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How does M&A work for cannabis businesses?

On Behalf of | May 6, 2023 | marijuana businesses

The California cannabis industry is rapidly growing. One of the most effective ways of jumping into the cannabis industry is merging or acquiring an existing business, commonly known as M&A.

However, it is important to remember that the cannabis industry is unlike any other industry. With several distinct local, state and federal regulations controlling the industry, mergers and acquisitions in the cannabis industry tend to feature a unique set of challenges, complexities and requirements. This makes merging or acquiring cannabis businesses relatively tricky.

Executing a successful M&A can be a rewarding undertaking. However, the legal complexities that define the cannabis industry can complicate the process. Here are important points you’ll need to note during an M&E exercise for a cannabis business in California.

Transfer of license rights and tax issues

One of the challenges you will contend with while merging or acquiring a cannabis business is the difficulty that comes with transferring operating licenses. Unlike in other states, cannabis licenses are not expressly transferable in California.

Fortunately, you have options. For instance, a newly acquired cannabis business may operate under an existing license while the new owner works on acquiring their own. However, the previous owner must sit on the board during the transition period. Also, per California cannabis laws, a change of up to 20 percent financial interest is not considered a change in ownership. However, you are still required to notify the Bureau of Cannabis Control (BCC) of such changes.

Also, most mergers and acquisitions of cannabis businesses are intended to accomplish tax-free reorganization. This way, the M&E exercise bypasses the taxes that would otherwise result from a straight sale.

Protecting your interests

Merging or acquiring a cannabis business in California is no small feat. Seeking legal guidance to learn more about California cannabis business laws can help you safeguard your interests during an M&A process.