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Acquiring a Cannabis Company: Important Issues to Consider

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With the impending codification of the OLCC’s moratorium on new licenses for marijuana producers and retailers via Senate Bill 218 (which we discussed here), our clients continue to expand their business operations by acquiring licenses from existing OLCC licensees. While these acquisitions can come in a few different forms (e.g., stock purchase or merger), we typically see these transactions effectuated by an asset purchase agreement. An asset purchase agreement is advantageous for an acquirer because it allows the acquirer to purchase certain assets of the target company (i.e., the OLCC license, inventory, equipment, etc.) without assuming the target company’s liabilities. Below are a few important considerations when entering into an asset purchase agreement to acquire a cannabis company.

Obtaining all necessary regulatory approvals: An acquirer should never commit to paying the purchase price for a cannabis company until all necessary state and local approvals have been obtained that (i) allow the acquirer to properly own the applicable OLCC or ODA license, and (ii) authorize the acquirer to operate the target company’s business under the acquirer’s sole and direct control. The acquirer should also ensure that the asset purchase agreement requires the target company to cause the city where the business is located to issue any necessary permits or registrations that are required for the business to operate in the acquirer’s name should there be any.

Payment of the Purchase Price: Any portion of the purchase price that the acquirer plans to pay in cash should be paid to the target company on or after the “closing date” of the deal, which should be defined in the asset purchase agreement as a date that will occur at a specific time after all of the conditions required under the agreement have been satisfied, including obtaining all regulatory approvals. As the competition for OLCC licenses continues to heat up, we are seeing more acquirers offer to make a deposit for the asset purchase to preserve the deal. If an acquirer is offering to make a deposit, we generally recommend that asset purchase agreement specify that the deposit shall remain in escrow until the closing date, at which time the deposit and the remaining balance of the purchase price will be disbursed to the target company.

Tax Liabilities: Given the complex tax treatment of cannabis businesses under IRC §280E, acquirers will want to make sure that they have certain contractual protections against any taxes owed by the target company. When representing an acquirer of a cannabis business, we will typically include representations and warranties on behalf of the target company that confirm, among other things, that (i) the target company’s tax returns and reports are accurate, (ii) there are no deficiencies for the payment of taxes, and (iii) there are no liens for taxes on the target company’s business or any of the target company’s assets that are being purchased. In the event that any of those representations turns out to be inaccurate, our acquirer will have the opportunity to either terminate the agreement and/or be indemnified for any damages resulting from such inaccurate representations.

The terms of every deal are different, and the items discussed above are just a few of the issues to keep in mind when conducting due diligence on a potential target company. Our team is here to help if you need any help navigating the process of acquiring an OLCC licensee.