On January 28, attorneys from Tonkon Torp’s Cannabis Industry and Mergers & Acquisitions practice groups co-hosted a webinar on M&A trends for Oregon’s cannabis industry with representatives from MGO, a CPA and accounting consulting firm with a substantial cannabis practice. Moderated by Tonkon Torp partner Jessica Morgan, the panel featured Tonkon Torp partners Jeff Woodcox and Danica Hibpshman, as well as Scott Hammon, Sanjay Agarwal, and Mark Hefner from MGO. A recording of the webinar can be screened below.
Scott Hammon began the conversation by discussing factors fueling the current wave of consolidation in the cannabis industry as compared to the push in previous years to secure licensing footholds in different states through acquisitions. Although there are exceptions based on local market and regulatory conditions, values are generally up for cannabis businesses and he expects to see a focus on growing through acquiring profitable targets and established brands. Scott also discussed the recent surge in the use of Special Purpose Acquisition Companies (SPACs) in the cannabis space.
With her unique perspective of having worked with Oregon cannabis regulations on both the rulemaking side as well as with industry clients, Danica Hibpshman reviewed OLCC regulation changes that went into effect in October 2020. Although streamlined processes and reduced timelines have given businesses more fluidity to access financing, Danica stresses that there are still many requirements and rules to follow. Working with experts trained in compliance who understand the complex regulatory environment can help businesses avoid pitfalls while navigating an M&A deal.
Sanjay Agarwal focused on maximizing value in M&A deals while minimizing tax exposure. Strategies for handling common tax liabilities, such as tax liens or payroll tax liability, include escrows, special indemnities, and purchase price reductions. To avoid deal delays and cancellations, and to proactively prepare for the prospect of an audit, Sanjay encourages business owners to assess possible tax liabilities to identify and remedy issues early on. He also discussed structuring a deal to take advantage of tax-free reorganization provisions, such as a reverse subsidiary merger structure.
Turning to the legal side of cannabis M&A, Jeff Woodcox looked at ways to work with the OLCC’s mandatory pre-closing approval requirements. This requirement often creates a substantial lag between signing and closing. That lag, which has been shortened with new OLCC rules, can be bridged by creating a management services agreement that gives a buyer the ability to manage the target business while OLCC approval is pending. Jeff also reinforced the importance of a good Letter of Intent for deals. The process ensures all parties are on the same page, identifies legal and financial affinities, and often helps in negotiating the definitive documentation of the transaction. Jeff concluded his segment by noting the continuing trend of stock as purchase consideration, which adds securities compliance issues to the deal.
With regard to deals that contain real estate assets, Mark Hefner encouraged both targets and buyers to get their house in order, encouraging sellers to complete due diligence on a property before engaging with a buyer, and buyers to ensure that the real property aligns with their business objectives. From practical experience, Mark encourages parties to consider sale lease back options, which are an easier and less expensive way to monetize assets for reinvesting in a business.
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