Washington State recently approved moves to permit owners of marijuana stocks retailers to have ownership interests in up to five licensed retail stores and to allow owners of licensed producers to have interest in up to three licenses, the market for acquisitions in the state is still very active. Other states that have legalized marijuana to some capacity such as California and Nevada are both seeing an increase in acquisition transactions as well. This usually occurs before and following a market inflection point. Significant rule changes, new licenses being distributed, and first business dates all ignite the market for big business transactions. In the marijuana industry, we are witnessing a lot more deals being structured as equity driven deals that entail no cash.
Two key components emerge in structuring a merger or acquisition: The
Two main components arise in structuring a merger or acquisition: the envisioned organizational structure at the end of the deal and the method of payment for owners of the selling business. The entities could execute a merger, where the companies are combined and only one continues. The selling business could sell its assets, where it gets rid of its tangible and intangible assets to the buyer and then cashes out its owners and dissolves. The other option is both business entities could stay alive and the buyer takes ownership of the selling company, turning it into a subsidiary. On the payment side, normally it comprises a mix of assumptions of the selling company’s cash, debt, promissory notes payable to owners of the selling company, and stock.
Stock deals are a fascinating calculation, and the value of the stock and the stability of that value depends on a variety of factors. If a publicly traded company listed on the New York Stock Exchange or Nasdaq wants to purchase a company using its stock, selling shareholders receive the value that is almost as good as cash. They can hold the stock in the buying entity, or they can sell it in the public market for its cash value. The scenario differs for stocks sold over the counter and stocks in private companies. For penny stocks (OTC stocks) price volatility hops around so much that selling shareholders may or may not be getting the value they anticipated. Selling shareholders may believe they are getting something of value, but that value can drop at the drop of a hat.
For privately held acquiring companies, cash and stock are totally different. The regulated sentiment of most marijuana business markets only enhances that difference. In a privately held company, no matter if it’s a corporation or an LLC, the company operating agreement usually prohibits or outright disallows selling shares to a third party without the approval of company management. If shareholders of a selling company want short-term liquidity, the privately held company has to allow it. And despite some companies have scheduled liquidity events for their owners through some form of redemption of shares, most purchasing companies limit minority owners to getting profit distributions and hoping the buyer company either sells itself to another third party or eventually goes public.
Also, just because a company is performing well financially does not mean it will
Distribute profits or issue dividends to its owners. Managers of advancing companies usually want to utilize that cash for business expansion, reinvestment, or as a possible source for business acquisitions in the future. When a company owner issues a dividend or distribution, that owner is basically saying it can’t think of anything better to do with the cash. In Washington State, marijuana business owners often store cash for an emergency fund, as the regulations make it so difficult to get short-term capital in case of emergencies.
With that being said, for anyone who’s looking at long-term plays, getting stock in an acquisition could be well worth it. Marijuana licenses are valuable and good owners with solid brands can most of the time take more profit out of a license than its last owners could. If the numbers make sense, getting a small piece of a larger pie — a pie that you predict will continue growing at a solid reate — can result in earning a lot more money in the long run than just cash deal. It’s just a matter of how much risk the sellers are willing to take.
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