EXCLUSIVE: The Business Of Cannabis Is Tough Right Now—How Can Companies Ensure Successful M&A Deals?

Raising capital has become an uphill battle for companies in the cannabis space, many of which grew in an environment of high stock prices, easy raises and cheap debt.

"We're in quite a stressed environment," said Scott Greiper, founder and president of Viridian Capital Advisors, while speaking at last week’s Benzinga Cannabis Capital Conference.

"Capital is very difficult. Equity is relatively dead," he said.

Matt Bottomley, equity research analyst at Canaccord Genuity said that a lack of pro-cannabis federal policies have taken a toll on stock valuations, as investors were expecting more catalysts to come in sooner.

Without debt providers, growth and acquisitions in the cannabis space would be impossible, says Greiper, as there would be no one to supply that capital.

"Stock is not as valuable as a currency anymore," said Erica Rice, co-chair M&A at Foley Hoag, noting that the drop in stock prices has magnified the challenge of raising capital.

M&A in cannabis continues to tick along, but in a more reduced and laser-focused fashion.

Viridian has tracked 37 M&A transactions since the start of 2023 through April 10, for a total of $823 million of deals, with $22 million being the average deal size.

Those numbers are far surpassed by the same period of 2022, when by April 10 the industry had seen 61 deals for a total of $2.5 billion. The average deal size that year was $47 million.

That means that in the first quarter of 2023, M&A transactions in the cannabis industry were down by about 40%, while the average deal size was down more than 50%.

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Neil Prasad, who's a CPA and a partner at Assurance Services Group in Chicago, said that the deals are also taking a lot longer to come through than in previous years, as both parties take more time to make sure risks associated with the transactions are kept in place.

Most companies in the buyer side of the equation are looking closely at balance sheets and core competencies, as opposed to the possibility of multiplying their investments in the long run, said Canaccord's Bottomley.

Viridian's Greiper describes this shift as a period of "much more strategic, targeted buying on the part of the buyers." 

However, sellers can have a "delusional" view of the current landscape, says Drew Mathews, CEO of Green Life Business Group Inc, who works with both buyers and sellers in closing M&A deals.

Many sellers, he says, are convinced that the market is full of cash buyers. That's why setting the right expectations for sellers is the best strategy to closing an M&A deal in today's environment.

The bright side is that there are new sources of capital coming into the industry, like large family offices and private equity that have had no exposure to the industry yet.

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Photo: Benzinga