Best Practices

Red Flags To Watch For When Purchasing Marijuana Businesses In California

Purchasing any business is a major investment so doing diligence is key

Many people in this world are just looking for a chance to make a profit, even if it means being less-than-honest about what they are offering.  And anytime a business sees a big boon, scam artists come running, looking for a way to cash in on a trend.  As we are coming up on the full rollout of SB 94 —the Medicinal and Adult Use Cannabis Regulation and Safety Act— here in California, you can bet that there are people chomping at the bit to find ways to take advantage of this expanding market. One way that you might do this, which is on the up-and-up, is to purchase a cannabis business already operating in California.  The problem is that some sellers are looking to scam buyers.  To avoid being taken advantage of, keep an eye out for the red flags listed below.


The Sellers Avoid Answering Questions

Purchasing any business is a major investment, and you would be doing yourself a disservice if you failed to complete your due diligence before signing contracts and exchanging money.  Part of this due diligence is asking specific questions and getting proof from the seller to back up their answers.  What are some things you need to look into?  Check to make sure the business has not been suspended by the Franchise Tax Board, is not facing an IRS audit, owns the property being sold, and that the person selling it to you actually has the right to sell it.  If the seller ignores questions, answers them without providing proof, or seems to talk around the issue, move on.  Another common approach is to claim that there is no documented history of the business because it is better in the industry to operate this way.  However, if you are buying an above-the-board business, this just isn’t true.


The Sellers Get Nervous About Interacting with Regulators

Another aspect of your due diligence is making certain that the business you are purchasing is licensed and approved to sell medical marijuana products and is also in good standing to be given permission to sell to adults in general come 2018.  To do this, you need to speak with local regulators.  If the seller seems nervous about speaking with them or discourages you from contacting them, it is a very strong sign that not everything is in order, and that you could, at best, find yourself jumping through a lot of hoops to be ready to go in 2018.


The Deal Is Too Good to Be True

This is a red flag in any industry, but it is especially problematic in new and emerging industries.  What are some common claims that sellers might make that are too good to be true?  At the moment, the big one is claiming the business comes with a license to operate under MAUCRSA.  However, California is not yet issuing these licenses, so any such claim is patently false.  Another claim sellers are prone to make is that they already have numerous contracts in place with retailers and hospitals, ensuring your business is booming once MAUCRSA goes into effect.  However, in most cases, these are just contracts with existing collectives, not something that will guarantee large profits.


The Sellers Overestimate the Worth of their Business

How much profit will there be in the California marijuana industry come 2018?  While we can make projections, the truth is that we don’t know.  Despite this, most people selling their marijuana businesses believe that they are worth millions.  Regulated competition is going to be new to the industry and when you add on to that other variables at play, such as business structures and local ordinances, chances are most sellers are significantly overestimating the worth of their businesses, and you need to ensure you are not overpaying.


The Seller Claims to Offer an Exclusive Opportunity

What kind of exclusive opportunity?  Usually, the claim is that their business is the only marijuana business in their area.  Usually, this is an outright lie.  However, in cases where it is true, you cannot expect to be the only entity for long.  Do not purchase a business based on claims of exclusivity; be sure to research this claim and ensure it accurate and also consider other factors when making your purchase. While looking to break into the industry is understandable, you could be doing more harm than good to your bank account if you make the wrong decision.  Keep your eye out for these red flags and work with a lawyer who specializes in California cannabis law before you sign any contracts.

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