I often write about the various separate aspects of cannabis mergers and acquisitions. A full list of my posts, along with those of other contributors to the Canna Law blog, is at the bottom of this post. Today, rather than looking at the individual elements of a cannabis merger and acquisition deal, I want to see what the deal looks like from start to finish.
Step 1: Find the deal
It sounds very obvious, but the first step in any cannabis M&A deal is to find a potential deal. Usually one or both parties (buyer and seller) use a middleman or agent to connect them. Sometimes a buyer will “cold call” or get into an active business and try to make a deal. Parties may meet at trade fairs or other venues and begin talks.
When a seller goes to a broker, they usually provide basic information about the terms the seller wants to sell and, most importantly, the desired purchase price. When the parties meet face to face at a trade show or otherwise, there is usually more room to negotiate the terms of the big picture. This leads me to step 2.
Step Two: Initial Negotiations
Once the potential buyer and seller meet, initial negotiations will begin. At this point, the buyer will try to get information from the seller (without taking full care) and try to work with the seller to get to the key terms of the transaction – things like the purchase price, closing timing, terms that are unique to that specific transaction, etc. Once this is done, both parties will move to step 3.
Step 3: LOI
At this point, the buyer usually prepares a terms sheet or letter of intent (LOI) that both parties will sign, which contains the key deal points agreed in step 2. I have written a detailed post about the letter of intent and term sheets Here. In short, they are used as a shorthand way to memorialize the terms of the big picture of a deal. It is good practice to generally keep it non-binding, but there may be binding exclusivity and confidentiality provisions to prevent the seller from purchasing the transaction, and state law will enforce what must be said in the letter of intent to keep it confidential.
Step 4: Initial Diligence
The buyer may start making due diligence from the beginning of the deal, but things usually move between executing the letter of intent and signing the purchase agreement and other documents. I wrote a post about ijtihad Here. During this time, the buyer will ask the seller written questions and various types of documents. Sometimes the questions come from the buyer himself, other times they may come from other lawyers, accountants or consultants. Lawyers typically review legal documents, while the buyer and his accountants review the financial statements.
Depending on the responses the buyer receives, he may decide to go ahead or renegotiate certain terms of the deal. For example, if you know that a former employee is suing the seller for hundreds of thousands and that there is a good change that the former employee will win or settle for, the buyer will want to lower the purchase price (or just make sure those claims are resolved by closing).
Step Five: Drafting and Negotiating Final Agreements
In conjunction with the diligence, the legal team of the buyer usually begins the process of drafting the long purchase agreement and any other documents that the parties have to implement. Usually there are lengthy negotiations. Even in a deal that started with a blanket terms deal, things are likely to change during the diligence process. Even in relatively small and uncomplicated deals, there are at least a few round trips.
Step 6: Pre-closing period
After the signing of the master purchase agreement, the pre-closing period begins. The purchase agreement will list each party’s closing terms. I wrote about the common closing conditions Here. Essentially, the party will not be obligated to close unless all of its closing conditions are met by the end of the pre-closing period, or it waives those conditions.
For example, if a jurisdiction requires agency approval before a change in ownership occurs, such approval will be a condition of closing. If the company has significant unpaid debts, the buyer will require closing that debt being paid off.
Sometimes, extra care is taken during the pre-closure period. This usually happens when there is reason for the parties to speed up the implementation of a definitive agreement but the buyer still has to take extra care. Or it could happen if there is a long period before closing and the buyer wants to be satisfied that things haven’t changed.
Step 7: Close
I wrote a detailed post about the closure Here. Closing is the process in which a transaction is executed. In the simplest example, once all closing conditions are met, the shares will be awarded to the buyer, and cash will be given to the seller. Any contracts that were required to be signed at closing will also be signed.
Some purchase agreements will specify “final delivery dates”. These dates are set by the parties to essentially set a deadline on closing. If, for any reason, closing is not completed by the final delivery date, one or both parties (depending on the transaction) can proceed. Deadlines are a good idea to motivate parties to follow through on their closing terms as quickly as possible.
However, we have seen many situations where both parties are too ambitious in choosing a delivery date and you need to amend the contract to move it multiple times. But this is definitely never a guarantee and one party may stand firm on the final delivery date. So it’s a good idea to be as realistic as possible when putting on one.
Step 8: Post-Close Commitments
Purchase agreements may specify a set of obligations that will necessarily occur after closing. If, for example, regulators require that certain steps be taken after a stock change, those steps are often included in the purchase agreement. If there are adjustments to the purchase price after closing (which you can read about in my post Here), will also be taken up.
As you can see, buying cannabis business is complicated. This is a significant simplification of the process, and I must point out that it does not always proceed along the same linear path as shown above. For more cannabis merger and acquisition posts, check out the following, and you should also follow the Canna Law blog.