Getting M&A to Pay in Cannabis
Some smart cannabis people believe that rescheduling, profit pressures, new markets and falling rates will trigger a new wave of M&A beginning in Q4 2024. I’m not so sure, but let’s go with it for now.
M&A speculation is a popular cannabis pastime. I won’t let on which MSOs and LPs are dating but some deals are inevitable given market and regulatory dynamics. Other companies will follow suit because of FOMO.
Accordingly, medium-to-large companies can’t afford to neglect M&A in their growth plans.
The perennial challenge
A healthy majority of all M&A transactions (including cannabis ones) fail to build accretive shareholder value.
Two things regularly kibosh deals: 1) the inability of the acquirer to quickly capture expected cost savings & incremental revenues and; 2) a failure to unlock the hoped-for revenue synergies (e.g., cross selling).
Most firms pay a lot of attention to choosing the right target, estimating maximum value and negotiating the right price. However, much less time and effort are devoted to the ‘day after’ the transaction closes.
The ‘day after’ is when you need to move quicky and effectively to secure 3 objectives:
i Integrate the firms
ii Keep what you purchased
iii Reap the financial benefits.
This last objective is where many acquirers’ stumble and fail to achieve target transaction ROI.
A better approach
Capturing all cost savings, efficiency gains and incremental revenues is about moving quickly with revenue on-boarding, eliminating redundancies and securing scale economies. It is also about being aggressive yet realistic with your financial milestones and integration plans.
Below are 4 of my best practices to help you ‘hit your number.’
1. Set your deal price based on the most probable value outcome
Many companies set their transactional prices based on what they can afford to pay. Determining the achievable value is given short shrift or is heavily reliant on unrealistic market or pricing assumptions.
To reduce risk, your estimated financial benefit should be discounted 30% as a safety margin. Paying less goes a long way in doing better deals.
2. Forget synergies
Revenue synergies are hard to realize so consider them the cherry on the sundae. Your transaction’s attainable financial value should be enough to warrant moving ahead.
3. Have an ambitious payback period.
Time hurts deal ROI and delays incremental cash flows. Insist on a 12 mo. payback period, or 18 mo. at the latest. Suffice to say you will need to be ready with a solid integration plan and team at deal closing.
4. Build integration capability
Post-acquisition integration is a learned competency. Companies can get better at M&A when they inculcate learnings, develop repeatable practices and centralize expertise.
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