As we await news about rescheduling, we know a new round of mergers, acquisitions, and capital infusions surely will follow. Whether you are a potential seller or buyer—or just want to grow your business with new capital—one thing is certain: If you aren’t prepared, luck will not save you. Even if you don’t anticipate a potential upcoming transaction, preparing for one just makes good business sense. Preparation will help you identify and mitigate risks, increase your confidence for if and when the time comes and, ultimately, increase your relative enterprise value.
Those who carry out their due diligence before mergers and acquisitions (M&As) will have a much higher chance of success in closing transactions for the highest value. Preparation, including a thorough analysis of your assets, can protect you and your business from nasty disputes and surprises that may spoil the deal and carry serious legal risks.
When proactively carried out, mergers and acquisitions can be massively successful. This industry has proven rife with opportunities—and risks—for those who take the plunge. However, the early days of unrealistic blue-sky valuations and surface-level due diligence that could best be described as “shoot first; ask questions later” are over. Only companies that are prepared for deep and thorough diligence will get the opportunities they desire.
Mergers and acquisitions are inherently risky for buyers. Companies that rush into agreements underprepared tend to face the worst outcomes. Before considering any purchases, assess all possible risks and scrutinize every legal facet to ensure you’re not about to acquire any skeletons hidden in closets.
Scrutinize all contractual agreements, licenses, permits, intellectual property portfolios, and litigation histories with a team of trusted experts. If you’re purchasing existing assets, learn everything about the party’s financials, contracts, and other pertinent information that will fall on you after the purchase. You don’t want to get stuck with unexpected liabilities or costly obligations.
Also thoroughly understand the employees you are acquiring and the obligations that come with them. Employee contracts should be examined along with assessments of other contractual obligations. You may need to amend benefits packages and restructure job roles. With this comes an imperative to understand labor laws in the jurisdiction of your purchase target. Further, you should address, proactively, employee-related concerns to create a seamless transition and avoid future legal entanglements and employee discontent.
In addition, ensure you thoroughly understand the regulatory approvals required to complete the transaction and the associated timelines. You likely will face delays and possibly unexpected regulatory scrutiny. Make sure these hang-ups are considered in your transactional documents.
Above all, be proactive. Dig deep and leave no questions unanswered.
The same considerations also can be used to guide sellers. After all, sellers want to convey that potential buyers will be set up for success. If potential buyers run into convoluted information or funky financials, they may lose confidence and back out of the deal.
Establish buyer confidence by scrutinizing your financials. Tax returns, audits, Internal Revenue Code Section 280E records, and every other pertinent document should be readily available. You should have documentation of everything that can be documented.
Make sure all third-party relationships are documented, too. Once new leadership comes in, verbal agreements no longer apply. All regulatory documents should be gathered and ready for assessment, as well. Ensure all contracts are up to date and not expired. Misplaced documents should be found and unsigned documents rectified before presenting your assets to a potential buyer.
If you don’t have documentation that guarantees your key employees will continue to work for the company, sort that out before making any final agreements. Figure out the next steps for all employees and ensure those are documented and signed by all relevant parties. Additionally, your internal and external teams must be prepared to move quickly once the transaction closes. Set them up for success by laying out all the steps and expectations to guarantee a smooth transition.
All of your due diligence should be easily accessible and ready for review. Organize all contracts and essential documents to make it easy for potential buyers to assess the viability of the purchase. Missing documents and incomplete contracts quickly can plant a seed of doubt in potential buyers’ minds.
Lining up all the key considerations will make it much easier for your business to jump when the right opportunity arises. But don’t jump and sell at just any opportunity. On top of all the other risk-mitigation required for a successful sale, you must assess whether your investors and the potential buyers are aligned with regard to their goals and objectives.
Likewise, potential buyers must feel confident in their purchase. If any red flags appear when assessing a potential acquisition, dig deeper. Don’t be afraid to back out before the deal is sealed.
Whether you’re buying or selling, expect to turn down several offers before the right opportunity comes knocking. When it does, you’ll be glad you prepared for the moment.
Ryan Hurley, Esq., is chairman of the cannabis practice group at Rose Law Group PC. His practice has been focused on the business of legal cannabis since 2010. Hurley was deeply involved in the 2016 and 2020 initiatives to legalize adult-use cannabis in Arizona and, subsequently, in crafting the regulations.
