Why Cannabis M&A Will Be Harder, Pricier and Take Longer
M&A activity will soon bounce back, thanks to improving corporate fortunes, new markets coming on stream and emerging regulatory daylight.
The next upswing, however, will be different. Macro factors such as stricter insurance requirements, high interest rates and increased investor wariness (arising from big corporate frauds) are amping up transaction scrutiny.
Today’s cannabis dealmakers are more diligent, cautious and price sensitive.
Here’s what I am seeing on the cannabis M&A front:
1. Sellers > buyers
Most weed companies are looking for a liquidity event (i.e a way to realize shareholder value), lower cost debt or equity-based funding. Considering that valuations are in the toilet it’s clear that well capitalized and patient buyers have a cornucopia of good (and desperate) firms to choose from, right across the value chain.
Astute or previously burned buyers understand this leverage and will negotiate harder on purchase price and terms in areas like extra contingent rights, longer milestone-based earn outs, and deal breaking clauses.
2. Caveat emptor
Dealmakers are being especially cautious about a target’s business and financials including who they transact with. No one wants to purchase assets with hidden legal or reputational land mines.
Lots more due diligence is being conducted including investigating the target company and its leaders around commercial practices, social media posts, legal history and payment behaviors.
Moreover, transactions that are getting done are taking months to make it through a due diligence process that previously took weeks.
Experienced LP and MSOs also haven’t forgotten their hangover from the last frenzied cycle of transactions, when capital was plentiful and cheap, and their equity was a desired currency of exchange.
Finally, buyers want to de-risk potential deals by asking for strict Reps & Warranties insurance to reimburse them for the cost of a failed transaction.
3. Playing hard ball
Today’s M&A story would have a chapter on questionable buyer practices. Examples abound: ultra low-ball bids, 11th hour revisions of terms & conditions and unnecessarily long due diligence processes (or what ends up resembling a tire kicking exercise).
Not surprisingly, all of these flags have led to a rash of failed M&A deals in Canada and the US – with more to come.
4. The day after…
Despite all firms being on ‘sale’ savvy buyers understand the importance of post-merger integration and execution if they are going to quickly capture cost savings, seamlessly integrate firms and realize strategic synergies.
Gone are the days when you can afford to ignore what happens after the deal closes.
#M&A #mergersandacquisitions #deals #duediligence