Setting up an option agreement is a key step in selling a marijuana business
By David Kerr
Everyone understands the Washington State Liquor and Cannabis Board rule that a marijuana business license (or application) cannot be sold, but that the business that holds the license (or application) can be sold, in whole or in part. Additionally, any person or entity that buys all or part of a licensed marijuana business needs to complete the personal, financial and criminal background disclosures and be approved by the Liquor and Cannabis Board as a true party in interest. The question is then, how do you nail down a potential deal to buy or sell a licensed marijuana business while the Liquor and Cannabis Board is conducting its investigation of the potential buyers and before they have been approved?
The answer is an option agreement.
An option agreement grants the buyer the right to acquire some percentage of the marijuana business in the future, after the LCB has completed its investigation and approved the buyer as a true party in interest. It is called an option agreement because in its most basic form the buyer usually has some period of time to decide whether or not they want to exercise that option or withdraw from the deal. When you are thinking about entering into an option agreement, here are some to the elements that you’ll want to consider.
– The option fee: The buyer is acquiring a right to decide in the future if they want to buy into the business. Acquiring that right costs money — that’s called an option fee. Generally, the buyer wants the option fee to be as small as possible and to be refundable if the option isn’t exercised or the buyer isn’t approved by the LCB. On the other hand, the seller wants to get the largest non-refundable option fee possible because the seller is essentially taking its business off the market and there is always the risk of the buyer deciding not to go forward with the deal or the LCB not approving the buyer. Given these two competing interests, the option fee is always subject to negotiations between the buyer and seller.
– Exclusivity: The buyer will always insist that the option they are acquiring be exclusive. The buyer doesn’t want the seller to be out there shopping around for a better deal while the buyer is doing the leg work to get the deal finalized with the LCB.
– The option period: There will be some window of time during which the buyer can decide if it is going to exercise the option or not. The buyer will usually want the option period to be as long as possible, giving the buyer more flexibility. I have seen buyers request option periods for up to six months. The seller usually wants the option period to be shorter, a matter of days, so that the deal either gets done or the seller can move on. If the option period ends without the buyer exercising the option, the option expires and the rights granted in the option agreement terminate.
For a marijuana business that is still in Washington’s application approval process, the option period usually starts when the LCB issues the license. After the license has been issued, the trigger for the option period to begin will usually be some key milestone in the process, such as when the paperwork has been submitted to add the buyer as a true party in interest.
– Terms of the deal: The option fee is the fee paid to acquire the option itself. It is not the amount the buyer is paying the seller for the percentage of the business being acquired. The terms of the deal are just that; the amount the buyer is going to pay and the amount the seller is going to get, if and when the option is exercised. There can be other considerations that are part of the terms of the deal; some include an ongoing percentage of profits for the seller, how payments will be structured, what equipment or facilities will be provided, certain performance guaranties. Whatever is agreed to between the buyer and the seller as part of the deal should be included in the option agreement.
There are very good reasons for negotiating the terms of the deal and explicitly stating those terms in the option agreement, not the least of which is that without actual terms of the deal being agreed upon and written down there is a pretty good chance that once the option is exercised there are going to be disputes and difficulties.
– The “call” and “put” option: Option agreements sometimes have provisions for both a “put” option and a “call” option. The call option gives the buyer the right to require the seller to sell or convey the percentage interest in the business, at the agreed price, when the option is exercised. Conversely, the put option gives the seller the right to require the buyer to purchase the percentage interest in the business, at the agreed price, when the option is exercised. A put and call option provides assurances to both sides that they can require that the other side perform and the deal will get done.
Keep in mind that these are a few of the more significant considerations that go into putting together an option agreement. Each potential deal and your particular situation is unique and working with a business attorney with experience in Washington’s legal cannabis industry is well advised.
Attorney David Kerr serves business clients throughout the state, including an emphasis on the emerging legal, regulatory and compliance issues facing new cannabis businesses.