By Vince Sliwoski, Attorney at Harris Bricken
We have been helping people buy and sell Oregon cannabis businesses since the early days of the adult use market. Most of these sales are relatively simply asset purchase agreements—including many for naked licenses—but some have been stock sales. Others have taken place amid administrative enforcement action by the Oregon Liquor and Cannabis Commission (OLCC). This post and my next post will cover mistakes commonly made in these sales.
Lazy diligence
Buyers of Oregon cannabis businesses don’t need to do an extraordinary amount of diligence—especially outside of stock sales—but it’s wise to do some, starting with a public records request on the seller. I can’t tell you how many times we have seen people try to sell things that aren’t actually saleable– either because they do not own them, or because the business is mired in an OLCC enforcement proceeding, or because the item at issue (i.e., a pending application) isn’t transferrable as a matter of administrative law.
Sellers should also consider doing some diligence on Oregon cannabis business buyers. On several occasions, we have seen people assume they can purchase a business and transfer its license to a location that doesn’t work. We have also seen sellers agree to carry financing on sales with buyers who could not pass even basic underwriting muster. One buyer literally defaulted under the first monthly payment on promissory note, 30 days after close. That was sort of incredible; but it was also avoidable had the seller done some basic vetting.
Finally, diligence and monitoring may often extend after a purchase agreement is signed, and through the closing period. Aside from general business or financial inquiry rights the parties may negotiate, it’s important for a buyer to require a seller to timely notify it of any potentially adverse OLCC action during the pre-closing period. Sellers, in turn, should require that a buyer submit to OLCC a “Licensed Representative Authorization” form, authorizing the seller or its lawyer to receive information about the buyer’s license application. These are just a few examples to ensure things remain on track.
Sleeping on inventory
I’m amazed at how many forms I come across that give cursory treatment—or no treatment at all—to inventory matters. Inventory is very important! Sellers want to ensure they can liquidate their METRC prior to handing off the business, whether to the buyer or via a separate sell-down process. A buyer, alternatively, may want to ensure that a seller operates its business in the ordinary course with respect to inventory practices prior to close. The parties may also agree to assign a base inventory value in the purchase agreement, from which closing adjustments can be made.
Inventory may be purchased per a stand-alone inventory purchase agreement at closing, or wrapped in with other assets in a bill of sale exhibit. Pricing is typically tied to seller’s wholesale cost, but other metrics may be used. In any case, it’s important for buyers and sellers to coordinate on the physical count (by seller) and any audit (by buyer) at changeover. Failure to outline basic inventory terms can result in negotiation long after close, or even litigation. No one wants that.
Using a services agreement
A few months back I wrote a post called “Oregon Cannabis: Beware the Services Agreement.” I began that one by stating that services agreements are a problem in the Oregon cannabis industry. Feel free to click through for all the gory details, but the big takeaway is that these agreements add arbitrary and significant risk for sellers (up to and including license cancellation). Most of these agreements are badly drafted and loosely followed to boot. Stay away! Or, if exigent circumstances require a services agreement, make sure you really dial in the form and that both parties adhere to its terms closely in the pre-closing period.
Unclear deadlines
A well drafted cannabis purchase agreement will be marbled with deadlines for buyer and seller. Some of these deadlines will apply to both parties, as in the case of a “drop dead date” after which the transaction may be terminated. Other deadlines will relate to specific, required actions by one party or the other. The buyer, for example, should be required to submit OLCC and local land use compatibility statement (LUCS) applications within a short period after signing the purchase agreement. The seller should be required to submit OLCC “Change in Ownership” forms shortly after that.
We’ve had parties come to us for purchase agreement enforcement long after execution, where the buyer literally never submitted basic OLCC paperwork. We’ve seen others agree to large earnest money payments with no funding or return deadlines, causing disagreements. All of these dates and deadlines should be present in the purchase agreement, calendared, observed and enforced by the parties. You want a smooth roadmap and process here.
Re-published with the permission of Harris Bricken and The Canna Law Blog
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