What to Know When Buying or Selling a Cannabis Business

September 14, 2023

As more states legalize cannabis and the industry experiences ongoing growth, we are witnessing a rising trend of acquisitions and sales within this sector. While buying and selling a business is a complex process for any industry, there are unique considerations to keep in mind when buying or selling a cannabis business.

Here are some key factors to consider when it comes to deals in the cannabis industry:

Regulatory Compliance

Cannabis businesses must navigate a complex patchwork of state laws. In addition, the regulatory landscape is constantly evolving as more states legalize cannabis for medical or recreational use. For this reason, it’s crucial to ensure that any cannabis business you’re considering buying or selling is fully compliant with all applicable laws and regulations.

Most states have laws related to changes in control of the cannabis business. Whether a buyer is purchasing the assets or equity of a cannabis business, there will likely be a number of filings required with the applicable state regulatory body. Parties need to ensure those filings strictly comply with all applicable regulation to avoid facing any penalties or fees or potentially a cancellation or suspension of the seller’s cannabis license.

Representations and Warranties

In any acquisition agreement, a seller will represent that its business is in compliance with all applicable laws. This is problematic given the current federal illegality of cannabis. Parties to an acquisition need to carefully draft representations and warranties related to compliance with laws. On the one hand, a buyer needs assurance that the seller is complying with all state cannabis laws as well as other federal and state laws unrelated to cannabis e.g. employment laws. On the other hand, a seller doesn’t want to put itself in a position where a buyer could claim it is in breach of the acquisition agreement for failure to comply with certain federal laws.

Intellectual Property

Many established cannabis brands have invested significant resources into developing unique strains, products, and branding. As such, when buying or selling a cannabis business, it’s important to carefully evaluate any intellectual property (IP) associated with the business. This includes trademarks, patents, and copyrights that could be valuable assets. Buyers should determine whether there are any existing contracts or licensing agreements in place for the business’s IP, while sellers must ensure they have a clear value proposition for their IP.

Buyers should be aware though that cannabis businesses generally are not able to obtain federal trademark protection for their businesses because the United States Patent and Trademark office will not allow registration of a trademark used in connection with what it views as an illegal good. So, while a seller’s brand may be valuable, ultimately it lacks certain basic protections that a typical buyer would expect to see.

Navigating Unique Challenges

KJK understands the unique challenges and opportunities that come with cannabis deals. Whether you’re a seller looking for optimal pricing and deal structure, or a buyer seeking access to valuable intellectual property or a new market, we can help you navigate the legal and regulatory landscape through every step of the process. If you have any questions or would like to discuss further, contact Alex Jones (440.832.0599; AEJ@kjk.com) or your KJK attorney.