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The cannabis industry is rapidly growing, as is its mergers and acquisitions activity, but federal prohibition, a patchwork of state regulations and the lack of banking services available to the industry add layers of complexity to acquisition deals.

Here, three M&A experts offer their top advice for cannabis companies looking to expand their footprints through acquisitions, from outlining clear M&A goals to integrating acquired assets into existing operations.

Melissa Diaz, CFO, Rebel Rock

Melissa Diaz

1. Set an end goal. Any company looking to acquire another business should first have a goal for that transaction, which will determine how the deal is structured and how the two businesses are ultimately integrated, according to Melissa Diaz of Rebel Rock, which provides accounting consulting services for the cannabis industry.

“Are you acquiring this company because you want to keep their people and absorb them into your operations, or are you acquiring them as slash and burn?” she says. “In the latter case, you don’t really care how you merge. You’re the acquiring company. You’re going to impose your will.”

On the other hand, if a cannabis company plans to integrate another organization into its operations, it needs to determine whether the company it plans to acquire is the right cultural fit and whether its existing operations are similar, she adds.

2. Use multiple valuation techniques. Historical performance, future expected performance and overall market are the typical metrics businesses use to determine company valuations, Diaz adds, but these metrics can be difficult to evaluate in the cannabis space because of a lack of historical data.

Prospective buyers should use multiple valuation techniques and consider the target’s cash flows, market approach and assets, Diaz says. Non-monetary facets should also be evaluated, she adds, such as the company’s management team, including their industry expertise and M&A experience, she says.

Erich Mauff, president, Jushi Holdings Inc.

Erich Mauff

3. Understand the regulations— and the market. Buyers should understand the target’s market, including local and state regulations, according to Erich Mauff of Jushi, a multistate cannabis owner and operator. Vancouver-based Jushi has purchased several cultivation, processing and retail businesses during the past year. “[Within a state], many localities may or may not allow cannabis,” he says, which is important when acquiring a license/business with no established facility/location.

Buyers also should factor market trends into their purchasing decisions, including the number of potential competitors and pending adult-use initiatives, he says. Other considerations include the state’s labor costs, its cannabis program’s status (timeline until it’s fully operational) and product pricing rates, Mauff says.

4. Establish a clear integration plan. Prior to a merger, it’s important to understand where redundancies exist and how to consolidate these systems. For example, Jushi works quickly to integrate accounting, security, inventory and marketing systems into its platform after closing a deal, Mauff says. But it’s equally important to ensure people impacted by these decisions still feel valued and that the company retains some of the acquired company’s original brand identity, he says. “We don’t change the [company] name. We don’t try to rebrand because it’s just a great local feel for that particular store. … We’re not trying to cookie cutter a look and feel that’s identical,” Mauff says. “We’re not creating McDonald’s.”

Todd Williams, chief strategy officer, and Andy Williams, CEO & founder, Medicine Man Technologies

Todd Williams

5. Evaluate the company culture. A buyer should examine an acquisition target’s company culture. “There can be all kinds of synergies, but if the cultures don’t come together, I think you’ve run into a roadblock that can ... derail a successful acquisition or merger,” says Todd Williams of Medicine Man Technologies, which has entered into agreements to become a vertically integrated seed-to-sale operator.

6. Analyze a target’s tax records and financial history. As in any industry, a buyer should thoroughly examine a target’s books and financial history, but 280E can cause unique challenges for the cannabis industry and can leave a buyer on the hook if a seller hasn’t paid taxes correctly.

“280E, very specifically, [is] handled in different ways by companies, so ... we’re also looking at how they paid taxes and what they’ve taken [and haven’t taken] as a deduction to see if there’s liability for our company down the line,” says Andy Williams, CEO and founder of Medicine Man Technologies.

Andy Williams

7. Conduct an operational review. A target’s day-to-day operations should be compatible with the buyer’s, and a buyer should identify areas that can be improved, Todd Williams says.

“Can we easily transition their IT and their data into our system? What effort is involved and what cost is involved?” he says.

For example, if a cultivator is harvesting one pound per plant and a potential buyer believes he or she could increase that to three pounds, the acquisition becomes more attractive, Todd Williams says.

Melissa Schiller is the assistant digital editor for Cannabis Business Times and Cannabis Dispensary.