Cannabis Sector Poised For Increased M&A Activity In 2021

Fox Rothschild LLP

Fox Rothschild LLP

The legal cannabis market is still in its infancy and there is much more room to grow. At the end of 2020, we saw an uptick in merger and acquisition activity as the industry shook off some pandemic-related instability, and we expect that trend to increase significantly in 2021.

Despite abundant money available to the large Multi-State Operators (MSOs), most cannabis companies still have relatively limited avenues to raise capital due to the federal illegality of the industry. However, that may change soon with the Democrats now controlling both houses of Congress and the White House.

Legislation on the Horizon

Two bills that died in the last Congress nonetheless charted a course for important progress that could happen quickly.

In December 2020, the House passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which would have descheduled cannabis from the Controlled Substances Act and enacted a variety of social and criminal justice reforms related to cannabis. However, the MORE Act was never brought to a vote in the Senate. Similarly, the Secure and Fair Enforcement (SAFE) Act – which passed in the House in 2019 but was never brought to a vote in the Senate – would have allowed banking institutions to accept deposits from legitimate cannabis- and hemp-related businesses without fear of penalties from federal regulators.

Going forward, it is likely that the Democratic-controlled Senate will bring cannabis legislation to a vote, especially now that the sweeping approvals of 2020 state ballot measures confirmed that a majority of U.S. voters support cannabis legalization. Democratic leaders have vowed to prioritize cannabis legislation, but Washington is famous for moving slowly. Regardless, it is anticipated that cannabis legalization could happen as early as this year.

When, not if, cannabis is descheduled, we anticipate an influx of cash into the cannabis sector as previously reluctant investors and institutions enter the market without fear of federal repercussions. This influx of cash will most likely increase the current merger and acquisition trend that we saw at the end of 2020 as MSOs continue to acquire smaller operators to expand their market share and enter into new territories.

Becoming an Attractive Acquisition Target

So what does all this mean for cannabis businesses large and small? If you are a smaller operator looking to sell your company, you should take steps now to make your enterprise as attractive as possible to MSOs seeking to expand.

Now is the time to focus on the details so that your company can present itself as a well-run and attractive target to any potential suitor.

To be an attractive target for acquisition, operators should:

  • strive to become cash-flow positive
  • have all federal, state and local taxes in order
  • resolve any corporate governance-related matters
  • not be saddled with debt

In addition, having a clean capitalization table without questions as to current ownership will be important to the majority of prospective buyers.

For Buyers, a Cash Influx Means More Competition

If you are an MSO, you will likely have access to additional streams of capital that were previously not available to you. As a result, you will see an increase in competition.

Many MSOs will be able to take advantage of this to expand operations and grow market share. The influx of cash into the market will increase the purchasing power for many MSOs. There will be winners and losers at the end of 2021.

Those MSOs that can move quickly and diligently in acquiring value-rich operations will be the winners of the anticipated boom in the 2021 cannabis M&A market.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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