What You Need to Know When Buying a Cannabis Business, Part 4: Working With Brokers

06 Jun What You Need to Know When Buying a Cannabis Business, Part 4: Working With Brokers

Buying a cannabis business does not occur in a matter of days, and transactions fall apart for a variety of reasons, as we discussed in Part 1 of this blog series focused on the buy-side of a cannabis M&A transaction. In Part 2, we focused on the regulatory environment, discussing concepts that first-time buyers and their attorneys should be aware of. In Part 3, we looked into things to consider when hiring your cannabis attorney. Today, we have brokers in the crosshairs.

I don’t hate brokers, but I also don’t want to invite most of them to dinner. I expect brokers to pull their fair share of a transaction. Some brokers are really good at doing that, but others are only focused on two things: (1) connecting the buyer and seller and (2) closing as fast as possible so they can get paid.

(If you’re wondering whether Cannabis brokers are any different from other brokers, take a look at my blog post for our sister China Law Blog on international personal protective equipment (PPE) brokers.)

Cannabis business brokers that provide general brokerage services (connecting buyers and sellers) are common in the industry, but like most industries, broker competence and experience vary significantly. There are specialized cannabis business brokerage firms, some of which also provide valuation services, but counsel will most likely run across real estate brokers and non-cannabis brokers who will know little about the industry and contribute little to the transaction other than pushing to close as quickly as possible.

Even developed cannabis markets like Washington, Oregon, and California do not have licensed cannabis brokers. In my opinion, we will probably never see any brokers who need to be licensed in order to deal in cannabis assets.

Much like the real estate market, brokers can represent a buyer or a seller or act as a dual agent with written consent from both parties. The fee arrangement typically mirrors the assets being sold: a real-estate centric deal with a real estate agent involved will be in the 6% total commission range, while a business broker will typically require a 10% commission, with payment either split between the parties (in a real-estate centric transaction) or paid entirely by the seller (in a business-focused transaction) unless negotiated otherwise.

If a broker is involved in the transaction, you and your legal counsel will need to evaluate the broker’s competence and qualifications before allowing the broker to facilitate the due diligence process or any part of the transaction. If the broker is not competent, counsel should advise the buyer that the transaction will proceed more efficiently without the broker’s material involvement in the due diligence.

As a great rule of thumb, you should never let your broker provide the contract that will be used for the transaction. Even outside the cannabis context, brokers who choose to use the “industry standard” form contracts tend to end up with a slew of amendments that do not always make sense and never contribute to clarity. I am not saying this just as an experienced lawyer; I’m saying this as a dispassionate human being who extremely dislikes inefficiencies and disorder, especially where significant legal rights and sums of money are involved.

Almost as a rule, counsel should seek to modify or entirely replace existing broker-facilitated transaction contracts with counsel’s own contracts as soon as possible, even in a real-estate centric transaction. Very few broker-preferred contracts (even ones they have used in “dozens of deals” will contain the level of detail and protection you will want in the transaction documents.

Lastly, even though I generally meet brokers with an upraised eyebrow, your legal counsel should never advise you to circumvent your contractual obligations to your broker. It’s usually not legally justifiable, and it’s not the right decision, even if you balk at the broker’s take-home percentage of the transaction.

Keep your eyes open for the good brokers, and when you find them, please send them my way.