Enter the Foray: Buying a Marijuana Company
So you’re thinking of buying a new marijuana company. Hopefully, you recognize just how many things can go wrong with the sale (pessimism is often useful) and you’ve taken the necessary steps to protect yourself. Due diligence ultimately boils down to the buyer (and generally not the seller) exerting maximum effort to search and probe the financial weak points of the target company and reduce the chance that they will, in short, get screwed. That’s right, contact your marijuana lawyer ASAP.
Who Is Actually Doing The Due Diligence?
Due diligence is often conducted by associate attorneys who represent the potential buyer. During the due diligence process, the target company’s owners can expect to receive a detailed and exhaustive list of seemingly random and irrelevant questions from the marijuana attorney. Hopefully, if the marijuana lawyer is doing his job, these questions are not random at all and serve a very real purpose. While annoying, it is important that business owners are prompt in responding to these requests, as a cooperative client can meaningfully expedite the due diligence process. In order to streamline this process, marijuana companies (with the ultimate goal of selling their company) should avail themselves of software-based filing systems that can manage huge data load; such systems may include descriptive file names, clearly identifiable labels, or numbered filing. The objective is to make the process run as smoothly as possible and save both parties time and money.
What Does Due Diligence Seek To Uncover?
The purchaser of the target company will look specifically for financial information that may reveal liabilities or weaknesses that are otherwise not immediately apparent. For example, inquiries may center on the following meta-questions; who has owned the company in the past, which assets does the company own, what if any outstanding contractual obligations do the target company maintain, how much debt does the company have that is not recorded etc.
It is of course not surprising that the acquiring company will want to know who the current equity holders are in the marijuana company and the conditions of their ownership. If it is not entirely clear who owns the company, the purchasing company cannot safely acquire it. Unfortunately, obtaining this information is not always easy. Indeed, many companies start out as loose partnerships without clear and lucid delineations of ownership. Perhaps the CTO thought that his contribution of the technology used to run the company bought him an equity stake in the business. Conversely, the founding CEO may have thought that the CTO only had the future right to purchase stock in the weed company. These things need to be investigated.
Marijuana Due Diligence and Debt
Beyond resolving any internal ownership disputes, it is absolutely critical for due diligence investigators to determine whether or not the targeted marijuana business has any outstanding contractual/financial obligations. The potential buyer of the marijuana company, of course, needs to know if he will be saddled with debt and liability upon signing his name on the dotted line. Finally, if the company does, in fact, have debt, the acquirer should evaluate this risk in light of its offsetting benefit and the future likelihood of being served with claims, demands, and lawsuits post-sale.
Closing the Deal
The comprehensive and indeed exhaustive process of due diligence is an absolutely essential part of any acquisition deal. Ultimately, if the buyer is satisfied with what has (or has not) been uncovered during the due diligence process, the marijuana business owner and acquirer will proceed with the sale and our industry moves one step further to glory.
