabis marketplace, how will your business rise up to meet that day?
Equally important to the technology piece is the industry experience that a company’s management team brings to the table. These are the key personnel who have brought the company to the point of an acquisition deal—and who will help shepherd the company into this next phase of business.
“Your plans generally will hinge on the management team being able to navigate the future of that market,” Venegas says. “Technology might change. … Trends emerge and disappear. But [it's beneficial] if your management team is adept at … reading the signs of the future and correctly interpreting the next 50 years.”
And regardless of whether a potential acquiree is looking to be actively involved in a larger company or merely seeking an exit ramp from the industry, the management team of a target company will have put in the pure sweat equity required to make the company a target of buyers in the first place; there’s often a deep personal attachment to a business on the part of its managers (and the entire staff). Both sides of an M&A deal must know and respect those key personnel who have real skin in the game and who want to elevate the business.
This is one of the clearest rationales for acquisition deals in the cannabis space. With the regulated industry being so new, it’s vital for buyers to identify successful teams that have brought a unique edge to their business. For those sellers, it’s important to know what that edge is. Maybe it’s technology…
…and maybe it’s funding.
“Raising capital in cannabis is not easy, right?” Venegas says. “But some businesses spend all of their time just raising that next bit of capital, and they start to lose the competitive advantage because they spend all their time on the money. And you may say, ‘OK, I'll be acquired, it will be a bigger piece of the pie, but if I can just have easy access to capital because my acquirer already has that and is willing to commit that in terms, … then the certainty around the capital frees me to do what I know I can do or what my team to do.’ That's the rationale.”
As far as raising investment dollars and finding access to capital, Venegas uses the cannabis supply chain to illustrate a broader point. Money—and a lot of the past 12 months of cannabis M&A bears this out—flows toward license holders. Growers. Closer to the fringes of the market, where ancillary and technological businesses find themselves, cannabis companies must be very clear about what that capital will allow them to do.
It’s less about pure market share than about that competitive advantage—and that may be something that’s tied into broader market forces, like federal legalization in the U.S. and movement from consumer packaged goods companies.