The California cannabis market has been tough for many operators and some may be looking for an exit.  To maximize the value of the company being sold, sellers should take steps to prepare before seeking a buyer or starting the negotiation process. 

This checklist will provide some guidance on preparing a company for sale and highlight issues to consider.

• Assemble Transaction Team – The transaction team will play a crucial part in finding potential buyers, negotiating, and processing the sale.  The better the transaction team is the smoother the sale will go and the more value the seller will receive. The transaction team should include the following:
  • Management team
    • These are typically your key employees and officers.  They will have critical knowledge of the company and will play important roles in engaging advisors, marketing the company, performing due diligence, and negotiating the transaction documents.
  • Legal advisors
    • The legal advisors will assist with drafting and negotiating the transaction documents, facilitate the due diligence process, and coordinate with all transaction team members.
  • Broker/Financial advisor
    • Brokers and financial advisors can help locate potential buyers and market seller’s company.  They have access to a pool of potential buyers that the seller may not have access to.
  • Accountant
    • Accountants will help prepare the seller’s financial statements and any financial projections used to market the company.  They can also help the seller identify any accounting issues that need to be resolved before marketing or negotiating the sale of the company.

• Seller Due Diligence – Before engaging with a potential buyer a seller needs to conduct due diligence on itself.  This self-due diligence will ensure that there are no problems that could delay or negatively affect the sale.  The seller will be able to find unforeseen or unknown issues and address them before any potential buyer conducts its own due diligence.  The following are some key areas that sellers should focus on when performing self-due diligence:
  • Financial Statements
    • Potential buyers will generally expect audited financial statements and, potentially, financial projections.  Preparing audited financial statements can be expensive and, if the deal size isn’t that large, unaudited will be sufficient for some buyers.  Having an accountant prepare financial statements will also undercover any potential accounting issues that can be addressed before entering into discussions with a potential buyer.
  • Corporate Records
    • A seller should have its legal counsel do the following:
      • Confirm it is in good standing in all necessary jurisdictions.
      • Review and confirm the company’s organizational documents are up to date and comply with the applicable law.
      • Review the cap table and ensure all equity has been issued in compliance with the applicable law.
      • Review the minutes and resolutions to verify the appropriate authorization was obtained for the company actions and fix any issues if past actions were not properly authorized.
      • Review Shareholder or Operating Agreements to determine if any provisions need to be waived or revised in order to complete the sale.
  • Material Contracts
    • These contracts should be reviewed to determine whether there are any change of control, anti-assignment, or other provisions that would be triggered by the sale of the company and would adversely affect the contract.  Expiration dates and other restrictive covenants within the contracts should also be determined so there are no unknown issues.
  • Material Relationships with 3^rd Parties
    • A seller should identify its material relationships that are a significant portion of the company’s revenue, provide goods or services that the company cannot easily replace, or provide a unique business advantage.  Identifying these will help provide the seller with leverage and assess its proper value.  If any key relationships are not memorialized in a written agreement, a seller should enter into an agreement with the third parties to ensure those relationships continue post-closing.
  • Company Assets
    • An audit of the company assets is needed to determine if any carry a lien or other encumbrances.  A seller should also ensure all company intellectual property is properly secured or that any right to use necessary third-party intellectual property will not terminate with the sale of the company.
  • Employees and Employee Benefits
    • Employment contracts, consulting contracts, and all employee benefits should be reviewed for any change of control provisions and notification or other requirements.
  • Government Permits and Licenses
    • A seller should make a list of all necessary permits and licenses for its business, ensure they are all in good standing, and determine the transferability of the permits and licenses. 
    • When selling a cannabis company, the deal should be structured so the operation does not have to shut down while the buyer’s qualifications are reviewed by the state.  Local municipal rules and regulations must be taken into consideration when looking to sell a permitted cannabis business. Corporate cannabis attorneys can provide roadmaps to structure the deal accordingly.
  • Legal Claims
    • A seller needs to be aware of any outstanding or incoming legal claims against the business.  If possible, it would be best to wrap up any claims, or potential claims, before entering negotiations.
  • Real Estate Issues
    • Any lease needs to be reviewed for potential change of control, anti-assignment, or any other clauses that would be triggered by the sale of the company.
  • Environmental Issues
    • CEQA compliance is a huge hurdle for cannabis businesses and having all paperwork in order demonstrating compliance can put the company ahead of others.  Also, if the deal is large enough, a seller may consider having an environmental specialist confirm that the target company is in compliance with all applicable environmental laws.
  • Insurance Coverage
    • Review current insurance policies to ensure the company has the type and amount of insurance appropriate for a business of its size and industry.

• Find Potential Buyers and Market the Company
  • After a seller performs its self-due diligence, a seller should determine an accurate and realistic value of its company.  A price target too high can scare away potential buyers and setting the price too low would make a seller leave money on the table that it never know was there.  Therefore, it is important to engage with a reputable accountant to assist in preparing a proper valuation.
  • Once the price target is set, a seller can begin marking the company to potential buyers.
  • As potential buyers come in, the seller should have each potential buyer enter into a confidentiality agreement so the parties can share information freely without worrying about the information being leaked to the public.  These confidentiality agreements should be entered into at the onset of discussions.