It’s a big reward to get a lucrative offer when some big company wants to buy your cannabis business but it is important that you consider any offer carefully to make sure you are getting what you bargained for. Consider these tips specific to sales of cannabis businesses.
Form Of The Sale – Stock Sale or Asset Sale?
Traditionally, a sale of a business is structured as either the sale of the business’ assets or a sale of the business’ stock. In a sale of the assets the buyer carves out and purchases only those assets only it requires leaving the other assets (and often liabilities) left in the business which remains owned by the seller. Whereas in the sale of stock, the seller sells all the shares of the business to the buyer. For sales of cannabis businesses in California the sale of stock is a better form to follow.
Benefit Of Structuring The Sale Of A Cannabis Business As A “Stock Sale”
The most important asset of the cannabis business is its local license which in California is issued by the Bureau Of Cannabis Control (“BCC”). Such a license is hard to get, takes time to acquire and costly if one must first start the process of obtaining a license. However, in a sale of stock the same entity still survives after the sale and if structured properly the same license will remain in effect despite the change in ownership of the business.
BCC Regulation Section 5023 provides that in the sale of a company “or other transfer of the business or operations” covered by the licensee, if there is one owner that continues to be defined as an “owner”, then the entity can continue its operations while the new owner is approved.
The regulation’s language on this provides that operations can continue “if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. But beware that if all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the BCC, and all application and license fees for the new application have been paid.”
So the key in avoiding the termination of an existing license is to structure the change of ownership in a multi-phase plan.
- Phase 1: The seller remains on but transfers a large percentage of its ownership interested in the licensed entity to the buyer.
- Phase 2: Update the BCC with all the required Livescans, etc. of the buyer while the entity can continue to operate under the existing license because by virtue of Section 5023 the current owner has stayed on.
- Phase 3: The seller eventually transfers its remaining interest to the buyer and now the buyer owns 100% of the originally licensed entity.
Following this strategy this should leave the originally-licensed entity as the licensee which is far more attractive for the buyer.
Other Tips When Selling Your Cannabis Business
· Consider the deal carefully and do not rush into the sale – having expert legal counsel representing you can make sure you are getting what you bargained for and avoid adverse unintended legal and tax pitfalls.
· Protect confidentiality from the outset – have in place a comprehensive non-compete and confidentiality agreement as a buyer is going to look into all aspects of your business.
· Be prepared for due diligence and do your own due diligence on the buyer – any buyer is going to want to look at the inner workings of the business. The process of obtaining and reviewing this information is called due diligence.
What Should You Do?
It is important that you have cannabis-industry experienced and trusted legal counsel involved from the outset to maximize the amount you receive and the success of the transaction. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.