Caveat Emptor: Buying and Selling a Cultivation Facility, Part One

Purchasing an operational cultivation site is the fastest way to begin growing in a new cannabis market.

This approach has been the primary method that multi-state operators have used to quickly get into the cannabis game.

Though often sold at a premium, the high price tag for a licensed cultivation site can be justified by the obvious benefits. There’s no searching for properties or building out facilities, no elongated waiting period for the license to be granted, and no ramp-up to full production.

When a company buys a licensed cultivation business, it’s often plug-and-play; the asset starts generating revenue as soon as the transaction is complete.

But not every cultivation facility for sale is appropriate for every buyer. The excitement of the opportunity and the pressure to close a deal could result in purchasing a facility that costs the buyer much more than the original purchase price.

In this first installment of “Caveat Emptor: Buying and Selling a Cultivation Facility,” I identify key considerations for companies seeking to purchase a cultivation business.

In Part Two, I’ll share insight into how licensed operators can position their grow site to become an attractive acquisition target.

If your group is looking to purchase a licensed grow operation, keep these five questions in mind to help avoid buying a facility that you later regret:

1. Can this facility accommodate your business?

If you’re eyeing an acquisition with the goal of creating a national footprint, you’ll want to keep your operations as similar to one another as possible. Buying a licensed operation and then tearing out 90% of the facility doesn’t make much business sense. Ideally, it’s best not to disrupt production with serious retrofits once a facility has been acquired.

Avoid this conundrum by verifying that a potential acquisition target can meet your needs.

Is the building big enough? Can it accommodate your company’s method of growing without undergoing massive retrofits? Is the facility laid out so that the flow of plants and people lend themselves to good agricultural and manufacturing practices?

The most attractive facility is the one that’s built to accommodate many different ways of growing—the more versatile the production site, the better.

2. How easy will it be to expand?

If you’re looking towards the future with expansion in mind, investigate the feasibility of doing so.

What will be required to increase the power supply, and how long will the local utility take to do this work? Is there sufficient space for additional parking? Will it be possible to buy adjacent land to support the expansion?

Don’t just look at the facility as it exists today; look at it through the lens of future expansion.

3. How difficult will it be to hire more people?

Most people currently employed at the grow site will likely remain there, but where will you source new employees if you choose to expand?

This may be a problem if the business is located in the middle of nowhere. Aim for grow operations within a 45-minute drive of a city or well-populated town. Further than that, and your company may experience some hiring woes should you plan to expand substantially.

4. What’s the health of the current crop?

Sometimes people lie, but plants never do. If the seller boasts about their product quality but walking the crop paints a different picture, take note.

It could be due to underperforming genetics (which you can replace) or an inexperienced head grower (who you can replace). But if it’s caused by a malfunctioning production facility, this could mean substantial retrofitting costs to bring the operation up to snuff.

You’ll want to conduct sufficient due diligence to determine if the site can maintain the ideal environmental parameters for the crop at all times. If not, this could get expensive to fix.

5. What equipment and technology are you buying?

Part of the purchase price will be based on the physical assets you’re buying. If the license is attractive, but the equipment is cheap and clunky, ensure this is reflected in the deal.

For example, grow facilities full of high-intensity discharge lights will likely need to be replaced with more energy-efficient LED lights in the near future. Regulations in some states already require this, so we should assume other states will follow suit.

Have someone knowledgeable inspect the cultivation equipment, fertigation technology, and HVAC system. Reliable equipment costs money, and if you’re looking at a facility without sufficient technology, that could amount to additional investments in the hundreds of thousands of dollars. The acquisition price should be discounted to reflect these necessary upgrades.

If you’re tasked with identifying a cultivation business to acquire, due diligence is crucial to avoiding a bad purchase. If no one on your team is experienced enough to evaluate things like production capacity, crop health, or grow equipment, find that person and hire them. The ROI on this expenditure will be dramatic, both for the business and your peace of mind.

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