We’ve been helping people buy and sell Oregon cannabis businesses since the early days of the adult use market. Most of these sales are relatively straightforward asset purchase deals – many for bare licenses – but some have been stock sales. Others have taken place under administrative enforcement actions taken by the Oregon Alcohol and Cannabis Commission (OLCC). This article and my next article will cover common mistakes made when making these sales.
Buyers of Oregon cannabis businesses don’t need to exercise extraordinary due diligence, especially outside of stock sales, but it is wise to do so, starting with a request for public records about the seller. I can’t tell you how many times we’ve seen people try to sell things that aren’t actually salable – either because they don’t own it or because the company is mired in an enforcement process. of the OLCC Act, or because the item in question (i.e., a pending application) is not transferable under administrative law.
Sellers should also consider being diligent with buyers of Oregon cannabis businesses. Many times we’ve seen people assume they can buy a business and transfer its license to a place that doesn’t work. We’ve also seen sellers agree to fund sales with buyers who couldn’t even pass basic underwriting tests. A buyer literally defaulted on the first monthly promissory note payment 30 days after closing. It was kind of amazing; but it was also avoidable if the seller had done some basic checks.
Finally, due diligence and monitoring can often extend after a purchase contract is signed and during the closing period. In addition to general business or financial investigation rights that parties may negotiate, it is important for a buyer to require a seller to provide timely notice of any potentially adverse action by the OLCC during the period pre-closing. Sellers, in turn, should require a buyer to submit an “Authorization of Authorized Representative” form to the OLCC, authorizing the seller or its attorney to receive information about the buyer’s license application. These are just a few examples to ensure things stay on track.
Sleep on inventory
I’m amazed at the number of forms I come across that deal briefly — or not at all — with inventory issues. Inventory is very important! Sellers want to make sure they can liquidate their METRC before they sell the business, either to the buyer or through a separate sale process. A buyer, alternatively, may want to ensure that a seller is carrying on business in the ordinary course with respect to inventory practices prior to closing. The parties may also agree to assign a base inventory value in the purchase agreement, from which closing adjustments can be made.
Inventory may be purchased under a stand-alone inventory purchase agreement at closing, or incorporated with other assets in an exposed deed of sale. The price is usually tied to the seller’s wholesale price, but other metrics can be used. In any case, it is important that buyers and sellers coordinate on physical counting (per seller) and any auditing (per buyer) when switching. Failure to define baseline inventory terms can result in negotiations long after closing, and even litigation. Nobody wants that.
Use of a service contract
A few months ago, I wrote an article titled “Oregon Cannabis: Beware of the Services Agreement”. I started this one by stating that service agreements are a problem in the Oregon cannabis industry. Feel free to click through for all the gory details, but the big takeaway is that these deals add arbitrary and significant risk to sellers (up to and including license cancellation). Most of these agreements are poorly drafted and poorly followed. Stay away! Or, if urgent circumstances require a services agreement, make sure you really compose the form and both parties closely adhere to its terms in the pre-closing period.
A well-drafted cannabis purchase agreement will be marred with delays for both buyer and seller. Some of these time limits will apply to both parties, such as a “cut-off date” after which the transaction may be terminated. Other deadlines will relate to specific actions required by either party. The buyer, for example, should be required to submit OLCC and Local Land Use Compatibility Statement (LUCS) applications within a short period of time after signing the purchase agreement. The seller should be required to submit OLCC “Change of Ownership” forms shortly thereafter.
Parties have come to us for the execution of a purchase agreement long after execution, where the buyer has literally never submitted the OLCC source documents. We have seen others accepting large deposit payments with no funding or time to return, which has caused disagreements. All these dates and deadlines must be present in the purchase contract, calendar, observed and applied by the parties. You want a smooth roadmap and process here.