Selling a Cannabis Manufacturing and Processing Business

What a buyer is paying for

Extraction companies, edible makers and vape cartridge producers earn money in different ways, so buyers separate them. An extraction business sells concentrates and oil, often to other manufacturers, and its margin depends on the yield from the input material and the price of that material. An edibles company sells a finished product with a brand, and its value depends on shelf placement and repeat orders. A vape producer sells cartridges and hardware, and both the oil supply and the hardware supplier matter.

The buyer wants to see how much product moves each month, at what price, and to whom. They want it by product line and by customer. A company that sells many different items to many dispensaries is safer than one that relies on a single gummy flavor sold to three stores. Our post on customer concentration explains why buyers press on this.

Because most of these buyers are other operators or investors rather than first-time owners, they pay attention to whether the company can grow without you. A business with a production manager, a lab lead and a sales person who covers the accounts is worth more than one where the owner does all three jobs.

The lab and the equipment

Buyers walk the production space with a technician. In an extraction operation they look at the extractors, whether hydrocarbon, carbon dioxide or ethanol, along with the closed loop systems, the rotary evaporators, vacuum ovens, chillers and the solvent storage. In an edibles kitchen they look at the depositors, tempering equipment, mixers, cooling tunnels and the packaging line. In a vape operation it is filling machines, capping equipment and the workstations.

The equipment list should show age, make, model and condition, with maintenance records. Solvent rooms draw particular attention because fire marshals inspect them, and a buyer will ask for inspection reports, any engineering sign-off on the room and the safety plan. Rules vary by state and your attorney confirms what applies. Calibration records for scales and meters matter in a trade where accuracy is checked.

Leased equipment, equipment financed by a lender and equipment owned by a partner all come up. Find out what the business owns before anyone asks, and who holds the title to each machine.

Licenses and product approvals

Manufacturing licenses are issued state by state, and a sale of the company or of its assets usually needs the regulator's approval before the new owner can operate. That can take months. Buyers ask which approvals are needed, whether the buyer qualifies, and how the license behaves if the ownership changes. Your attorney confirms what applies, and we plan the closing date around it.

Each product usually has its own approval or registration, covering the formula, the label and the package. A buyer will want a list of every approved item, with its status and the dates. A product that sells well but has a pending label question is worth less than one with clean paperwork. If the recipe is the heart of the brand, the buyer will ask where it is written down and who knows it. A formula that lives in one chemist's head is a risk.

The brand and its trademarks, if any, also transfer. Check that the brand is registered in the company's name and not an owner's.

Testing, batch records and tracking

Every batch goes through a licensed lab, and the certificates of analysis are the buyer's best window into quality. They will look for failed tests, how the company handled them, and the cost of retesting. Batch records, standard operating procedures, recall plans and tracking system entries should line up with the sales records. A buyer will pick a batch and follow it from the input material to the customer to see if the paper trail holds.

Waste handling also gets a look. Plant material, spent solvent and failed product all have disposal requirements, and a buyer wants to see the records.

Wholesale accounts and the money owed to you

Wholesale to dispensaries is where the money comes in, and it comes in on terms. Some stores pay on delivery and some take weeks. A buyer will ask for the receivables aging report, which shows what is owed and how late it is. Old balances from stores that have closed or are unwilling to pay get subtracted from what the buyer counts. Pricing pressure is common, so expect questions about discounts, rebates, free product and any promotional spending.

Buyers also ask how the accounts were won. Relationships held by a salesperson who might leave need to be made durable, and written agreements, even simple ones, help. Our post on recurring revenue covers the idea of income a buyer can count on.

Records and financing

Expect to provide business tax returns, monthly profit and loss statements, a balance sheet, inventory counts by stage from raw material to finished goods, and a cost of goods breakdown. Inventory valuation is a source of disagreement, since a buyer may value the same material differently from the seller. Get a count done by someone neutral near the closing date.

Because federal lending programs generally do not reach this industry, buyers usually pay from their own cash, from investors, or with seller financing. Our post on seller financing walks through that structure. Plan on a longer process than in an ordinary small business, and on a smaller pool of qualified buyers.

What tends to sink a sale

The common causes are a license that cannot be moved in the time the buyer has, a product line with unresolved approvals, one account that provides most of the sales, a lab lead who leaves, equipment that needs heavy repairs, and tests that fail more often than anyone admitted. Receivables that cannot be collected also appear late and cause fights. Nearly all of these can be found by the seller first.

Confidentiality is harder here than elsewhere because the trade is small and people talk. We market without naming the company and buyers sign a nondisclosure agreement before seeing anything identifying.

How to get ready

Collect the license file and every product approval in one place. Write the formulas and procedures down and make sure at least one other person can run each. Run the receivables report and chase the old balances. Put the equipment list together with serial numbers and maintenance records. Walk the solvent room as an inspector would. Talk to your attorney about what the regulator needs from a buyer.

Business Advisors of America begins with a valuation built from your own numbers, then prepares the materials and screens buyers before they see the site. If you are weighing selling a cannabis manufacturing business, that page explains how we approach it, and a short call with us can follow.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.