How to Buy or Sell a Cannabis Business

00:00:00:00 – 00:00:28:27
Vince Sliwoski
Hey everybody, welcome to the webinar on how to buy or sell a cannabis business. My name is Vince Sliwoski I’m one of the lawyers and partners here at Harris Sliwoski. I’m joined by my partner, Griffen Thorne, and by Andy Shelley at CannXperts And, I’ll just say, personally, I’m a business and real estate transactions lawyer. I’ve been in the cannabis space, almost all my career.

00:00:28:27 – 00:00:40:17
Vince Sliwoski
So I’ve been doing deals in this space since, I think 2000, 11 or so. And, without further ado, I’m going to allow these fine gentlemen to introduce themselves. Maybe starting with, Andy.

00:00:40:19 – 00:01:02:28
Andy Shelley
Right. I’m. I’m Andy. Shelley, I’m the CEO and founder of CannXperts, former regulator in Oregon. And we do compliance and licensing for a couple of hundred licensees here in the state. We also have a, sales side and mergers and acquisitions team for, buying and selling businesses.

00:01:03:00 – 00:01:04:20
Vince Sliwoski
Griffen.

00:01:04:23 – 00:01:28:04
Griffen Thorne
Hey, everyone, I’m Griffen Thorne I’m one of the partners of Harris Sliwoski in our Los Angeles contingent, corporate lawyer and among many other things, I help people buy and sell businesses, do a lot of it in the cannabis industry, but a lot in other industries as well, help buy and sell businesses and, according to Washington, Oregon, Florida, you know, all over the place.

00:01:28:04 – 00:01:35:05
Griffen Thorne
So, happy to be here and talk about some of our experience on the cannabis. Right.

00:01:35:07 – 00:01:50:22
Vince Sliwoski
Great. Okay, without further ado, let’s kick it off. We have it looks like 90 people signed up here. We got a lot of good questions in the webinar, which I appreciate. And I want people to know that you’re also welcome to type them into the chat as we go. And we may we may get to those here during the webinar too.

00:01:50:24 – 00:02:10:22
Vince Sliwoski
And we’re recording the webinar. So if you missed anything today or you have to step out, if you’re not, you can watch this later on YouTube or our website. So without further ado, let’s kick it off. first question for Andy is we don’t often have, somebody like Andy in these in these talks. Andy, what what’s the role, the exact role.

00:02:10:22 – 00:02:16:17
Vince Sliwoski
Like what does a broker or a group like can experts actually do in a business sale? Cannabis business.

00:02:16:17 – 00:02:46:28
Andy Shelley
So yeah. Good question. I mean, first and foremost, we need to establish some sort of value for what? The, for what’s being sold. And that can be, you know, if it’s something static, like a license or equipment that’s typically done with, with comps, comparables, if it’s, if it’s a business that’s up and running, then we’re going to take a look at, you know, profit loss statements, balance sheets, try to figure out, you know, what?

00:02:46:28 – 00:03:17:21
Andy Shelley
Something might be worth for that particular industry. and, and, and then from there, you know, we are looking for buyers where marketing the, the, the asset. And, and once we connect the two people, then we want to try to shepherd these things through this as quickly and as possible. a lot of times, you know, those deals will break down with just, over time.

00:03:17:21 – 00:03:24:12
Andy Shelley
So you’re trying to make sure that everything is happening as easy as possible. Process.

00:03:24:15 – 00:03:38:18
Vince Sliwoski
So that’s kind of teeing them up for sale and kind of shepherding them through sale from a buyer side perspective, I guess, Andy, what should these people be looking at in the potential cannabis business acquisition?

00:03:38:21 – 00:04:08:09
Andy Shelley
from the buyer side, our buyers are getting, pretty sophisticated and savvy now. I mean, they want to see really clean books. they want to see clean operations. they’re looking at, employees, you know, who’s coming along with the, with the sale, you know, aging equipment. What what are they going to have to put out in the first year to, to make improvements?

00:04:08:12 – 00:04:22:16
Andy Shelley
they want to know is you know, is there property involved? Is there a lease involved? What does that lease look like? Are they able to negotiate a long term lease that’s, you know, that’s going to work for their operations. Those type of things.

00:04:22:18 – 00:04:33:27
Vince Sliwoski
What do you think from a lawyering lawyer’s perspective? Griffen what are you looking for when you you know, I come across your desk, you’re you’re representing a buyer. And one of these deals.

00:04:34:00 – 00:04:52:25
Griffen Thorne
I guess the first question and the first thing I want to do is figure out whether it’s been signed or not. and usually, if it hasn’t been signed, especially if it hasn’t been drafted by a broker lawyer, I’ve, you know, put a lot of red, red lining on it. I mean, I write about this from time to time, you know, like, typically it’s not a binding document.

00:04:52:25 – 00:05:15:28
Griffen Thorne
And it’s really just like, sort of an outline of potential deal. and you can mess them up, certainly. And make them binding when they want to. And that’s kind of a whole different discussion if you if you’re interested in that. Look, it’s my post on otherwise. but, you know, nine, 99% of the time you’re going to be non-binding, with the exception of a couple of provisions like confidentiality and exclusivity and stuff like that.

00:05:15:28 – 00:05:44:25
Griffen Thorne
So, even though they’re not binding, I think they’re really important because they established sort of the outline for a deal. And, you know, from a buyer’s perspective, let’s say you set the purchase price at $1 million. And during diligence, you find out that there’s $150,000 of tax lien that wasn’t disclosed. that’s something where you’ll you’ll adjust the purchase price, but a lot of times, or you’re you’ll go back to the seller and say, hey, we’re going to adjust the purchase price.

00:05:44:28 – 00:06:03:09
Griffen Thorne
You know, a lot of times in my experience, though, when one side is negotiating something in a deal, the other side says, hey, this isn’t what we we put in the lot. And even though things are, like, flexible and not binding per se, that’s been something powerful I’ve been able to use. And I’ve seen other people use going through the process.

00:06:03:09 – 00:06:22:20
Griffen Thorne
So I do think it’s important to have a good one on a really small deal. It might not be important if you’re just buying, if you’re in a state where you can just buy a license and it’s like a low value thing and, it might just be better to proceed right to the definitive contract. But in a bigger deal or more complicated one, it’s absolutely crucial to get it right.

00:06:22:20 – 00:06:27:25
Griffen Thorne
Otherwise, even if it’s not binding, there can be headaches down the road.

00:06:27:27 – 00:06:46:06
Vince Sliwoski
Yeah, I agree really a lot with that sentiment that even if it’s non-binding, it is important to get key terms in there because it sort of sets guidelines, right? I mean, people get expectations in place and even if it’s not binding and not a binding term when you’re drafting definitive agreements, a lot of times, I mean, people are going to draft off the lie.

00:06:46:06 – 00:07:02:07
Vince Sliwoski
And when people start negotiating things, you can say, hey, look, this is what we’ve been talking about. It was written down, we understand we can’t force you to do it. But, you know, why are you sort of pulling out the rug on a new term now? So I like I think that’s kind of an underrated consideration sometimes in these deals.

00:07:02:10 – 00:07:19:18
Vince Sliwoski
I also think when you’re talking buyers, Griffen since you’re talking about buyers, there’s, this sort of thinking always that buyers want to buy assets and not stock. Would you agree with that? And if they’re buying assets and not stock, do you have to diligence that businesses are?

00:07:19:20 – 00:07:38:11
Griffen Thorne
Well, I mean, the first question is like where are you actually looking? Right. So in California you can’t I think you can technically can’t do asset sales for licensed business just because the license is tied to a business and, and to a property. states like Oregon have made things much easier for the industry where you can sort of buy the license.

00:07:38:11 – 00:07:56:25
Griffen Thorne
I may not be using the rights of analogy. California. So that’s like the first question. Right? Then the second question is, what’s better to do an asset sale or business sale? And you’re right, from a buyers perspective, it’s better to just buy the assets, because when you buy a business, you’re in fact you’re buying a business that may or may not have liabilities.

00:07:56:25 – 00:08:16:18
Griffen Thorne
And you have to hope that the seller disclosed everything to you. And if they didn’t, your ramifications, you’re stuck with that liability. As the owner of that business, you’re going to have to sue the seller. I mean, there’s other things you’ll probably talk about later with and sort of soften the blow, but at the end of the day, it’s a much it’s much better to just not have to worry about that.

00:08:16:20 – 00:08:34:12
Griffen Thorne
Is diligence still important? Of course. Right. So I think one of the things you’re going to want to look for in diligence is its other companies financials. The reason being that you want to make sure that even if you’re buying the assets, it’s a productive business, right? You might be able to get a license in wherever, whatever city but you.

00:08:34:12 – 00:08:56:10
Griffen Thorne
It’s still important to know that it’s going to be productive. You’re going to want to know that the assets themselves are subject to an equipment lease, or some kind of other document where they’re securitized in favor of a third party, and you’re just going to get sued five seconds later. if you’re if your idea is to keep the license housed in the same location, you got to get a copy of the lease to figure out what you’re going to deal with.

00:08:56:10 – 00:09:16:25
Griffen Thorne
And yet, in almost all cases, in all cases, and effectively the consent of the lessor, which can be a huge pain in the ass. and so there’s just a lot of things you’re going to need to diligence. Of course, it’s not nearly as extreme as it’s going to be with a business sale. and the sellers will often be more grumbly about it, but you still got to do it if you want to make it.

00:09:16:25 – 00:09:19:13
Griffen Thorne
If you want to do things the right way.

00:09:19:15 – 00:09:40:18
Vince Sliwoski
Yeah. And one thing I would add is that in certain kinds of purchases, like stores say, especially even if it’s an asset purchase agreement, often the buyer is going to agree to assume some liabilities, right? Because the day they take over that store vendors are still going to be owed money. And typically and that’s a big reason the diligence things.

00:09:40:18 – 00:09:55:12
Vince Sliwoski
Right. You don’t you don’t want vendors and other people sort of popping up a month after the sale saying, hey, look at this 90 day old invoice. You have to pay it. And then they say, oh, I didn’t assume that liability, and you just don’t want to be in that sort of position or having to go back to the seller for indemnity and things like that.

00:09:55:12 – 00:10:15:23
Vince Sliwoski
So I think diligence is important. Like Griffen is saying, in an asset or in stock sales. how about from the seller side, Andy? Like, how should sellers be kind of vetting buyers to some extent. And, and what should sellers be looking out for when they’re approached by somebody wanting to buy their cannabis businesses?

00:10:15:26 – 00:10:46:22
Andy Shelley
Oh, yeah. Absolutely. yeah. You definitely need to vet buyers. We have, you know, here we have kind of a vetted, qualified buyer list. and then we have others that we send out to, you know, via email, buyers list. But, I mean, you definitely want to see proof of funds. It’s it’s gotten crazy how how many of these deals have gone down the road for months and months and months, and it turns out they do.

00:10:46:24 – 00:11:08:12
Andy Shelley
and then, you know, they should be showing up with their attorneys and have professional documents and these types of things. So we still see I just saw one last week, kind of a handshake, you know, somebody wanting to do a handshake deal. And I mean, that just turns into a bunch of problems if things aren’t spelled out.

00:11:08:12 – 00:11:17:05
Andy Shelley
And, you know, everybody’s represented and, and, you know, that type of more professional transaction.

00:11:17:07 – 00:11:35:20
Vince Sliwoski
Pool, I’m seeing, like a comment from a friend of the firm, Dan McKellar. Hey, Dan, how you doing? He’s a lawyer out East. He says, particularly for buyers. Don’t forget environmental due diligence. Read property purchases. And with respect to the cannabis businesses waste disposal history practices, it’s critical and environmental strict liability states like new Jersey where he is.

00:11:35:26 – 00:11:53:12
Vince Sliwoski
That’s true. I’ve helped buy all kinds of properties with serious environmental considerations attached to them. And if you don’t check that stuff out and you just buy it and you know, there’s supply and everything else where you could be left holding it back. So thank you for that point. Dan Griffen, I didn’t mean to interject. Go ahead.

00:11:53:14 – 00:12:11:28
Griffen Thorne
It’s fine. I think two other points where it becomes really heated, among other things, diligence of buyer. You have to look at the consideration on a deal. Right. So, if the consideration is cash, you want to make sure they have proof of funds or with finance that they have financing. But what about like if it’s stock, right.

00:12:11:28 – 00:12:29:24
Griffen Thorne
If a parent of a public company is going to issue stock as part of the purchase price to the sellers? Well, I want to know that the company’s viable. Right? Or if it’s an earnout type setting where you know, some of the purchase price is deferred over a couple of years. So, you know, like it’s tied to performance of the business.

00:12:29:27 – 00:12:36:26
Griffen Thorne
Yeah. To make sure that they actually are going to staff it to run the way that’s going to hit that or not target. so.

00:12:36:26 – 00:12:52:29
Vince Sliwoski
A lot of times the stock two is going to be restricted. I mean, it’s not liquid like you think a lot of stock is. Right. Like you’ve got to hold it for a half the year or a year until some event happens. So it’s it’s not like if you decide you don’t want a on that piece of consideration anymore, you can cash it out after the sale.

00:12:52:29 – 00:13:02:28
Vince Sliwoski
Sometimes you’re stuck with it. You have no control over it. It’s public company, and you can go on to the toilet and you’re just sitting there. Kind of sad. You agree is such a big component of your sale price of stock.

00:13:03:00 – 00:13:05:24
Griffen Thorne
Yeah.

00:13:05:26 – 00:13:14:26
Vince Sliwoski
somebody is asking, since we’re talking about last a little bit, can we use a generic letter of intent? Griffen. No. Right.

00:13:14:29 – 00:13:35:08
Griffen Thorne
I mean, I nobody’s going to like my answer to this, but that’s my job is to get an answer to people that like, I mean, I wouldn’t do it personally, like, if I was buying a business, I don’t I’m not position. But if I were, I wouldn’t do it because a generic letter of intent can’t really capture the deal points that most deals need.

00:13:35:08 – 00:13:58:12
Griffen Thorne
I mean, cannabis deal by the cannabis business is almost never like I’ll give you X dollars and you give me the keys to the business. It’s never that simple. It’s always very convoluted. You have provisions dealing with all kinds of undisclosed liabilities and things like that. And if that’s the case, then one of the plate always happy to address it.

00:13:58:13 – 00:14:21:17
Griffen Thorne
And then at the end of the day, you know, your question might be, can I just simply address it myself. And I usually recommend people just have a lawyer look at it quickly and maybe make some edits. I can fix most lines up in an hour or two and save people a lot of headaches down the road. And there’s some states where you can accidentally walk yourself into a binding Loi.

00:14:21:17 – 00:14:38:17
Griffen Thorne
And like I kind of alluded to, this at the top. But at the end of the day, if you have a non-binding, if you have a binding LLC, it creates a huge amount of headache. especially where the the other side suddenly doesn’t want to negotiate on a point. That’s. Now, why didn’t you walk yourself into that accident?

00:14:38:20 – 00:14:44:08
Griffen Thorne
I wrote about this a few weeks ago. If you check that post out, it has a lot of information on that point.

00:14:44:11 – 00:15:01:16
Vince Sliwoski
Yeah, I think the LOI is a really sort of like Griffen said, it’s not that much work for a lawyer to deal with and like, because to us they’re sort of standard, right? I mean, they get complex if you’re talking about a public company, stock sale haunts and all the rest, but most of them we can kind of deal with pretty quickly.

00:15:01:16 – 00:15:22:23
Vince Sliwoski
And that is money well spent. Getting a good LOI in place is money well spent. I mean, there’s diminishing returns on other things you might want to use a lawyer to negotiate, but I what I really get frustrated by sometimes as a deals lawyer is when somebody brings me, horrible binding LOI and we’re stuck with it and I.

00:15:22:24 – 00:15:43:16
Vince Sliwoski
And what do you do? I mean, you can try to move around, but sometimes you’re pinned. And I think people sometimes say, well, just get the deal ready and then I’ll bring it to the wire. I don’t think so. I think you do a lot better if you bring somebody in who has some perspective on some of these important things on the front end, you pay a lot less on the back end.

00:15:43:18 – 00:16:02:24
Vince Sliwoski
what do you think, Andy? Do you, do you give sort of like general, like here’s what to do thoughts to clients when they sort of come in and they say, I have a potential person on the line. What sort of best practices at that point when a deal seems on the horizon?

00:16:02:27 – 00:16:25:06
Andy Shelley
yeah. I mean, definitely to utilize your, everybody that we work with has good attorneys. You know, we share clients, between us. so definitely getting them involved. If they’re not, if they’re not, you know, using us for the, for part of the deal or any of the deal, then, just making sure you have the paperwork in place.

00:16:25:06 – 00:16:47:24
Andy Shelley
Good purchase agreements with firm dates, you know, for due diligence and getting your licensing involved. These are the things that tend to make the deal, you know, go away or get sour at some, some point down the road. So I love firm dates and a purchase agreement that everybody is sticking to what they’re supposed to be doing.

00:16:47:24 – 00:16:55:00
Andy Shelley
And, you know, and it’s just moving along nicely. Instead of, you know, all these hiccups and delays.

00:16:55:02 – 00:17:11:21
Vince Sliwoski
Yeah. Lately in mine, in the last year or two, we’ve really been spelling out the dates where everybody has to do everything. I mean, it’s not just like buyer has to submit an LLC application and seller has to submit a change in order. It’s like within two days a buyer doing this seller has to do that. And then it varies.

00:17:11:26 – 00:17:28:18
Vince Sliwoski
And it kind of goes back and forth. And there’s a really well delineated process. And I feel like if you don’t do that, people miss it. And and you need to do do that. People miss it half the time. And you have to not just oh yeah, default and stuff. but I think it’s really important to have that separate not in your agreement.

00:17:28:20 – 00:17:47:11
Vince Sliwoski
Somebody asked before the webinar actually a pretty good question. Asset sale versus entity purpose purchase. Pros and cons. We’ve talked a little bit about it. Griffen could you give like a high level like who wants an asset purchase and who wants a stock purchase generally in the deal and why.

00:17:47:13 – 00:18:04:03
Griffen Thorne
If it’s if it’s allowed under the law, the buyer is going to want an asset purchase, just like we don’t want to assume the liabilities of the seller and an asset purchase, you know, the liabilities. let me sort of break this down a little bit. Seller. We’ll just call it ABC company. Right? It’s an entity. It holds the license.

00:18:04:03 – 00:18:31:15
Griffen Thorne
It holds, machinery holds, you know, a car and all that stuff. It has loans, it has leases, it has, tax liabilities, all that stuff. Right. So if I’m a buyer, I don’t want to buy ABC company. I want to buy all the individual machines and vehicles. And the license, again, subject to law, that I can buy and then assume only specific liabilities that are relevant to my business, like the lease got us in that right.

00:18:31:17 – 00:18:50:13
Griffen Thorne
You guys have to have a lease for property. So those various things so you can be picky and choose to some extent of the liabilities you assume buying business. You can’t because the business strategies liabilities, unless the seller of the business agrees to assume those liabilities and individual. And that that doesn’t usually happen in these kinds of deals.

00:18:50:13 – 00:19:25:12
Griffen Thorne
So sellers usually want to sell the business and just, you know, go to Hawaii and sit on a beach somewhere. but the buyer, you know, so that’s just where things get negotiated. I in my experience, in California, you just we don’t really have asset sales. You know, business sale is kind of the default. Whereas in Oregon, where I do a lot of work events, I very rarely see business sales as compared to asset sales, where people are either buying just a license and moving it to a new location, or sticking at the same location, buying the license and buying all of the assets along with it.

00:19:25:12 – 00:19:43:09
Griffen Thorne
And then you just negotiate what specific contract and other liabilities you want to assume. So I mean, if you’re a if you’re a seller now and you sell all those assets, you suddenly have to deal with winding down the business and all that stuff, right? So it’s less, it’s less ideal, I guess, for the people selling the business.

00:19:43:09 – 00:19:47:15
Griffen Thorne
And so they’re going to sort of try to get the business.

00:19:47:18 – 00:20:09:03
Vince Sliwoski
I would add to all of that, that from a tax perspective, which is important. The asset sale deal structure is strongly preferred by buyers. And in strongly not preferred by sellers. And the tax consequences of it are going to depend obviously on like the legal structure of your business to begin with. If you’re a C corporation, you’re subject to two levels of taxation.

00:20:09:05 – 00:20:38:05
Vince Sliwoski
First, at the corporate rate, when you receive the proceeds of the sale, and then again at the individual rate when the proceeds of that sale are distributed out to shareholders. If you’re an S corporation or an LLC or partnership, any of these pass through entities, those entities are taxed. They’re not taxed. I mean, you’re taxed only once, so the gains are passed through to you as a selling owner, but you pay at your individual rate, which is going to be higher than a capital gains rate that would normally be applied to an equity sale.

00:20:38:07 – 00:20:59:20
Vince Sliwoski
If you’re on the buyer side of it. I mean, you don’t really care about a seller’s tax rate, right? It doesn’t matter to you, but you may be strongly motivated by the fact that in an asset sale, everything that you purchase is going to have a valuation as of the date of the acquisition on the closing date, if you hear accountants talk about that, they’ll call it a stepped up cost basis or a stepped up basis.

00:20:59:22 – 00:21:18:24
Vince Sliwoski
And that’s a big deal for a buyer. That’s a great value when you go to sell the asset. buyers also receive a restart of depreciation and amortization schedule that comes into play when you’re buying things. You can depreciate real estate’s classic example, but there are other pieces of equipment and things that you can sometimes depreciate. It’s another valuable tax break.

00:21:19:01 – 00:21:45:18
Vince Sliwoski
And neither of those tax features applies for buyers and equity sales. And in an equity sale, like Griffen said, the buyer simply purchasing all of the owner’s shares in the business, right, or their stock. And by buying that stock or those shares, they automatically acquire all of the assets and liabilities of the business. It’s a cleaner deal from a sellers perspective, because unlike in an asset sale, the starting point is that everything’s included.

00:21:45:20 – 00:22:03:04
Vince Sliwoski
it could go on. I guess the last thing I would say that comes to mind is a seller in in equities. Halewood would also benefit from preferential tax treatment. You only have to pay the capital gains rate on the profit and that’s subject to change, right? Congress is always messing around with, rates paid on capital gains in ordinary income.

00:22:03:07 – 00:22:30:11
Vince Sliwoski
Definitions of short versus long term capital gains are subject to change as well. So stepping back, I tell people, I’ll help you do this deal. I can give you a big picture of thoughts like I just rattled off, but you need to talk with the CPA too and talk with your CPA because there are a lot of considerations around selling, even within the paradigm of I’m locked into an asset or a stock sale, I don’t know if anybody has anything to add to that.

00:22:30:13 – 00:22:47:12
Vince Sliwoski
I’d say I’ve just seen people lose so much money just doing it wrong, like from a structural consideration. And that’s sad. When that happens. They say, oh, this is how you sell a business. I may just sign something. Doesn’t have to be, how about we talk about something a little less wonky and talk about the actual market?

00:22:47:14 – 00:23:10:20
Vince Sliwoski
We got a bunch of questions, and it looks like, And see if I can read some of them in and around, like, how’s the market lately? how about this one? Let’s answer the question. How overcrowded is the Oregon recreational producer space and how long until attrition normalizes the market? Do you have thoughts on that, Andy?

00:23:10:23 – 00:23:42:24
Andy Shelley
yeah. It’s crowded. there’s no hiding it. I mean, there’s a lot of licenses out there. we’re currently, at least, you know, we’re overproducing we have a lot of retail stores, so that’s driving prices down. A lot of our customers have the same, as for retail, we’ll have the same customer account. They did three years ago when they were making, you know, when they were having half $1 million a month.

00:23:42:27 – 00:24:21:05
Andy Shelley
there’s they still have the same customers, same customer account now, but they’re having $150,000 months. And it’s because the prices have tank so much. They just, you know, those profits aren’t there. we have a lot of producer licenses. I didn’t think that they would sell, but we have been selling through them like crazy here. Yeah. I don’t, you know, I thought, oh, these are going to sit here for a while, but we keep we actually keep running out of, people are for the most part, buying them and warehousing them a little bit.

00:24:21:05 – 00:24:45:08
Andy Shelley
I mean, we have, our compliance officers here and licensing folks have, you know, stuck them in garages and, you know, all, all sorts of places all over the state of Oregon. We have producer licenses just tucked away in closets, basically. So, that one was, surprising to me, but they they still were selling them, pretty quickly.

00:24:45:10 – 00:24:48:04
Andy Shelley
And the prices have been going up.

00:24:48:07 – 00:25:07:16
Vince Sliwoski
Yeah. It’s interesting. We talked a little bit about that last week. I mean, prices, Oregon producer licenses. Couple of years ago we were sell them for a quarter million all the way last year I closed a bunch of sales in that 30 to $40,000 range. And I’m sure you did too. Now I’m seeing them listed. What do you guys have most of that like 120, something like that?

00:25:07:18 – 00:25:12:03
Andy Shelley
Yeah, 100 are our sellers. One 120 currently.

00:25:12:05 – 00:25:29:06
Vince Sliwoski
Yeah. So it’s interesting and I, I kudos to the sellers, I guess, for holding the line there. I don’t think we can attribute all of that to the moratorium that finally passed with House Bill 4121, because I feel like there was a moratorium in place. Essentially, it was just kind of limping along from year to year, and now it’s made permanent.

00:25:29:06 – 00:25:48:10
Vince Sliwoski
But I think it’s more of like industry getting together and saying, no, these things have value. And they have permanent value. And we shouldn’t be fire selling them. yeah, that’s my take on it. I don’t know what about somebody else. Here’s kind of an interesting question. Somebody saying, how do you value licenses that ties into that. Would you agree, Andy?

00:25:48:10 – 00:26:07:29
Vince Sliwoski
And maybe Griffen, that producer, like if you’re selling a naked producer license like we just talked about, it’s got a sort of arbitrary value with 100,020 thousand or whatever that is. Right now, if you’re selling a store, it’s different, right? It’s based on sale, like the Naked Retailer license really doesn’t have an independent value like the Naked producer license.

00:26:08:01 – 00:26:11:23
Vince Sliwoski
Is that how you think about it? That’s how I’ve always thought about it.

00:26:11:25 – 00:26:36:01
Andy Shelley
That’s. Yeah, that’s how, you know, with a license or equipment, like I said. I mean, there’s enough comparables out there. you look around, see what other people are selling them for, and that’s what they’re going to sell for with with retail stores in particular. It takes, you know, we have to I have to dive into the books for a week or more, and I’m looking for anomalies in their operations.

00:26:36:01 – 00:26:56:22
Andy Shelley
But ultimately I’m trying to come up with a price because at that point, you’re not buying a box or a house, you’re buying, you know, you’re buying a stream of income or a stream of debt for the next several years. And, and then it comes down to whatever our, our buyers are willing, you know, how long they’re willing to wait to get ROI.

00:26:56:22 – 00:27:28:25
Andy Shelley
And, you know, we, we try to land on a price. So everybody’s going to be everybody’s going to be different. Everybody’s retail store isn’t worth a million bucks. you know, but ultimately we will list it for whatever our sellers, ask us to. But that’s typically after we’ve had a long talk about, what, what the current local market is, is willing to, invest and how long they’re willing to hold that debt before seeing some sort of profit share.

00:27:28:27 – 00:27:45:09
Vince Sliwoski
And then somebody asked a question which I think I can tie into this. They say, can you provide your thoughts on the likelihood of a federal legalization? I guess I’m gonna add to that question. Griffen, can you provide your thoughts on that and what that will mean for buying and selling cannabis businesses and their values?

00:27:45:11 – 00:28:11:02
Griffen Thorne
Okay, sure. So so first, just a quick thing. Someone asks when we’re talking about naked licenses, that just means buying a license, right? That’s not necessarily tied to anything else. yeah. yes. Opposed to a business where all the assets of a business, rather than just you just buy noise, which, you know, I keep saying is and I always feel like a broken record, but people really need to consider the state law on this because it might be doable in Oregon.

00:28:11:02 – 00:28:38:16
Griffen Thorne
It’s certainly not doable in other states. And, I’ve seen plenty of situations where people set deals up that are completely legal. And you that that’s a whole other can of worms that will probably come back to you later. federal legality. I mean, there isn’t going to be you’re you’re referring to rescheduling. So sort of that globally here, cannabis might get moved to schedule three at some point, probably before the election.

00:28:38:19 – 00:29:01:23
Griffen Thorne
that really won’t make any of these state legal state programs legal in any sense. You know, they’re still going to violate the law under schedule three. a lot of people have been sort of hand-wringing and thinking that this is somehow a tactic by the DEA to them or the federal government to them. You know, assert schedule three regulations on cannabis, which I just don’t see happening.

00:29:01:23 – 00:29:25:01
Griffen Thorne
Like, why would they go through all this effort, agree to make things better, and then make them worse again? I think realistically, things will only get better. And what specifically will get better is that it will no longer be an issue. And so right now, if you want to own a cannabis business, you’re going to no matter how good your sales are, you’re still going to have pretty thin margins.

00:29:25:04 – 00:29:25:20
Griffen Thorne
in a lot of.

00:29:25:27 – 00:29:29:16
Vince Sliwoski
This for if anybody’s brand new, what is 280 Griffen.

00:29:29:19 – 00:29:54:18
Griffen Thorne
Sure. So 280 is a part of the federal tax code, doesn’t allow businesses that traffic and schedule 1 or 2 controlled substances, to make standard tax deductions. So cannabis businesses just cannot make the same kind of tax deductions as like, you know, an ice cream store can make or any other business in America, in traffic is the keyword, you know, people who sell OxyContin, you know, that’s not trafficking, right?

00:29:54:18 – 00:30:20:08
Griffen Thorne
That you can schedule to, you’re not trafficking it in that in the way that firms defined it’s illegal sales of it in federal speaking. It’s it’s all illegal. So if cannabis is put on schedule three that just by its tax doesn’t apply. Of course, it’s possible the DEA could move it to schedule two. and in which case, like, not a whole lot would change, from from this perspective.

00:30:20:11 – 00:30:40:13
Griffen Thorne
But that’s the big thing. And so will that affect M&A immediately? I don’t know. But what I think it’ll do is it’ll it’ll bring capital back into the industry. You know, back when I started in this space was 2018. everybody wanted to seem to buy it seemed like everybody just wanted to buy in the cannabis business or just throw money at the industry.

00:30:40:16 – 00:31:01:23
Griffen Thorne
So everyone thought it was just going to be like printing money. And that didn’t, you know, that didn’t turn out to be the case in almost all cases. but once that, like, huge impediments to profitability goes away, I think there’s going to be an incentive to invest in probably that’s going to drag into businesses wanting to expand.

00:31:01:25 – 00:31:19:27
Griffen Thorne
so you, you’ll see a place that has three retail facilities, want to go up to five, or want to bring in, you know, manufacturing capabilities or whatever it might be. So I, you know, it’ll probably be indirect and take a few months, but I think there’ll be sort of a rejuvenation of the industry, so to speak.

00:31:19:29 – 00:31:37:09
Griffen Thorne
And, you know, at the end of the day, it just sort of remains to be seen as to when that’s going to happen. you know, there’s a lot of reporting is that it’s going to be next. I know a guy who knows that, you know, a guy whose sister friends with under.

00:31:37:11 – 00:31:38:17
Andy Shelley
Write.

00:31:38:20 – 00:32:00:12
Griffen Thorne
Some of that stuff and that’s just. Yeah, I don’t know if ever things change in the federal government, you know, completely decriminalized. Is it federally or regulated federally in allows for interstate commerce? I mean, that’s a completely different story, but that’s not really on the table right now. Our Congress is completely inept, and I there’s just no way they’re going to do that.

00:32:00:14 – 00:32:13:20
Griffen Thorne
I’ve been I’ve been saying that for six years, that I’ve been right every year or so. yeah, rescheduling will be big, but I think it’ll take a few months at least to filter into this specific type of stuff.

00:32:13:23 – 00:32:37:19
Andy Shelley
I think we will see a boost to M&A, like you mentioned and like you’ve said, I’ve said it for the last, you know, six years as well. I don’t have the crystal ball, but it seems, you know, with with this being an election year, we might and probably we’ll see something, in rescheduling, but as soon as that happens, I think we’re going to see a lot of new, new money.

00:32:37:19 – 00:33:03:25
Andy Shelley
We’re going to see banks loosened up for, lending. I, I just think this for the last three years, it’s been very much a buyer’s market. Prices have tanked. We’re seeing multipliers of 1X2X. We’re back and 16, you know, you might have seen ten x. And so with all that rejuvenation happening, I think we’ll switch from being a buyer’s market to a seller’s market.

00:33:03:25 – 00:33:12:06
Andy Shelley
You’ll see a lot bigger better deals happening. So if you want to buy something now is probably the time.

00:33:12:09 – 00:33:30:25
Vince Sliwoski
There you go. Here’s and here’s hoping. Okay, let’s bust through a couple of recent questions we got that are all good. We already talked a little bit about valuing production licenses Andy, but Mark Kramer is asking if there are revenue or sales in play. In other words, it’s not a naked license. Does that factor at all in the valuation?

00:33:30:27 – 00:33:34:27
Vince Sliwoski
If they’re selling a going concern, I guess not just a license.

00:33:34:29 – 00:34:07:25
Andy Shelley
Yes. yeah. I mean, again, equipment, vendor or customer lists, those types of things can have value. You have to look at everything. I don’t know if you’re talking about land real estate. Those types of things should, should factor in. I think a lot of people and this is kind of a little off topic, but, I think a lot of things that I’ve seen over the last several years as people really become in love with their brand and they think they’re going to sell their brand for a lot of money.

00:34:07:25 – 00:34:35:27
Andy Shelley
And typically I would tell you that it’s probably, you know, that’s something that’s unless you’re really well known brand, it’s it’s probably not going to factor into crisis. But having, you know, good lease, having real estate, having something that’s up and running, great equipment that you know, isn’t going to cost a lot. then yeah, that can all that kind all value into that or, you know, come to a different valuation I guess, or a better valuation.

00:34:36:00 – 00:34:59:18
Vince Sliwoski
Yeah. And even if your brand really isn’t affecting like the overall top line sale price, you can still allocate some of the sale price to it. And there may be tax reasons to do that. So that’s something to cover with your CPA, I think. another question related. Salena has Dwyer has asked, do buyers seem more interested in naked licenses or a license in real estate deal combined?

00:34:59:18 – 00:35:21:28
Vince Sliwoski
I guess what I would say about that, I wonder if Andy agrees. Is there just more buyers for the naked licenses because they’re cheaper, right? And a lot of people want a license and already have their own real estate. It’s hard to sell. I mean, real estate is expensive, typically. you can I, I sold we closed the property last month over a million bucks down in southern Oregon on almost all of them are selling carries at this point.

00:35:21:28 – 00:35:31:27
Vince Sliwoski
But I feel like those are a lot less frequent, the buyer like that than somebody who’s got, say, 100,000, hundred and 20,000 for a license. Would you agree with that, Andy?

00:35:32:00 – 00:35:56:11
Andy Shelley
Yeah, I see the, just the naked license. Those are those sell pretty quickly. and then you have these ranges where, like, you know, up to a half $1 million that you have a full build out and submit it and assume the lease. Those are fairly attractive to and sell, you know, quickly. And then you get up into the, you know, 1.5 and above.

00:35:56:14 – 00:36:10:16
Andy Shelley
Those are really hard to sell right now. People, you know just aren’t seeing the value in it. So, yeah, if you, you know, that’s kind of the where we’re, where we’re seeing a drop off in buyers currently.

00:36:10:18 – 00:36:13:14
Vince Sliwoski
Brad ever sellers. Exactly. Oh go ahead, Griffen.

00:36:13:16 – 00:36:25:09
Griffen Thorne
Just to add to that point, I mean, I, I would say I can’t put a number on it, but the vast majority of cannabis businesses don’t actually own the real estate that they’re using.

00:36:25:15 – 00:36:26:16
Vince Sliwoski
I agree.

00:36:26:19 – 00:36:44:03
Griffen Thorne
Yeah. I think the reason for that is that the it’s much more expensive to buy in the short term to buy real estate than it is to lease it. Lease rates are very high in the industry. But, you know, buying a multi-million dollar property is just not in the cards for most people when they’re in a startup mode.

00:36:44:03 – 00:37:07:17
Griffen Thorne
And, you know, like all cannabis businesses, to some extent are startups. So most of them just don’t own real estate. So when we’re talking about naked leasing versus assets in a business sale, usually it’s going to be a business that has a lease, and then that means you have to deal with the landlord and get their consent, which, it can be a real pain because they don’t like to just negotiate with a new person.

00:37:07:17 – 00:37:17:06
Griffen Thorne
They just leased it to somebody. And yeah, no, but I want to deal with this new guy. I’ve had a lot of that, a lot of headaches, over the years dealing with that. But,

00:37:17:08 – 00:37:19:28
Vince Sliwoski
At the least you may have to stay on as a guarantor seller.

00:37:20:03 – 00:37:21:27
Griffen Thorne
Yeah, that’s where it gets hectic, right?

00:37:21:27 – 00:37:24:01
Vince Sliwoski
You can’t just get out. Yeah, yeah.

00:37:24:03 – 00:37:45:18
Griffen Thorne
The landlord might say, hey, I’ll, I’ll consent to the change of ownership, but I’m not going to release the original if you’re a borrower. And then the seller is like, well, I don’t want to speak a guarantor for someone else’s lease obligation. And you get all these funky situations that arise out of that. Yeah. I did recently help someone sell a business that owned its own real estate.

00:37:45:18 – 00:38:12:20
Griffen Thorne
And what that meant is that the valuation was just much better, right, for the sale seller, because that real estate’s, you know, like, the best asset a cannabis business can own, essentially. And so, very often you see these very low, often considered low prices for a business just because they don’t have any owned assets. a lot of cannabis businesses, you might have a fancy location, but it’s just leased and they might not own a lot of equipment or anything like that.

00:38:12:20 – 00:38:18:07
Griffen Thorne
So every deal is different, I guess is my take on it.

00:38:18:09 – 00:38:38:02
Vince Sliwoski
Yeah, I agree, Brad is asking, what are the average attorney and or broker for use for selling and make it producer licensed in Oregon? That’s a very specific question. I’ll answer the attorney part and you can answer the broker part. And the the attorney part is classic lawyer answer that nobody likes. It depends. But they they tend to be pretty cheap.

00:38:38:02 – 00:39:01:00
Vince Sliwoski
And the reason why is a I have a brilliant form that I’ve adapted over the years, which is five pages. So if somebody comes to me saying, I want to sell a naked producer license and you’re the terms, that is literally going to take me an hour to get that form ready to roll. and then the question is just how much, if at all, do people negotiate if people don’t negotiate much at all?

00:39:01:00 – 00:39:18:29
Vince Sliwoski
And everybody says, yeah, that looks good because it is a great form and they don’t have all sorts of changes or foot dragging and stuff that that sale is going to come in well under $5,000. I’ll just tell you that if there’s negotiation, if people hem hemming, if people sign a contract and then don’t perform, it can cost more.

00:39:18:29 – 00:39:32:25
Vince Sliwoski
So I mean, it’s, it’s it’s kind of as you go, but and typically I would say they come in at that $5,000 range or so if people are acting responsibly and just kind of wanting to do a deal, what about you and the.

00:39:32:28 – 00:40:01:05
Andy Shelley
we we we asked for a 6% broker fee. it is negotiable. and and again, it kind of depends on whether it’s a, whether it’s a single license or whether it’s a fully operational retail store. It seems like on our in the same amount of work is involved, however, I mean, we, we do try to for buyers that are coming in, we want to do their paperwork because we do it faster and better.

00:40:01:05 – 00:40:13:14
Andy Shelley
And, you know, there’s there’s things that we try to incentivize them with that can bring down the broker fee. And it’s just part of our, you know, the services that we’ve been doing for the last seven, eight years. So.

00:40:13:16 – 00:40:29:07
Vince Sliwoski
Gotcha. Okay. Good answer. let’s get back to the we got a lot of questions that came in for the webinar on make sure I get to some of them. one is I’ll ask you this Griffen. What is in the sale transaction? What is the purpose of using an escrow? And what’s the benefit of using an escrow?

00:40:29:08 – 00:40:32:28
Vince Sliwoski
Do you need to use an escrow? Tell us about Escrows.

00:40:33:00 – 00:40:56:06
Griffen Thorne
Right? I mean, you don’t need to use one. And I’ve done plenty of deals without them, but it just depends on what the how the deal is structured. when you’re buying property, I mean, I yeah, use natural, but when, when you’re buying a business or a license, if you’re just giving cash in exchange for a license at closing, it’s sometimes not necessary, but a lot of the times it is necessary if there’s more complicated things than that.

00:40:56:09 – 00:41:20:08
Griffen Thorne
one thing people do, we talked about this a little bit, one of the problems that could come up in a deal is there’s undisclosed liabilities, right? So if I’m buying your business in Santa Monica, and the seller says there’s no taxes, and then I find out three months later after it’s closed, that there are, you know, hundreds of thousands of dollars in unpaid taxes, in spite of the diligence I did.

00:41:20:11 – 00:41:29:03
Griffen Thorne
Well, I want to turn on to that seller, but you have to just assume that person is gone or the money is gone or both. and so some that’s.

00:41:29:03 – 00:41:33:11
Vince Sliwoski
Why we do a hold back sometimes. And that’s what I was like, okay, so.

00:41:33:13 – 00:41:55:27
Griffen Thorne
Here’s the thing. It’s called a hold back. Right? So if I’m a buyer I’d say I have to factor, especially in a business sale, I have to factor that possibility in and the possibility that the seller is just going to split. And what I want to do is keep some percentage of the purchase price held back in an escrow account for some period of time after the closing, let’s say a year or two.

00:41:55:29 – 00:42:17:04
Griffen Thorne
and that way I can, if there’s an issue, take money out of it. Right. I can see, if I there’s $1 million purchase price, I’ll leave, let’s say 15% in an escrow account for a year or two. And then the first two years, if I discover something that’s, you know, $100,000, I’ll take back 100,000 out of that, that account.

00:42:17:04 – 00:42:39:29
Griffen Thorne
Right. And so that’s one of the huge values of how you can ask your agent. Another way people do it is if it’s a seller finance at all, meaning let’s say go back to $1 million purchase price and buyer only has 850 on on signing or closing the closing, the seller will take a promissory note and, he’s entitled to 150,000 over a payoff period with interest.

00:42:39:29 – 00:43:02:12
Griffen Thorne
Right. And you can offset, any liabilities against the the promissory note as a buyer. Right. So those are two of the common ways to deal with post-closing liabilities. obviously, if you’re buying an all cash deal, you’re kind of, those are not options, right? But from a buyers perspective, that’s one of the really good reasons to use escrow.

00:43:02:12 – 00:43:19:22
Griffen Thorne
Another reason to use escrow in this might be it might benefit both parties, is that sometimes at closing, the proceeds of the purchase price are not just going to be given to the seller, but they’re going to use to be paid off targeted liabilities. And as a buyer, I don’t want to trust that the seller is going to do that itself.

00:43:19:22 – 00:43:37:20
Griffen Thorne
Right. So if I’m buying, you know, ABC property and it has $100,000 in tax liabilities and $1 million purchase in my deal with the seller is, hey, you pay those at closing. I’m not going to give the seller that 100 grand to go pay the taxes or I don’t trust them. No offense to the seller either. I put it in an escrow account.

00:43:37:23 – 00:44:09:26
Griffen Thorne
I say to the escrow account, here’s the instructions for payment of, you know, the IRS, whatever it might be state tax authority. And at closing they disperse the money, you know, the 900,000 to the seller and the 100,000 to the IRS. And oftentimes it’s much more complicated. There’s, you know, 9 or 10 people to pay. So an experienced escrow company can can manage all that without having to trust that the seller is going to do it themselves, is the worst possible situation would be that you pay the million dollars to the seller, he says, oh yeah, I’m going to go pay, you know, the 200 K in liabilities, one in splits, and then you can’t

00:44:09:26 – 00:44:39:25
Griffen Thorne
get the 200 K back and your business is stuck with those liabilities. You got yourself in the foot. So I know an escrow agent is going to cost a couple thousand bucks. It’s usually split between the two parties 5050. And I think it’s it’s like an insurance policy. Right? It’s it’s extremely good investment. and, you know, I forget the last year we did, it was maybe two grand for the aspiration and split was nothing compared to the risks of not having it done that way, you know.

00:44:39:27 – 00:44:55:17
Griffen Thorne
So again, I recommend it where possible. Obviously, if you’re talking about $20,000 license being sold, maybe that’s not worth it. But, okay, the average deal, 500 K, $2 million deal. Yeah. Get national.

00:44:55:19 – 00:45:13:26
Vince Sliwoski
That’s a great summary. The only thing I would add to that is there are escrows and then sometimes squeeze collection escrows on deals too. Griffen talked about seller financing. That’s where the seller is. The bank essentially after the deal. And they’re paid out slowly over time. That’s very common in cannabis deals because of the lack of traditional lending for the most part.

00:45:13:26 – 00:45:32:22
Vince Sliwoski
And if you set up a collection escrow, that may or may not be the same as what kind of did the deal for you that the collection escrow will receive payments? Monthly payments usually enter promissory note or something down the line, maybe for years and years, and then pass those payments on to the seller. It helps avoid disagreements.

00:45:32:22 – 00:45:52:29
Vince Sliwoski
A lot of time about interest in principal balances, and it also makes it such that the buyer and seller don’t necessarily have to have sort of direct transactional relationships anymore. You you as a seller don’t have to deal with like arranging payments from the buyer and things like that, which can be a pretty valuable insulating services. So that’s that’s what I got.

00:45:52:29 – 00:45:56:17
Vince Sliwoski
I like using house calls, except when it doesn’t make economic sense to do so.

00:45:56:20 – 00:46:01:25
Griffen Thorne
Then should the parties want to buy or sell what is an escrow agent?

00:46:01:27 – 00:46:27:01
Vince Sliwoski
Hell no. I mean, that’s I don’t like it at all. It’s allowed in some states. Not now. There’s, a lot of lawyers don’t even. They have insurance policies that cover that don’t even realize they don’t have insurance policies that cover that. But, you know, think about what an escrow is. An escrow is a neutral, right? It’s a it’s a third party that sits between two parties to take instructions, joint instructions from the two parties to do something.

00:46:27:03 – 00:46:47:22
Vince Sliwoski
If the escrow is also somebody’s lawyer here. And under the ethics rules, they have to, you know, zealously advocate for that person. They’re wearing two hats and it gets awfully awkward. And there are ways to do it in some states. And you need waivers typically. And obviously you got to disclose all that sort of stuff. But I just don’t want to do it.

00:46:47:22 – 00:46:57:16
Vince Sliwoski
I’d, you know, I wouldn’t touch it. some lawyers will think carefully about it if you’re in one of these deals and somebody says, my lawyer is the escrow agent.

00:46:57:18 – 00:47:07:13
Andy Shelley
Yeah, agreed. It’s not worth the $2,000. I think that’s typically what we, you know, the people that we use, that’s what we’re paying as well.

00:47:07:15 – 00:47:25:22
Vince Sliwoski
Yes. And and, you know, at this point, those guys cross. They’re like the lawyers and everybody else have done so many deals that it’s not like we have to sit there, negotiate an escrow agreement or is it? It’s not like a lot of extra time. It’s not like anybody’s reinventing the wheel. This is done in certain customary ways, and it’s done and done and done over and over again.

00:47:25:22 – 00:47:44:24
Vince Sliwoski
So it’s it’s kind of a go at which, you know, I want to get my deal done. I want to be serious, and I want to have a sort of insurance like, yeah, all right. Let’s talk a little bit. Here’s some other questions we got earlier. How about diligence? we talked a little bit about that already. Griffen how is how about this.

00:47:44:24 – 00:47:58:04
Vince Sliwoski
How is diligence typically handled in a cannabis deal? Who does it. And you know, how much time is there afforded to diligence? Does it happen before people sign an agreement? Does it happen after signing agreement? What? To tell us what you think about diligence.

00:47:58:06 – 00:48:27:09
Griffen Thorne
I mean, more often than not, let’s the Loi is can to talk about diligence. And it’s going to set a period let’s say 45 days or 90 days or something. 30 days might be fast. and that’ll start when the party usually when the parties signed the Loi. And we’ll continue until that the period runs out. you know, in a more complicated deal, the purchase agreement might get signed after the diligence period expires, but that’s just because of negotiation.

00:48:27:09 – 00:48:43:25
Griffen Thorne
Sometimes you could sign while the period is still ongoing. I don’t tend to see, like, uncapped diligence periods anymore, because people just want to be, but sellers want to be ensure that this, you know, the buyer’s locked into the deal at some point.

00:48:44:01 – 00:48:44:28
Vince Sliwoski
Yeah.

00:48:45:00 – 00:49:03:03
Griffen Thorne
And the way it usually works is the seller. you know, we talked a little bit about when you when it’s important for a buyer to due diligence with the seller is usually the one I’m sorry we talked about when it’s important for a seller to go against the buyer. But usually even in those deals that diligence is going the other way.

00:49:03:05 – 00:49:32:25
Griffen Thorne
so it’s initiated by the buyer sending a request to the seller. Like we have a pretty good diligence form. We have a couple, one is a lot more robust. which is used on bigger deals, and one is more concise. So it’s, that out. It’ll include questions about, you know, everything litigation, indebtedness, financials, tax stuff, real estate issues, licensing compliance, employment matters.

00:49:32:28 – 00:50:01:16
Griffen Thorne
sometimes you want to even ask for things like data privacy law compliance and so, you know, this gets it becomes even more important when you’re buying the business. And then, you know, going through the process, the seller will start to give you documents, more sophisticated sellers will create what’s called a data room online. Think of it like a drop box, where they put things in specific boxes and folders and say, hey, here’s your response to question, you know, 13.2 and, you know, you’ll have everything organized, some deals.

00:50:01:16 – 00:50:27:09
Griffen Thorne
It’s, you know, a lot more informal. And, you know, even though I’m asking people to send this tax returns, I’m not, you know, qualified to read and advise competently on like tax ramifications or financials. So we’ll request everything and then we’ll send it along to the buyers, CPAs or other financial advisors. In some cases, there may be other really specific professionals that need to get involved.

00:50:27:09 – 00:50:52:27
Griffen Thorne
Analyze something like, you know, if there’s an environmental issue, that involves some kind of remediation, there’s construction issues that might be required that someone might want to bring into a contractor. you know, there just might be various issues, but most of the diligence process can be run through a law firm. We’ll look at corporate governance practices, we’ll look at litigation, we’ll look at security interests, all that jazz and tell you what’s wrong with the business.

00:50:53:00 – 00:51:20:12
Griffen Thorne
And here are the risks and here are the liabilities. And here’s where you should probably consider negotiating. Because, hey, they didn’t tell you about those taxes before you signed. Yeah. Or you might want to try to work on the purchase price a little bit. and things like that. So that that’s where besides, just like negotiating the purchase agreement, which can take a lot of legal time, diligence can be extremely complicated as well, especially on really big deals, and especially if you have more than one location at play.

00:51:20:14 – 00:51:39:02
Vince Sliwoski
Agree I yeah, yeah. Rather than add on that, I’m going to just skip ahead because in the interest of time, we’re coming up on eight minutes left and they have other good questions and topics to cover. One is a big picture, one that I think people will be interested in. Andy, what are some just key areas that you see deals fail?

00:51:39:04 – 00:51:48:23
Vince Sliwoski
like what what are the reasons that, you know, over and over sometimes you’ll see a sale fall through. And Griffen you can answer that too. And he’s going.

00:51:48:26 – 00:52:26:28
Andy Shelley
Yeah, I think we touched on it, but definitely hidden. you know, we’ve seen tax liabilities pop up that weren’t, immediately disclosed or found in due diligence, expenses owing vendors. you know, just things like this that weren’t, that weren’t disclosed, during some sort of a vetting process. So, enormous leases that were signed back in 2016 or 50, you know, and when, when the industry was going to be, you know, everybody was going to be, billionaires.

00:52:27:00 – 00:52:43:22
Andy Shelley
And so, you know, it’s these types of things that were that, that you have to deal with. But I mean, after doing, I don’t know, 100 of these in the last couple of years, it’s it’s kind of we’re, we’re, we’re getting better at our vetting processes and, and learning to work through them as well.

00:52:43:22 – 00:52:55:10
Vince Sliwoski
So how about you, Griffen? Do you see any like particular pain points or just things that that are kind of hallmarks of a deal that might fail or resets? A deal frequently fails?

00:52:55:13 – 00:53:19:27
Griffen Thorne
I think. I mean, deals will often fail, were overly complicated. And this isn’t just unique to M&A. I mean, there’s a it’s just like sort of an endemic problem to the industry where people have these massively over complicated deals and things just fall apart. You know, at some point in the process. I obviously undisclosed liabilities is huge. in people 4 or 5 years ago would still be like, well, I need to buy this business.

00:53:20:03 – 00:53:39:19
Griffen Thorne
Sort of. Regardless of the situation, people have woken up to the idea that it’s not really smart in most cases nowadays. You know? Yeah, it’s a financial hit. And so people are a lot more conservative about it. I’ve seen deals fall apart from, just changes in economic conditions, you know, especially during close to Covid where, you know, it takes a long time.

00:53:39:19 – 00:54:04:15
Griffen Thorne
And then something happens in the intervening months where it’s like, right, or, you know, we’re not going to do it. And I’ve seen deals fall apart just because of like one side’s lawyer was to I’m trying to be diplomatic here, but, aggressive. Let’s just stick with aggressive. Right. Where. Yeah, where a lawyer was getting involved in negotiating business terms and, making things difficult for one of the parties just said, hey, you know, we’re we’ll look elsewhere.

00:54:04:15 – 00:54:16:19
Griffen Thorne
So, I think they can fall apart for a lot of reasons. But, you know, obviously the undisclosed liabilities is always a huge issue, which is just, again, choose what your audience is talking.

00:54:16:22 – 00:54:41:09
Andy Shelley
I just thought of a one of the odd ones we had and it was recently it was a retail store for sale to two times. Two buyers were ready to buy, and the deal fell through because of their, their Google, you know, comments from, from, customers. I mean, it was so bad that they, they, that they didn’t think that they could overcome that hurdle or would take them, you know, a year or two.

00:54:41:09 – 00:54:45:20
Andy Shelley
So we had two buyers walk away. So, you know, it’s kind of an odd one.

00:54:45:22 – 00:55:00:23
Vince Sliwoski
It’s hard to sell a crappy business I guess. Yeah. That’s what that comes down to. Well, what about what about when they do sell and after they close? What what do the parties have to think about after closing? Griffen I’ll give you that one, two to start.

00:55:00:26 – 00:55:03:21
Griffen Thorne
What do you can you what do you mean exactly?

00:55:03:24 – 00:55:28:12
Vince Sliwoski
Well, I mean, you sell the business, you know, the money comes out of escrow and you’re done. Are there any, like, post-closing considerations in my mind, a big one is often like allocation of the purchase price. what? People report to the IRS about the sale? Sometimes there’s license cleanup stuff still that’s associated. Can you think of anything else that that happens once the deal closes?

00:55:28:15 – 00:55:44:05
Griffen Thorne
Well, I mean, this is where it’s important to look at the purchase agreement because, you want to negotiate post-closing obligations. Some sellers are very difficult to work with. And as soon as the deal closes, they just want to be done with it and not. That’s it. I sold the business. What do I have to hang around for?

00:55:44:05 – 00:56:05:23
Griffen Thorne
So, you know, it’s not the case always. But it’s important to really sort of figure out at the outset what what you need the seller for after closing so that you can obligate them to do it. and as a post-closing covenant. And if they don’t do it, then you have, you know, whatever remedies against them, things that I’ve seen come up a lot are just sort of mundane.

00:56:05:23 – 00:56:33:05
Griffen Thorne
Right? So getting the employees rehired, if you’re doing an asset sale, getting transferred over and assigned in filings with the appropriate state, usually state agency, sometimes the USPTO and things like that. I’ve also seen cases where we’ve had, you know, funds and or just big business, big investors buy a business and they don’t necessarily have any experience in the industry.

00:56:33:08 – 00:57:04:20
Griffen Thorne
it’s more of an investment. And for those people, it’s really important to get the right folks in there to manage the business immediately. Right. And that’s that’s where Earnout can become bought and where they’re structured a deal so that the sellers have to actually be employees or officers or something for some period. Post-closing. And then, of course, like the big one is regulatory stuff in California, for reasons that I still don’t understand, you don’t give notice to the state regulators until the deal’s actually closed, which, is very stupid because then you have.

00:57:04:20 – 00:57:35:24
Griffen Thorne
And this is not the way the rules are written. you then don’t know if they’re going to approve it or not until the deal’s actually closed. So, that makes things very difficult. And, but it’s another post-closing obligation. So, I mean, there’s a lot of different things, but I it tends the things that tend to be the biggest snags are these little mini sort of like annoying regulatory things or annoying IP things that, yeah, people put off or they just physically couldn’t do pre closing.

00:57:35:26 – 00:57:57:00
Vince Sliwoski
The other thing I’d add is that it’s the rare sale agreement that doesn’t have some covenants or representations of the seller that don’t survive. Post-closing I mean, you’re talking about an acre license sale. That’s it. The seller sells and walks away almost always. But anything else? I mean, there’s usually a year or two there where the seller is kind of on the hook for something they did or said leading up to the sale.

00:57:57:02 – 00:58:14:01
Vince Sliwoski
And I tell Buyers Calendar that stuff. Remember that stuff? Because, you know, you might be claim barred and those windows may be shorter than the applicable statute limitations in your state. Right? So like maybe you might have two years to bring a claim under common law, but you’ve agreed to limit that window to six months or a year.

00:58:14:01 – 00:58:28:24
Vince Sliwoski
And if you’re a day late and it’s a big deal, you’re s. Well, so that’s that’s just something to think about after a deal closes the trigger on the buyer side. Anything to add and see any weird things pop up after sales close?

00:58:28:26 – 00:58:46:25
Andy Shelley
you know, we’ve seen a few, like, employment agreements to keep the seller around for a few months. I mean, those things are always nice. If you’re new to the business or you need, some time to kind of acclimate yourself to, to the business, then that’s something to think about in these deals as well.

00:58:46:27 – 00:59:11:04
Vince Sliwoski
Got it. Okay, I see a couple of questions which I’m not going to answer about allocations of purchase price with respect to 280 and deductibility of amortization and things like there’s a couple of questions like that. Guys, get a CPA in the sale and talk to a CPA. I mean, we’re business lawyers. We understand tax pretty well. But we’re not going to be signing your tax returns or we don’t want to touch allocating your purchase price or opine on how you should do that or activity.

00:59:11:04 – 00:59:30:09
Vince Sliwoski
So that’s how I’d answer that question. I’m sorry I can’t give you a direct advice on that. And with that, I think we have to wrap up. We are at the hour. I want to thank one of my favorite lawyers ever, my partner Griffen Thorne and one of my favorite industry entrepreneurs ever, Andy. Shelley’s an expert. It was a great talk.

00:59:30:16 – 00:59:45:26
Vince Sliwoski
Like I said, it’s going to be up on YouTube. It’s going to be up on our website. Maybe Andy can figure out a way to distribute it to stay tuned to our channel, our blog. We publish at least a couple times a week on these types of issues, and best of luck to everybody. It’s an interesting time out there in the industry.

00:59:46:00 – 00:59:47:12
Vince Sliwoski
We wish you the best.

00:59:47:14 – 00:59:48:20
Griffen Thorne
Yeah.

00:59:48:22 – 00:59:49:04
Vince Sliwoski
Take care.

00:59:49:04 – 01:00:03:10
Andy Shelley
Thank you.