Cannabis M&A – A Template for Success

2021 looks to be a banner years for both the public markets and cannabis mergers and acquisitions. For those of you contemplating an exit, KO Acquisitions co-founder Erik Ott has published a three part series to help cannabis entrepreneurs prepare, engage and consummate a successful M&A transaction. Check out the three part series below, Cannabis M&A – A Template for Success, published on Cannabis Business Executive.

Cannabis Business Executive – Cannabis M&A – A Template for Success 

CA Cannabis Mergers – A Guide to Survive and Thrive

With the capital markets dried up and M&A activity at a standstill many CA companies are considering mergers to achieve profitability and scale. KO Acquisitions has put together mergers for over two decades and one thing is for certain – mergers of private companies is as much art as it is science. Unfortunately, mergers do not always achieve the desired results even when the founders conclude the thesis is a “no-brainer”. A deep dive into the details, both qualitative and quantitative, is necessary to determine if “1+1=3”. Here are a few areas to focus on:

Vision & Culture: Alignment on vision and culture needs to encompass your company’s values and leadership philosophies. Can you define and agree on the core principles that will drive how your company will respond to organizational challenges? It may sound like “fluff” but it’s not.

People: Cannabis entrepreneurs are required to wear many hats that often results in someone being outside of their core competency and ill-equipped to handle a role. Getting the right people to do what they do best is critical to building a scalable human infrastructure. Be transparent regarding where your skills lack and put your people in position to succeed.

The Process: Acquisitions are truly process driven, designed to look into every nook and cranny during exhaustive Due Diligence. Private mergers, however, do not go through the same degree of scrutiny, often because the founders do not have the experience or discipline to perform (mutual) diligence on their partner. It’s the biggest strategic move of your life – be thorough and don’t cut corners.

Control: Just because someone holds 51% doesn’t mean they have control of “NewCo”. Developing the proper corporate decision-making is about far more than your equity stake and is critical to resolving future disagreements. This includes Board make-up, voting rights, shareholder management and approval processes for critical corporate initiatives. Clean and clear corporate hygiene can be more important than your equity percentage.

Financial Analysis: Your partners balance sheet is a very good place to start since many companies have significant liabilities that cannot be cleaned up in a private merger. Be clear up front on 280e, convertible notes, and other long-term liabilities that will create challenges at the closing table. Remember, investors on your cap table will look out for their own best interests so if you want their buy-in, get it early.

Valuation: As noted, private mergers are more art than science given a lack of capital market data and today’s somewhat meaningless comps. Revenue growth, margins and the balance sheet are table stakes for determining valuation but many qualitative metrics may be of equal if not greater importance. Critical analysis and alignment of what goes into the valuation matrix will help avoid disputes later.

Synergies: Deep financial analysis must be given to the potential for synergies in a merger. While synergies typically translate to EBITDA it is important to know exactly what assets (human and physical) will be leveraged and what will be shuttered.

Product Alignment: Is the thesis for coming together to be 100% vertically integrated? Is the plan to dominate a brand category? We have often seen companies believe their own bullshit when making these assumptions. This exercise needs to be performed with both rigor and skepticism and competitors need to be considered. Be your own worst critic and have a session with your prospective partner regarding “why won’t this work?”.

Disputes: How you handle disagreements during the dating phase will be a great indicator of what will happen when things go wrong post-merger. One of the biggest problems is transparency as nobody likes surprises so air you dirty laundry early and often. Seeing how your “partner” responds will go a long way to determining if the marriage will survive.

Of course these categories are just the tip of the iceberg but the key is to focus on things that matter and tackle the hard issues early. Mergers are challenging but with the proper framework and candor you can create magic, but the roadmap should be comprehensive from the onset rather than left for post-closing.

When we all get through this “Cannabis meets Covid” chaos there will be a lot of buyers looking to get back into California. But let’s be clear, the future M&A market will be driven by EBITDA and scale so best to start getting everybody on board with that thinking today. Mergers can be a great way to achieve that goal.

Five Critical Success Factors to Close Cannabis Mergers & Acquisitions

As Recently Featured on New Cannabis Ventures (Link)

Erik Ott, Partner at KO Acquisitions

The latest news on cannabis M&A transactions in the US might make one wonder if more deals are falling apart than are closing. In Q4 2019, over US$1 billion in M&A deals were terminated by Multi-State Operators (MSOs), including:

  • Cresco terminating the $120m acquisition of VidaCann
  • Green Growth Brands terminating the $310m acquisition of Moxie
  • Medmen terminating the $682m merger with PharmaCann
  • Harvest terminating a deal to acquire Falcon International as well as a massive downsizing of their planned acquisition of CannaPharmacy. 

Countless other deals across the US involving private companies were also terminated and while it may be easy to blame these failed transactions on the capital market, the truth is more nuanced. The reasons for failed deals in the cannabis market are as complex as the industry itself. KO Acquisitions has identified five factors that cause deals to collapse and how buyers and sellers might plan for these situations to keep deals on track.

  1. Licensing/Regulatory Issues: M&A negotiations in most industries are between the buyer and the seller. Only in the cannabis industry do local and state regulatory agencies have the proverbial “seat at the table”. Many CA jurisdictions don’t allow the buyer to own more than 49% of a company, necessitating complex deal structures and work-arounds. Further, changes to a local tax code can make a jurisdiction untenable overnight.  
  2. Poor Corporate Hygiene: Can sellers produce accurate financial information? Are they auditable? Have they properly accounted for 280e? Can their corporate records withstand the scrutiny required of a public company? Often, the answer to these questions is no.
  3. Seller Risk Exposure: Cannabis is rife with disputes — perhaps it is part of the industry’s DNA. What will buyer due diligence uncover about the decisions the seller made in the years leading up to the transaction? Perhaps the buyer will discover shareholder and partner disputes, messy cap tables, or other undisclosed liabilities. In addition, many operators lack trust in the folks “wearing suits”, which is certain to impact the ability to close.
  4. A Protracted M&A Process: It can take nine months or more from LOI to close, so it is not uncommon for deal fatigue to set in. Further, this period gives buyers time to look into the seller’s business, and often the pro-forma returns that sellers promised to deliver do not materialize. This can lead to a valuation re-trade that can kill even a deal with strong mutual alignment and cultural benefit.
  5. Capital Markets Challenges: If a buyer’s access to cash has dried up and CSE valuations have shrunk, the buyer will be left with little structural wiggle room. Many sellers with strong operations want cash to be significant percentage of their compensation. The lack of a cash component in M&A transaction can make many deals harder to close, not to mention the difficulty in selling the buyers stock.

To see what matters most to buyers, KO surveyed the M&A teams at the large MSOs. Not surprisingly, the collapse of capital markets was the #1 reason given for deals falling through. One MSO rightly noted that valuations in the public sector came crashing down in the second half of 2019, yet private seller expectations have only very recently begun to reset.

The second and third reasons given were poor corporate hygiene and high seller risk exposure. Almost all of the MSOs bemoaned the due diligence process, noting how many “skeletons in the closet” were identified and lamenting the need to solve problem after problem. Other MSOs took some of the blame themselves, stating that more due diligence should occur prior to executing a Letter of Intent (LOI). They opined that LOIs were being treated as “options to buy” in the cannabis market, resulting in astonishing fail-to-close rates relative to other industries where LOIs seem to be taken more seriously.

Of course, the story is completely different when interviewing sellers who have been left at the altar by large conglomerates — the reason most often cited is “they don’t have cash and/or I can’t sell their stock”.

Closing M&A deals is difficult. There are many variables at play – some that can be controlled, others that cannot. One thing sellers can do is to invest the time on the front end to get the house in order and be more conservative in your growth projections before you initiate buyer engagement. Once in the process the best advice is to focus on the areas that you can control, be transparent with your data (particularly the bad news), and pick a partner where the alignment and cultural fit runs deep.

Erik Ott is a Partner at KO Acquisitions, Inc. a boutique investment bank specializing in cannabis mergers and acquisitions. KO provides sell-side and buy-side advisory to companies looking to scale up their business through transaction with strategic partners. Erik can be reached at

Brand M&A: Interest Rising

While the California M&A landscape is still largely focused on the dispensary land-grab, there have been a number of transactions of late that are starting to put CA cannabis brands in the cross hairs of large acquirers. Recent acquisitions of Select, Lord Jones, Moxie, Beboe and Korova have CA brands peering into the crystal ball to contemplate scenarios that create global scale and liquidity. So why haven’t the floodgates opened for canna brands like it has for retail?

It comes down to scale. When KO speaks with MSO’s on their brand acquisition strategy we hear familiar refrains. “There are no brands that have garnered true brand loyalty”, or “We can create brands through R&D”. Many buyers simply believe that paying a multiple for brands that are “regional” is not an effective way to deploy capital. But clearly that sentiment is changing. Why?

First and foremost, some CA brands are starting to achieve “relative” scale. The ability to consistently manufacture high quality products and distribute into CA’s 500+ dispensary network is a challenge unique to the world’s largest cannabis market. Compared to any other State (or Country), this is a level of scalability that highlights the operational strengths of the brands that are separating from the pack. With six quarters of BDS data in the books, it is becoming increasingly clear which management teams are executing and outpacing the growth of the market as a whole. The second is a growing recognition of the “authenticity” of California cannabis. The MSOs (aka the Multi-State Oligarchs) realize their manufactured brands can’t compete with a free-market economy driven by 20 years of product innovation. CA brands have been building those connections for years, and similar to craft beer, story-telling is a big part of brand building and there are very few authentic stories outside of California. Finally, and perhaps most importantly, MSOs now realize that the CA consumer is among the most discerning cannabis consumer in the world. You simply can’t fool well-educated consumers who grew up with cannabis, making CA the most challenging test bed to launch and establish a brand. So rather than bucking the trend they are embracing the trend.

Jamie Mendola, who leads the acquisition efforts for Mercer Park, a $400mm SPAC focused on acquiring a portfolio of leading brands, is focused on filtering through the thousands of “products” to find promising brands that have the authenticity, quality and marketing to appeal to cannabis consumers across the country. “We believe that California will be the epicenter for national brands, particularly as some of the larger East Coast and Midwest states transition to adult-use. Leading brands need to be thinking about how to win in CA, but also how to navigate the supply chain, marketing and licensing challenges as they expand into other states.”

When it comes to valuation it is important to distinguish between valuation and terms, as they vary greatly by deal. The transactions with Select, Moxie, Beboe and Korova were all stock deals, making them effectively mergers with limited short term liquidity and where the headline valuation can be impacted dramatically by the stock performance of the acquirer. Cronos’s $300mm acquisition of Lord Jones, on the other hand, represented 15x revenues with 75% of the consideration in cash! Of course Altria’s $1.8 billion investment into Cronos had something to do with that. For those looking for heavy cash components the market remains tight due to volatile Canadian capital markets. But meaty valuation multiples are out there – particularly for those that have proven the ability to scale. For those who haven’t, mergers with like-minded entrepreneurs is looking like a viable alternative.

Bottom line? The signs point to change and the large CPG brands are starting to hover. As we get closer to legislative breakthroughs on a national level these forays’ are only going to accelerate. Investment has already occurred in the beverage market (mostly via Canada) and will soon cross over to the other market segments. A lot of cash is sitting on the sidelines once the dam breaks – fasten your seat belts!

Dispensary Gold Rush

California is well on its way to becoming ground zero in the competitive battle for cannabis dispensaries. No less than 40 companies from Canada and other US states are aggressively making acquisitions to establish themselves in the Golden State. Last year at this time there were over 2000 dispensaries, today there are 500 and by this time next year we may be back over a thousand. However, the ownership profile will change dramatically as more and more well-funded companies, offering cash and stock, will look to acquire California domain expertise in retail.

Why the focus on California? Obviously its big. Add to that the prevailing wisdom of the large-scale players is – “if you’re in Cannabis, you must be in California”. Just as important as market size is the sheer complexity of the CA market. With ever shifting sands driven by herky-jerky state regulation, evolving taxation across our 58 counties and a befuddling testing environment, CA operators are nose to the grindstone making sure they get and stay compliant. While CA retail owners focus day-to-day, well-funded multi-state operators roll in with an army of lawyers locking down every available retail permit (yes, even Coalinga). Add to that the inorganic strategy of acquiring retailers outright and you have a verifiably frenzied Green Rush. Chaos creates opportunity and well organized companies with strong balance sheets are taking advantage.

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Vertical Integration: Blessing or Curse?

When California regulations came out late last year the opportunity presented itself for cannabis companies to acquire multiple licenses, thereby enabling a strategy of vertical integration. As cannabis entrepreneurs went through the licensing process they had to decide how many licenses to apply for and determine how their corporate strategy would evolve with these new opportunities. As they evaluated the prospects many were keen to pursue vertical integration as it provided increased revenue, improved profit margins and the ability to control one’s destiny.

On the face of it this seems logical. But here we are nine months later and what was thought to be a blessing is turning out to be a curse. Vertical integration is a complex and costly business strategy and entrepreneurs have consistently underestimated the requirements to succeed, particularly in an industry built on the shifting sands of regulation. At the center of this predicament lie two interrelated concepts: Domain Expertise and Scale.

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Driving Scale in Cannabis the Silicon Valley Way

In today’s CA cannabis market everyone is scaling up as fast as possible. Licenses are being acquired, grows are being built out, manufacturing and distribution are being ramped up. Virtually every cannabis company is raising capital to pursue the opportunity and become the market leader.

In fact, there are several races going on. There are the large, vertically integrated companies trying to get really big (e.g. Cannacraft, Indus, Grupo Flor, Canndescent, Flowcana). Then there are a number of vertical markets where companies are battling for market share in their specific category: Distribution, Edibles, Craft, Carts and everything else for that matter.

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The Anatomy of a Canadian Acquisition – What’s the deal?

There has been a flurry of M&A activity in California from North of the Border in the first six months of 2018. Companies such as CannaRoyalty (4 deals), Nutritional High (2) and High Hampton (2) lead a group of over 15 companies currently hunting in CA. There is a lot of curiosity about the construct of these deals and what they mean so let’s try to clear up some of the misinformation.

One narrative being promoted by some suggests that Canada has boatloads of cash and is using it to buy companies here in CA. But the actual facts suggest otherwise. Let’s first look at the transactions closed or pending with CannaRoyalty, who has announced four deals since Jan 1.

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KO Acquisitions

Cannabis Valuations: Canada & California  – A practical guide to establishing valuation

Over the last 12 months one of the most frequent questions we get at Bowman/Hanson is; why are the Canadian companies valued so high? The follow up question is “since there are very few industry “comps”, isn’t it reasonable to apply Canadian valuations to my US cannabis business?”

This document is designed to shed some light into the factors that go into establishing valuation for cannabis companies and provide some practical advice for dealing with the growing number of Canadian companies looking to acquire in California.

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