As the regulatory environment around cannabis continues to soften, larger corporations are becoming more interested in acquiring smaller companies to grow their brand and increase their footprint around the country.
Most recently, companies are expanding into states that were previously off limits. The appetite for growth has increased tremendously. Because of this growth, the industry is noticing rapid changes.
Companies that entered the space during the initial decriminalization of the early 2010’s are now looking to sell their operation. These transactions can be highly complex and involve many millions of dollars on the line.
At Alliance Insurance Group, our in-house attorney is here to give sound legal advice and provide counsel on reps and warranties from the seller. Be sure to consult with your attorney and discuss insurance implications. This is especially important if you plan on selling your business or merging with another company.
In traditional mergers and acquisitions, sellers typically retained 10 – 15% of the purchase price for indemnity. This usually pertains if the seller breaches any of its reps and warranties. Insurance carriers have stepped in to offer a product that reduces this need by transferring the exposure away from the buyer.
In the cannabis industry, there are several ways that reps and warranties insurance products can help prevent loss during the merge or acquisition of a business. In this article, I go over some of the most common reps and warranties we see in cannabis acquisitions. Then, I explain how our product is able to protect against infringements.
Tax Compliance:
Cannabis companies face a great deal of tax pressure from state and federal governments. The buyer wants to be sure that the seller is complying with all tax liabilities. If there are outstanding debts the seller owes, these must be taken care of before the deal goes through.
The cannabis industry has historically been at a disadvantage when it comes to allowances like deducting expenses or having access to a bank. That’s why it’s critical for the buyer to protect themselves against unknown liabilities the seller might not be aware of.
Property:
Somewhat self explanatory. Buyers want to know that the property being sold is being used legally and for legitimate purposes. This must pertain to the cannabis operation.
They want to make sure that all equipment being purchased is in working order and that inventory is quality product ready to be sold. The seller must make the buyer aware of any mortgages or liens.
Licenses In Good Standing:
Cannabis licenses remaining in good standing is a crucial part of an acquisition. If a license is not in good standing, the buyer runs the risk of running into compliance problems with the Marijuana Enforcement Division. These issues will arise once the buyer takes control of the business. Any discrepancies could jeopardize the business and the buyer will run into legal ramifications or need to spend money to bring the license back to a better position.
There are many other reps and warranties coverages, but these are some of the most important as it relates to the cannabis industry.
How Much Does Reps & Warranties Insurance Cost?
Insurance companies usually charge a premium of 2% - 3% of the coverage limits. The minimum premium typically starts at around $100,000 with the policy lasting between 3 and 6 years.
There is usually also an underwriting fee. The underwriting process can be complex. It can narrow in on key details of the nature and scope of the seller's reps and warranties.
Cannabis mergers and acquisitions deals can easily reach the eight-figure range, so insuring against millions of dollars in losses is a small price to pay. Obtaining a policy to protect your deal will provide you and your investors peace of mind. What you are paying for WILL be backed up by the insurance carrier.
If you’re considering selling your cannabis operation, give us a call at 303-279-9700 or fill out the form below to speak with one of our agents today.
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Article by Kyle Hoffman
Kyle Hoffman helps cannabis companies implement risk management strategies that allow them to scale their business without sacrificing coverage. He consults with small to midsize cultivators and dispensaries on how to navigate the insurance market by putting together practical solutions that build confidence, drive revenue, and reduce total cost of risk.
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