One of the most common questions I get asked as a M&A intermediary serving the cannabis industry is, “How do I create a robust market environment for the sale of my cannabis company and maximize the value paid for the business?”
Preparing your business for sale is essential not only for the profit you could make but also to protect your investment.
As an owner or senior leader of a cannabis enterprise, you need to know the “blueprint” for preparing your company for sale. Did you know most companies will be acquired or shut down within only 5 years? According to the US Department of Labor, very few companies make it past 10 years as an ongoing entity. Thus, it is much better to sell on your terms when business is going well. If you’re not prepared or wait too long, the financial risk increases!
Since 1975 and as one of the oldest and most successful firms focused on the sale of privately held and family-owned businesses across various industries, our team has helped over 4,200 companies successfully exit—on their terms. IBA has witnessed a wide range of companies seeking to exit. Some had great businesses while others did not. Each of these experiences provided us with a deep understanding of assessing the quality of a business to market for sale.
Over the past 12 months, my business brokerage firm – International Business Associates (www.ibainc.com) has represented many companies within the cannabis industry for sale. There is no shortage of interest in selling, whether it is a grower/producer, processor or retail shop, or even a trade partner to the cannabis industry. In fact, we are experiencing increasing demand from qualified buyers seeking to purchase viable cannabis businesses as the industry becomes more mainstream and part of a larger segment of the population’s lives.
This list will help you gauge your own business and then establish a plan to move forward toward a successful sale.
1. Make sure you differentiate yourself from the rest of the industry! If you are competing on just price and price alone, you will face a tough road and sometimes one you can not overcome.
While it is true that the cannabis industry is an immature industry, there is much competition. Cultivators cannot just sell low-end flower and expect to hit it big. They need to sell a cannabis service or differentiated cannabis product unique to the competition. If a grower sells cannabis flower, they need to produce a high-quality, consistent flower, rolled joints, etc., or cultivate it better or more efficiently than the next supplier.
If a cannabis retail shop sells various cannabis and hemp products, customers should experience a friendly and secure environment with a great selection of merchandise. A processor selling an edible or other processed cannabis product needs to have quality packaging that appeals to the customers’ taste and visual acuity.
2. Your company policies, procedures, systems, and infrastructure should be as automated as possible and replicable
Excellent systems include sales, order management, inventory management, accounting, accounts receivable, shipping, and other day-to-day functions. As companies grow, they must create the infrastructure and teams to scale. Companies that require the owner to be involved in every decision, run processes, and cannot function without the owner do not sell well and sometimes never will. Therefore, it is essential to train and expose your strong staff members to more than just the day-to-day activities so the next generation of management is prepared to step in when a vital member of the team transitions out.
3. Make sure your financial records are in order and accurate.
Transparent documents and financials make it easier for the CPAs, bankers, cannabis regulators, and others to do their due diligence and sign off for a quick sale. The cannabis industry has several layers of regulations, taxes, and complex tax rules such as 280E. The more reliable and transparent your financial records are, the easier it will be for buyers and their financiers and lawyers to understand the company and invest in it.
4. Build and maintain a strong team
Leadership should entrust the company to the employees by building a great team and empowering them to run it to peak performance.
A strong manager will build a team that is autonomous and vested in the company. A potential buyer wants to know they can keep the team and continue its success.
5. Measure everything!
Successful companies have a strong drive for results and execute their operations efficiently. The management teams set clear and achievable financial and operational goals. They train their staff on key objectives and metrics. They meet with their teams regularly to review progress and steps needed to achieve their goals. Leadership teams measure success and reward/compensate their employees based on economic and operational performance, including customer satisfaction, profitability, and sales growth.
6. Have a strong exit plan (i.e., hire the right professionals to assist)
Successful entrepreneurs assemble a strong professional team around them to facilitate the sale of a company. Selling a company is a nuanced and complicated process requiring unique, comprehensive knowledge and experience. It is also a process that most business owners are unfamiliar with when they think about retirement or transitioning to a new project.
The business broker is the leader, or quarterback, of a business sales team. The business broker provides an array of specialized negotiating and business intermediary skills requiring advanced and extensive experience and knowledge. The first service provided is the valuation of your business. Valuing a business is complicated and is a subjective science that incorporates accounting, finance, and investment principles on one side of the spectrum and expertise similar to assessing art on the other end. The ability to price a business based on buyer demand and create a competitive marketplace is why only a professional intermediary with experience successfully selling within the cannabis industry should be engaged. The next step is to identify capable and credible buyers confidentially. The broker will facilitate information provision and all negotiations in the strictest of confidence so employees, competitors, and customers do not learn your business is for sale. The top business brokers in the marketplace will do this for free until the transaction is completed, similar to a real estate broker.
A professional intermediary is typically paired with a CPA and attorney. An accountant’s typical role in selling a business includes assisting with information gathering for the valuation, supporting due diligence, and providing guidance on tax allocation. Business attorneys will draft documentation and mitigate post-transaction liability. An entrepreneur’s failure to build the right team will likely cost money in the sale price, enhanced taxes, or post-transaction financial liability.
Certainly, a company does not need to be strong in every one of these characteristics to be sold in the market, but the more you do to prepare, the better! IBA has helped many companies from a variety of levels to exit and to reach the highest valuation within their company’s potential.
For additional information and/or questions about this content, Mr. Seth Rudin can be reached at (206) 502-7066 or by email at firstname.lastname@example.org.
Mr. Rudin is an M&A intermediary affiliated with IBA, the oldest business brokerage firm in the Pacific Northwest, and is the Director of IBA’s Cannabis Transaction Division. He welcomes the opportunity to be a resource in the cannabis industry.