By: Doug Ginn, Esq.
With over seventy active licenses and hundreds of conditional licenses issued by Maine’s Office of Marijuana Policy (as of the date of this post), the adult use cannabis industry in Maine is now in full swing. Although the industry is still in its infancy, the proliferation of active and conditional licenses has already been a catalyst towards exit for some cannabis business owners. It is too early to identify any broad trends, but so far, most of the ownership changes we are seeing are internal buyouts between partners and arm’s length purchases of one in-state cannabis operator by another in-state cannabis operator. Arm’s length buyers are targeting licensed operations that provide strategic growth opportunities either due to the seller’s geographic location and/or previously established infrastructure.
Those businesses contemplating buying or selling a licensed cannabis business need to be wary of a number of regulatory pitfalls inherent in Maine’s highly regulated cannabis industry. Most notably, changes in ownership require that state and local authorities issue new active adult-use licenses; Buyers and Sellers need to be working with state and local officials prior to any closings in order to facilitate quick re-issuances of conditional licenses or amendments to active licenses to ensure a seamless ownership and operations transition.
In addition to navigating licensing requirements, businesses that are interested in exit via a sale to an unrelated third party need to be sure that their internal operations and accounting practices match the legal documents that set forth the structure of their company. Due to tax and regulatory pressures, many cannabis businesses have highly complex internal operations with leases, subleases, management agreements and IP licensing agreements. When a potential buyer begins its due diligence of a seller, it is going to expect to see that the business has been operated and taxes have been filed in accordance with such internal agreements. Unfortunately, this is not always the case.
Fixing discrepancies between how a cannabis business has been run versus how such business’s internal agreements say it should have been run can be an expensive and time consuming process, and can result in delaying or killing a potential deal. This becomes particularly concerning if taxes have been filed in manner that does not match the organizational documents of the business. Cannabis business owners need to be cognizant that their operations run in accordance with their internal documents and need to make sure their accountants have all of the paperwork and internal agreements necessary to file taxes in accordance with the same. Though this is sound advice for any business at any stage, due to the complex structures of cannabis businesses, it is particularly important for those cannabis businesses that are eyeing exit. It would behoove such businesses to make sure their ducks are in a row, so to speak, prior to engaging potential buyers by self-auditing and reviewing their operations with their counsel and accountants.
If you have questions about the acquisition process for cannabis businesses please contact a member of Drummond Woodsum’s Licensing and Regulatory Compliance Division.