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Marketing a Cannabis Company for Sale, Part 3 – Identify Profitability and Financial Trends

Part 3: Identify Profitability and Financial Trends

In the series “Marketing a Cannabis Company for Sale,” Dena Jalbert walks through the nuances and intricacies involved in preparing a business for sale in the cannabis industry. This article, “Step 3: Identify Profitability and Financial Trends,” is part three of a five-part series. 

At this point in your journey of marketing your cannabis business for sale, you should have progressed through step one – mapping out your strategy – and step two – assembling a strong M&A team. The next step in the process is to identify profitability and financial trends.

Profitability

Profitability is the goal of any business, and is a critical component of making your business an attractive target for acquisition.

When you are positioning your cannabis business for sale, you will need to have a complete financial picture of your company, including past and current profitability, as well as projections of future profitability. Potential buyers want to know how your company is currently performing and look at its historical performance prior to an acquisition, assessing whether your profits are trending up or down. If your company is underperforming – not growing revenues and not controlling costs – you will find it challenging to attract a buyer willing to invest the time and attention needed to turn it around.

Many companies in the cannabis sector struggle to become profitable, hedging their success on future distribution and sale of their product as rules and regulations related to cannabis are solidified. The most profitable cannabis companies are those that are committed to staying in the black as they expand their product portfolio, have a focus on organic growth and/or a strategy for growth through strategic partnerships. A focus on successfully executing on your business plan to achieve profitability will position you to take advantage of the increase in consumer spending on cannabis products and will attract the most interest for your company as a target for acquisition.

Trends

Timing is critical in terms of your company’s profitability, but also important in this timing are trends that impact the financial health of the cannabis industry. As a business owner, you should have your finger on the pulse of what is happening in the industry in order to strategically adjust your business plan to take advantage of these trends and potentially adjust the timing of putting your business up for sale if needed.

Two of the most significant trends currently impacting the cannabis industry include the legislative climate and the development of new cannabis products.

Legislative Climate

One of the key drivers of growth in the cannabis industry is increased legalization. Exponential growth in the industry is already being seen in states where cannabis is currently legal and will only increase as markets open up in more states. According to New Frontier Data, in states where cannabis is legal, medical and adult use sales are forecast to grow from $12.9 billion in 2019 to $26.3 billion in 2025.

Lawmakers in states where cannabis is not legal are seeing the success of the industry in states with legalization and want to bring this revenue stream to their states. Recreational marijuana is now legal in 10 states and the District of Columbia, and medical marijuana is legal in 33 states and D.C. The New York and New Jersey state legislatures are considering legalization of adult recreational use of cannabis in their states this year, and momentum for legalization is building in Pennsylvania and Illinois.

The legislative climate should be a significant factor in deciding when the time is right to sell or buy. As more states legalize marijuana, the markets will continue to open up and provide an even more favorable climate for M&A.

New Cannabis Products

Another key driver of industry growth is cannabinoid, or CBD, which is making significant inroads in consumer products. CBD can be found in everything from food, to skin care, to pet and fitness products. Consumer interest in these products is increasing as many of these brands are touting the wide-ranging health and wellness benefits of CBD. CBD products are bringing mainstream market opportunities to the industry with the development of innovative consumer products, and is expected to be a key driver of industry market growth moving into 2019.

The growth in market opportunities generated by the continuing increase of cannabis legalization and the development of new cannabis consumer products has attracted interest from large corporations in a wide range of sectors including food, tobacco and alcohol. These corporations are strategically entering the market by acquiring small cannabis companies, providing an excellent window of opportunity to position your company for acquisition. This window of opportunity will begin to close as the industry matures. Fragmentation as the result of the entry of many new players, a dwindling availability of seed capital and an increasing squeeze in profitability will all inevitably occur when the market has met this maturity.

The bottom line is that timing in terms of where your company is in its drive toward profitability, as well as industry trends impacting the financial health of the industry, will be key determining factors in the success of the sale of your company. Get the full picture of both as you determine the right timing to position your business for acquisition.

Originally published on Cannabis Business Executive, March 11th, 2019:

https://www.cannabisbusinessexecutive.com/2019/03/marketing-a-cannabis-company-for-sale-part-3/

Marketing a Cannabis Company for Sale, Part 2 – Put Your Team in Place

Since we’re just coming off the Super Bowl, let’s use a football analogy. Tom Brady needs all of his players to win the game, despite being called the Greatest of All Time. You should have a team behind you as well when thinking about M&A. We talked with Cannabis Business Executive on this topic – Part 2 of a 5-part series…

Marketing a Cannabis Company for Sale, Part 2

Step 2: Put Your Team in Place

In the series “Marketing a Cannabis Company for Sale,” Dena Jalbert walks through the nuances and intricacies involved in preparing a business for sale in the cannabis industry. This article, “Step 2: Put Your Team in Place,” is part two of a five-part series.

After mapping out your strategy for selling your cannabis business – which involves determining your vision for post-sale outcomes, identifying the characteristics of the ideal buyer and analyzing industry market trends – the next step in marketing your cannabis company for sale is to assemble your mergers and acquisitions (M&A) team. This is the most important step in the process, as your M&A team will be the chief architect of the deal-making process.

Cannabis companies typically fall into the lower middle market (companies with annual revenue between $1 million and $100 million) due to the industry’s youth. Therefore, a small, experienced, highly nimble M&A team is the best fit to handle deal planning, a process that includes initial screening, legal structure and finance. Two major considerations for selecting the right M&A team should be their level of experience in, and understanding of, the cannabis industry and their ability to execute the deal while staying true to your company’s core values.

A typical deal takes more than 1,000 hours and around six months to execute. However, there is nothing typical about the cannabis industry. These hours include everything from researching the market, reaching out to potential investors and buyers, fielding and advising on offers, determining the best offers, negotiating with potential buyers and executing the contract process.

Because the cannabis industry is a new and highly specialized industry, it is important to select members of your M&A team who are knowledgeable about the many nuances of this rapidly developing industry. Key members of your M&A team should include:

M&A Advisor

The main role of your M&A advisor is to prepare and help execute your selling strategy. This function ranges from designing the overall exit strategy to ensuring your business is capable of executing due diligence. Your M&A advisor is involved in every part of the deal, and helps keep the company owner and executive team updated on all developments. On the front lines of any sale talks, your M&A advisor will also help you navigate the consolidation of your company’s culture and internal systems with that of the buyer. Most deals in this space move rapidly, and a good M&A advisor can help you do the necessary vetting that will keep deals on pace close as seamlessly and quickly as possible.

Legal Advisor

Your M&A team should include an attorney well-informed of the nuances of the cannabis industry and with a deep understanding of M&A. Not all firms specialize in both — so do your research. For example, an attorney who knows the cannabis industry can help you determine if your buyer has the right licenses, is a buyer who you will be able to transfer your license to, and can help you with the transfer of licenses. Each state has different regulations around the who, the what and the where of licensing, and a legal advisor with cannabis industry experience should be engaged early in the deal to evaluate the ability of licenses to transfer seamlessly.

CPA

The CPA on your M&A team ensures that your financial statements fit within the generally accepted accounting principles (GAAP), and makes sure your tax compliance filings are complete and accurate. Beyond these accounting functions, your CPA will need to be nuanced in the cannabis industry. Taxes, in particular, are very complicated — employer and income — depending on the state where you are located. Your CPA will also need to be with familiar federal tax code related to the cannabis industry. This includes section 280e of the Internal Revenue code, which forbids state-legal cannabis businesses from deducting otherwise ordinary business expenses from gross income associated with Schedule I substances.

When selling your cannabis business, you should never go it alone. As a business owner, you likely don’t have 1,000 hours or more to devote to executing the sale of your company, and need the support and guidance offered by a strong M&A team. The work of a good M&A team does not end when the deal closes. Your M&A team should also provide support for integrating entities after the sale closes, which is when the hard work of combining two businesses really begins. The integration of a seller’s team with an acquirer’s team to work together to grow the company is common in the cannabis industry due to the newness of the industry and the difficulty finding people with industry expertise.

The cannabis industry will continue to grow and then likely consolidate, making 2019 another big year for industry mergers and acquisitions. As part of this trend, companies will continue to explore buying or selling opportunities and look for the best fit to create new companies with higher valuations. This year will also see some big players, including food, tobacco and pharmaceutical companies, enter the market, forever changing the current small, independent business characteristics of this industry. As more deals are executed in this space and you look to sell your cannabis business, make sure you put the right team in place so that your deal is not one of the 70 percent of all M&A deals that fail.

Originally published on Cannabis Business Executive:

https://www.cannabisbusinessexecutive.com/2019/02/marketing-a-cannabis-company-for-sale-part-2/?fbclid=IwAR1Egayp4b8P519FogBE7PdQcxvqPoKu9SH2gdbGm8ee_DP7KZdPMYusGiw

Marketing a Cannabis Company for Sale – Step 1: Define Your Strategy

Article originally published December 19th, 2018, in Cannabis Business Executive:  https://www.cannabisbusinessexecutive.com/2018/12/marketing-a-cannabis-company-for-sale/

Marketing a Cannabis Company for Sale

Step 1: Define Your Strategy

In the series “Marketing a Cannabis Company for Sale,” Dena Jalbert walks through the nuances and intricacies involved in preparing a business for sale in the cannabis industry. This article, “Step 1: Define Your Strategy,” is part one of a five-part series.

Whether a company is looking to sell immediately or five years down the road, it is never too early to start the process of preparing for sale. As legalization continues to spread, the cannabis industry will see increased mergers and acquisitions (M&A) activity in the next few years. The first, and arguably the most important, step in the process of marketing a cannabis business for sale is to clearly and thoroughly define your strategy. The answer to the question “What do you want from this sale?” should be the motivation that drives the entire process.

Vision for Post-Sale

When preparing a cannabis business for sale, it is best to start where you would like the process to end. Think about your optimal position after the deal closes. Some business owners want to make a clean break and step away from the company entirely post-sale, while others desire to stay with the new entity as a part of the executive or advisory team. Understanding how you want to come out of the other end of the deal will help get the process started and help you find the right buyer.

Determining the level of involvement post-sale is a personal decision and one of the only parts of the process that a founder cannot be advised on, not even from an M&A advisor. Cannabis founders, in particular, have a strong connection with their companies because they have likely jumped through many hoops to get their business to a successful position. As a result, these business owners may find it difficult to completely walk away or accept a non-leadership role with the new entity post-sale.

Identify the Ideal Buyer

Understandably, many entrepreneurs are protective of the company they’ve worked hard to build. Regardless of the level of involvement post-sale, no business owner wants to leave their company in the wrong hands. Mark Zuckerberg famously turned down an acquisition offer for $1 billion from Yahoo! at a time when the company was not profitable and making $30 million in revenue. One of his reasons for turning down the offer was because he felt the acquirer did not have a clear vision for company.

Once you know the desired outcome of a sale, it is important to take the time to determine the characteristics of an ideal buyer. M&A deals fail 70 – 90 percent of the time; and one of the leading causes of a deal falling through is a lack of synergy between the two organizations. On the buyer’s end, it is easy to focus on the acquiring asset, but many different factors go into the success of a product or service, and the company overall. A product or service is only as good as the people, technology and company culture behind it. If a buyer does not understand the value of entire brand, the company should not be afraid to walk away from an offer.

Every cannabis company with an ultimate goal to sell or be acquired must take a deep dive into its own strengths and weaknesses. The perfect buyer will be the one who provides the most operational synergies when the two companies merge. When equipped with a clear understanding of the brand’s strengths and weaknesses, you’ll be able to recognize the traits in a buyer that can further strengthen the company. Remember that “weaknesses” in your company are really opportunities for growth that can be addressed once the business gains access to the buyer’s resources, like HR support and suppliers.

Because operational skills are not widely taught or trained yet, people are one of the most valuable assets for cannabis companies. Keep your people in mind when defining the ideal buyer. If a pivotal part of a company’s success is the open-door policy for employee issues, then possibly merging with a company that has an extensive chain of command and a lack of similar policies could cause friction when the companies merge.

Analyze the Industry and Note Market Trends

For any company, but especially cannabis companies, an understanding of the current market is vital in defining your strategy. The industry is truly unique, with no other industry even remotely similar in nature. Additionally, the cannabis industry is young, as the legalization of recreational and medical use has only existed for a few years.

Timing can be a determining factor in the success of a sale, as the cannabis industry is constantly changing and evolving. The legislative climate will weigh heavily when a brand is deciding whether it is the right time to sell or buy. As U.S. states continue to legalize marijuana, the markets will continue to open up.

Cannabis business owners should understand how an exponential growth in the market, or additional legal restrictions, would impact its company. Even if a company is based in the U.S., it should note how markets in other countries react to legalization. The response in Canada after its nationwide legalization of recreational use is a good indicator of how U.S. markets may respond if similar legislation passed.

More than 145 cannabis mergers and acquisitions were announced in the first half of 2018, almost double the activity seen in the previous year. Additionally, the largest cannabis acquisition to date occurred in July when Aurora Cannabis acquired MedReleaf for CA$3.2 billion ($2.3 billion in U.S. dollars). While 2018 was a huge year for M&A in the cannabis industry, 2019 is set to be an even bigger year. Every cannabis company looking to sell in the future should begin the process now by defining its strategy.

US Middle Market Fundraising On Track to Meet Record Levels in 2018

US Middle Market Fundraising On Track to Meet Record Levels in 2018

Last year was a record year for private equity fundraising in the US. This activity was driven by some mega-funds that allowed firms to bring in more cash than in any year since the financial crisis. In 2018, there are fewer of those mega-fund vehicles, and overall fundraising figures are down. However, in the middle market—defined as vehicles between $100 million and $5 billion—American firms are still thriving. The funds may be fewer. But they’re definitely larger. Through the end of 3Q, investors had raised more than $88 billion for middle-market funds, per PitchBook’s 3Q 2018 US PE Middle Market report, on pace for the most of any year in the past decade.

fundraising on pace to match last year's record

What Does This Mean for Middle Market Businesses?

Record level of capital in middle market funds means M&A deal volumes will continue to be strong and likely growing into 2019. All of this capital will need to be deployed, meaning investors will be looking hard in the middle market for platform and add-on investments for their portfolios. So, if you have been considering growth capital or of selling your business altogether, now is the time.

i4 Business Magazine – November 2018 – “Navigating the M&A Game”

Article originally published November 1st, 2018, in i4 Business Magazine:  http://www.i4biz.com/featured/navigating-the-ma-game/

Navigating the M&A Game

ALIGN PREPARES SMALL FIRMS FOR GROWTH — AND THE EVENTUAL EXIT

Dena Jalbert was working with the Tribune Media Company, where she and the publisher of the Sun-Sentinel newspaper in Fort Lauderdale would go out into the marketplace in the mid-2000s and acquire small local publications.

The Chicago native had spent her career until then working in corporate finance with other large enterprises, including Arthur Andersen and Ernst & Young. But she found herself drawn to the companies that were on the other end of the acquisitions she was negotiating for Tribune.

“I would watch these business owners sitting across the table from us who didn’t have representation,” she says. “I was so surprised and disheartened because they didn’t understand all the terms. It’s a complex process. They were inadvertently leaving money on the table.”

Today Jalbert is the owner and CEO of Winter Park-based Align Business Advisory Services, which represents firms in what she calls the lower middle market, or those with $1 million to $100 million in annual revenue.

Business owners at this level are “very much underserved,” she says. They’re too small to be able to afford a full staff of C-suite executives who can help them navigate through complicated business issues, especially a chief financial officer. The larger consulting firms and investment banks would consider them too small to become clients. But they’re too big to qualify for some of the services available for mom-and-pop start-ups.

“I want to help those business owners,” Jalbert says. “I want to make sure they’re getting the best terms and they’re maximizing their decades of hard work in that transaction.

“I compare it to a game of poker. You sit down at the table, and you know some tricks. You’ve read a book or two, and you know the rules generally. But you’re a novice, and you’re sitting across from someone who could win the World Series of Poker. You’re at an inherent disadvantage.”

Better Off

Jalbert purchased Align in 2017 after being hired previously by private equity firms and several midsize companies to help with their exit strategies.

One of those companies was Channel Intelligence, a Celebration-based firm that developed technology to power online shopping sites, including Walmart, Target and Best Buy. Google purchased the company for $125 million in 2013 in what still remains one of the largest acquisitions in the Orlando area.

After a series of these kinds of experiences, the lightbulb clicked on, she said. “I thought to myself, ‘Hmm, there’s a pattern emerging here. This isn’t coincidence. There’s a need for this level of expertise.’ So rather than doing this one business at a time and displacing myself every three to five years, I acquired this firm and now we get to do it one-to-many.”

Align was founded in 2010 and specialized in information technology (IT) consulting, and Jalbert has expanded it to include finance and accounting, human resources, mergers and acquisitions, and other services that help strengthen midsize businesses. The company employs nine and is looking to grow to as many as 35 in the next 18 months as it expands nationwide.

She is committed to making the team diverse. This includes personal background, such as gender, age and ethnicity. It also includes experience, such as industry, geography, business size and business type.

“In my number of years in finance, I’ve realized it’s an industry that is not very diverse,” she says. “You go to the Meet the Team page of most of our competitors, or any investment bank or PE firm, and they all look the same and they all come from the same place. … We actually take a completely opposite view of that. I focus very heavily in our recruiting on who we have on our team.”

That diversity brings a breadth of experience and knowledge that can better help businesses that otherwise might not get exposure to the world of M&A, she says.

“The firm provides a subset of consulting services because our clients in this demographic have these needs,” Jalbert says. “If we’re going to help them through a transaction, we’re going to help them better their business as well. So even if they don’t end up selling their business, their business is better off.”

In turn, she says, the firm’s work also creates value for the investment community. “Our venture capital and private equity partners, along with the corporate investors we work with regularly, find it refreshing to have our level of M&A expertise in this demographic of business. They’re used to having either no one present or owners whose experience is less sophisticated.

“In just about a year, we’ve had a tremendous amount of growth and success. I have to pinch myself sometimes. It goes to show our model is resonating in the marketplace.”

Start Anytime

It’s never too soon for a small or midsize business to start seeking help if the plan is to eventually sell instead of handing the company over to someone in the family, Jalbert says. Even if the vision is 15 years down the road, having an exit strategy on the radar helps strengthen the business today.

“One of the first questions we ask every client is, ‘When you lie in bed at night and you visualize what this transaction looks like for you, what is that?’” she says. “Are you going to retire in Costa Rica? Are you going to start a new business? Are you going to invest in real estate? What is your end objective? What is your motivation and your driver? Then you work backward from that.”

When it comes time to negotiate the sale, an average transaction takes about 1,000 hours to execute, she says. It’s a lengthy process that can be painful at times, and it’s hard for a business owner to run the daily business and continue to grow it while managing an extra 1,000 hours of work.

One step to start with is a talent planning analysis. “I compare it to an NFL football team,” Jalbert says. “You know what positions you need to play the game. Who do you have in those positions? Are they the right people for the positions? Which positions are empty? What do you need to fill and when? We’ll help them plan their ‘draft’ and make sure they have the best team members to get them to where they want to be so they can exit the business.”

After the merger, companies like Align also provide support for integrating the entities into each other. “Once two businesses combine, that’s when the hard work begins,” she says. “It’s easier to buy a business. The hard part is putting it together.”

Local Outlook

The Orlando area is not exactly viewed as a hotbed of activity for venture capital or private equity investment and M&A activity among small and midsize businesses — yet. But it shows promise, Jalbert says.

“As more wins become better-known, our market will hopefully start to attract more venture capital, private equity and corporate investment,” she says. “Here in Central Florida, it’s a bit of a desert. It’s difficult, and you have to go to other markets to seek funding. We have some local funds, but that expansion funding is where there’s a lot of opportunity for growth in Central Florida.”

Everyone wins if local small and midsize businesses can grow where they’ve been planted, Jalbert says.

“Silicon Valley is competitive and expensive,” she says. “Founders and business owners are looking for other markets for growing their businesses. We’re creating a competitive ecosystem here that will help that, but there’s still a ways to go.”

Watching the Trends
The mergers and acquisitions (M&A) landscape shows no signs of slowing down in the coming decade, says Dena Jalbert, CEO of Align Business Advisory Services. In fact, it seems to be picking up. She has noticed several trends that are affecting the marketplace:
• MULTI-COMPANY MERGERS
Private equity firms seem to be investing in multiple firms in the same line of business and merging them as a way of growing them to scale faster. For instance, they will buy six IT managed services companies, pool them to create one large entity, and then sell that to either a publicly traded company or a larger private equity firm. “Private equity is very much focused on a ‘buy-and-build’ strategy,” she says. “The statistic I’ve read is that 63 percent of all private equity portfolios employ this type of strategy.”
• CONSOLIDATION AMONG TYPES OF SERVICES
M&A activity has been heating up in contracting trade services such as lawn care, pest control, electrical and plumbing. It is also affecting business process outsourcing organizations, or those that handle back-office functions such as HR, finance and accounting, and call centers. Jalbert is also seeing consolidation in healthcare. “A lot of that is driven by the cost of healthcare, which is continuing to increase. Consolidation is a way to bring economies of scale and shake down costs and be able to preserve profit margin. We’re seeing consolidation in clinics and practices, devices, pharmacies, veterinarians and all sorts of niche healthcare.”
• FOREIGN INVESTMENT
In the U.S., businesses are starting to see deals involving foreign investors from Europe, Canada and Asia. “That’s new,” Jalbert says. “Traditionally, it was primarily domestic. Those investors are starting to see that consolidation in the lower middle market allows them to have geographic expansion quickly.”
• SPECIALTY FUNDS
Industry-specific funds are popping up, as well as those aimed at traditionally under-served types of businesses, such as those owned by women and minorities.
• SOCIAL RESPONSIBILITY
Certain funds are placing money in companies that rate high in corporate social responsibility, or missions and causes that help people and the planet.