As global cannabis regulations ease, industry leaders are fortifying their market positions by building full-service organizations, created through acquiring synergistic products, licenses, locations and expertise. The race is on to find the best companies to expand corporate portfolios.

Amid these conditions, even the most successful startups are tired of the endless chase for capital to fund growth. Finding the right strategic partner may be the best way forward for some cannabis entrepreneurs, especially as markets become more saturated.

No matter your business acumen, selling a cannabis business—one you built from scratch nonetheless—can be intimidating. Cannabis Business Times asked four industry experts for tips on striking the right deal with a potential buyer. Here’s what they said:

1. Like the buyers. The industry is young and the people with the know-how to operate a cannabis business are in limited supply. Smart buyers want to keep the most significant piece of a company’s value: its thought leadership and institutional knowledge. Buyers typically want current employees to stay with the new organization.

“That can be complex because someone who founded the company may now be an employee,” says Dena Jalbert, founder and CEO of Align Business Advisory Services, a Florida company that counsels cannabis business owners and investors through mergers and acquisitions. “One of the first questions you should ask is whether you like the buyers enough that you’d be glad to have a beer with them,” Jalbert says. If not, you may find it hard to work with them.

2. Ask for help. Jalbert’s clients are experts in growing a good business, but most have never sold one. Sellers who don’t enlist professional help may leave their businesses vulnerable. “Some of the terms are unique,” she says. “A lot of them are stock transactions, which is interesting to factor into the valuation component. How do you know what something is worth in an industry that doesn’t have a historical trend?”

A small business owner, for example, may be courted with stock in a business that has good revenue and huge market capitalization, but isn’t profitable. Owners make a long-term bet when they accept stocks as payment, not knowing what they will be worth in the future.

Jalbert compares it to a game of poker: As an owner, you may sit down with a little knowledge from past poker games, but you’re facing people who have won the World Series of Poker. “They’re people who do this regularly, who have huge corporate development departments and highly-paid attorneys, and you’re just at an inherent disadvantage,” she says. While there may not be any intentional malice, the sale’s terms and conditions may not be agreeable or fair to the seller.

A team of advisors can help sellers find the right strategic partners and navigate the process. “Having good attorneys and CPAs [certified public accountants] … can help you make better decisions, both financially and strategically,” Jalbert says. “We’ve seen clients chase the money and find out after the fact that the marriage wasn’t quite made in heaven. They may have different priorities, lack the authority to make decisions and the vision is much muddier than they imagined going into the deal.”

A 2011 Harvard Business Review article cites the mergers and acquisition (M&A) failure rate at 70 percent to 90 percent. Jalbert says the blame can often be cast on erroneous terms and conditions, over-emphasis on the product or service, failure to plan and lack of consideration for people and other intangibles that make a business successful.

3. Determine what you want for the future. “What do you want the sale to do for you?” Jalbert asks. “Do you want to stay on and work, or are you looking to take the proceeds and start another business? What’s your driving force?” Answering these questions can align you with the right buyer.

In the case of Swell Companies Limited, an Oregon-based cannabis extractor and manufacturer, founders Eric Shoemaker and Alleh Lindquist identified a buyer whose strategy matched their goals. The buyer, C21, was seeking knowledgeable people to expand its team. That suited Shoemaker, now president of C21’s U.S. operation, and Lindquist, C21’s vice president of manufacturing, who both wanted to stay involved after the sale. “They [C21] were looking for cannabis subject matter expertise and managerial power, and we provided both of those things,” Shoemaker says.

4. Insist on transparency. Information should flow both ways in a transaction, according to Jalbert. It’s a huge red flag any time a buyer won’t answer questions about their business, allow conversations between leaders or provide insight about roles after the sale.

Selling their business had an unexpected emotional component for Shoemaker and Lindquist. As a result, they did significant due diligence when talks began with C21 leadership. “We spent almost as much time underwriting the people as we did on the rest of the deal,” Shoemaker says.

Shoemaker describes C21 as a holding company that is building a portfolio of cannabis brands and related infrastructures across legal markets in the U.S. It’s a capital vehicle for companies that want to continue to grow in their home state and eventually expand brands across state lines to fuel future growth. The idea is to take quality brands and teams, find infrastructure in another state and replicate. “It’s how everyone will have to grow because we can’t take product across state lines,” he says.

The process felt straightforward, but they still worried if they were making the right decision. “It’s a leap of faith, to some extent,” Lindquist says. “There are just some questions that can’t be answered ahead of time. I needed to trust them in my gut 100 percent the same way I trusted my founding partners.”

5. Get your books in order. Any serious investor wants to know what he or she is buying. All business records should be in meticulous order—preferably before you start courting buyers. It can take eight months to a year to get everything in order to position your business for a sale. “There were a bunch of things we wish we had taken care of earlier,” Shoemaker says.

Expect to undergo a thorough discovery process that encompasses every aspect of your business, from payroll records to contracts and licenses. “If you aren’t required to do that, then you’re probably not working with the right group,” Shoemaker says.

Anything a seller doesn’t disclose is a potential liability. Most deals have provisions that reduce payments after the sale if anything is discovered that changes the business’s value.

6. Become a team player. The cannabis industry is known for resourceful entrepreneurs who enjoy being their own bosses. As the owners of successful startups that are now acquisition targets, many entrepreneurs will be forced to think differently about their work paradigms.

Hurca! | Adobe Stock

Joining a larger team is almost inevitable for any grower who wants to scale up for production farming, according to Shoemaker. “It’s fundamental to understand that it’s about being a good team player and the creation of scale,” he says. “That’s true of any manufacturing or even retail business.”

7. Put yourself in the buyer’s shoes. Every potential buyer has a unique strategy for consolidating various segments of the market. Understanding those motivations can put cannabis businesses in a better position to be acquired in a way that leverages their strengths. “That helped us get to a deal that was a fair one for everyone,” Shoemaker says.

8. Sometimes the best deals are the ones you don’t do. Swell’s founders had many conversations with investors before C21 acquired it. “We turned down some capital at certain points and didn’t want to take certain investors because of the terms they wanted,” Lindquist says.

As entrepreneurs, their early quest for capital was a useful experience when they began to search for the right strategic partner. “You’ve got to be out there learning and educating yourself all the time,” he says. “That’s an important piece for any entrepreneur who is going to be successful. You have to step out of your comfort zone.”

Lindquist encourages cannabis businesses not to skimp on experienced cannabis attorneys. But even with good legal counsel, owners should always read and fully understand documents related to a potential deal. “You really have to dive in and dedicate yourself to learning the process,” he says.

9. Don’t get too preoccupied with intellectual property. Proprietary processes are the norm in the cannabis industry. It’s natural to protect anything that gives you a distinct advantage over competitors, but Lindquist thinks sellers shouldn’t be overly concerned with intellectual property (IP) during negotiations. Although Swell has significant expertise in extraction, Lindquist says it wasn’t a factor in their negotiations with C21. “We certainly didn’t sell C21 [by saying] ‘Hey, we do this special thing,’” he says. “Usually, when we go out to talk with a business and they say that to us, it shows that they don’t understand where the industry is at, and they aren’t paying attention.”

10. Leverage your appeal. “If you’re being bought, how many companies are interested in your business?” asks Abe Cohn, THC Legal Group, a team of attorneys specializing in the cannabis industry. Being pursued by multiple buyers may give you a stronger position in negotiating a deal.

11. Get creative about finding the right buyer. Unfortunately, there’s no easy way for buyers to meet sellers in the cannabis industry. Cohn’s solutions:

  • Stay involved in the industry.
  • Attend trade shows.
  • Ask yourself who is financially capable of buying your company.
  • Put a list together and start working it.

“It’s boots on the ground, connecting with different people,” Cohn says.

12. Strengthen your negotiating position with good business practices. Cohn says sellers need to possess a good understanding of their company’s financial performance and a well-defined business structure.

Startups that are sloppy about defining how equity is distributed between the founders, for example, may run into issues when they are ready to sell. Nebulous relationships between the founders could be a spoiler for buyers who want full transparency.

“Buyers want to see all the corporate documents, how much debt you have, how much capital you have, what your client list looks like,” Cohn says. “If you’re pitching yourself to be bought out, all this needs to be immaculately presented and readily obvious to the buying company.”

13. Make an honest appraisal of how much money (rather than stock) you need from a sale. Depending on your need, you’ll have greater or less flexibility during negotiations. “If you’re building something really substantial that can withstand greater market pressure, you may be able to hold out a little bit” or accept more stock, Cohn says. “Some startups have taken money from family and friends, and angel investors. They really need to pay it back. They’re feeling a lot of pressure. They might be a little less tough at the negotiating table.”

Crystal Hammon manages Leading Reads, an Indianapolis company helping companies create online content and build relationships with their customers.