Key points:
- Federal marijuana rescheduling set off a wave of M&A, with cannabis operators buying retail, cultivation and brands from sellers with strained balance sheets.
- Successfully integrating newly purchased cannabis companies starts in due diligence.
- Executives suggest standardizing the back office and leaving the assortment and customer-centric decisions to local teams who already know their market.
Multistate cannabis operator Vireo Growth doesn’t wait for a deal to close before folding the new purchase into its existing business.
Integration begins during due diligence, and the Minnesota-based company has cut the timeline with each acquisition.
President Donald Trump’s Dec. 18 executive order directing cannabis be rescheduled set off a wave of cannabis deal-making. As those deals close, how well buyers absorb what they’ve bought will help decide which companies emerge as the industry’s next consolidators.
Speed matters, and Vireo’s results show what happens when financial integration comes first.
For its three 2024 deals – Deep Roots Harvest in Nevada, Proper Brands in Missouri and WholesomeCo Cannabis in Utah – folding in financial, human resources and procurement systems took three months.
In contrast, the $47 million acquisition of Eaze in January took about two months. And Nevada-based vertically integrated operator C21 Investment Inc.’s financials were on Vireo’s system by the time that deal closed in August.
This goes to show that integration planning belongs in the diligence phase, not after the deal closes, Vireo Chief Financial Officer Tyson Macdonald told MJBizDaily.
“While integration itself is necessarily a post-closing activity, preplanning really starts while we are completing our diligence but accelerates after signing the definitive agreements,” Macdonald said.
What should cannabis companies do to prepare for an acquisition?
Cannabis executives who’ve closed deals have advice for buyers:
- Start planning during due diligence. Don’t wait for closing.
- Define terms and KPIs on Day 1, making sure both teams use the same definitions such as “batch and “lot” and track the same metrics from the start.
- Centralize the back office, not the storefront. Leave local customer decisions with teams that already know their markets.
- Communicate early with every stakeholder.
Before Colorado-based cannabis brand Spherex announced its first acquisition on Oct. 6, it brought in corporate communications specialist Ani Vattano of Serendipity Creative to plan messaging for its 35 employees, cultivators, retailers and vendors.
“Integration never begins soon enough,” said Ryan Hunter, Spherex’s chief strategy officer.
“That tends to get left to the end, but our team has a lot of experience with M&A so we started pretty early on.”
Spherex acquired two Colorado cultivation facilities from bankrupt marijuana multistate operator The Cannabist Co.
The acquisition included an indoor site in Denver and an outdoor grow in Trinidad, on the border with New Mexico. Terms of the deal were not disclosed.
The company has held town halls with employees from both organizations to explain the deal and answer questions.
“It will be a gradual transition,” Hunter said. “We still have to go through licensing approval – that will take some time until we can completely take over.”
Meanwhile, Spherex will operate The Cannabist’s facilities under a managed service agreement, a common industry practice before regulators approve license transfers, Hunter said.
Spherex also hired a controller to oversee the cultivation facilities and coordinate the transition of The Cannabist’s assets to the company.
How can cannabis companies successfully merge?
Most cannabis businesses often misjudge the benefits they expect to achieve with an acquisition, said Craig Powell, chief operating officer of Sacramento, California-based cultivator and manufacturer Natura.
Improved financial health or marketing and operational savings often don’t materialize.
“Most M&As are really bad ideas – two-thirds end up reducing the value of the enterprise,” Powell said.
“Anticipated synergies never end up being realized, and that’s what drove the valuation and motivation in the first place.
“Customers don’t end up appreciating the acquisition to the extent it was originally forecast,” he added. “Companies lose customers and lose discounts from suppliers and vendors.”
But when an acquisition comes to fruition, choices must be made to avoid conflict.
Can a cannabis company run multiple platforms at the same time?
Operating two enterprise resource planning systems, finance or HR platforms creates different versions of reality.
“Every meeting becomes an argument over whose version of reality is the truth,” Powell said.
“You can’t integrate systems. One organization is going to have to change,” he said. “Implementing that change as quickly as possible is really important.”
Federico Gomes, managing director and cannabis analyst at ATB Cormark Capital Markets who tracks cannabis deals in Canada and the U.S., warned that some licensed producers bought pro forma market share only to find overlapping products competing with each other.
Organigram, he noted, is now reducing brands and SKUs after its acquisitions. But that’s not about reducing overlap from its acquisitions, CEO James Yamanaka told MJBizDaily in an email.
The acquisitions made the company a leader in vapes, edibles, pre-rolls and concentrates.
“We’ve cut our SKU count by roughly 10% over the past year and exited some white-label wholesale businesses, and both have helped our margins,” he said. “Today the market rewards focus.”
But sometimes, talent is the asset being acquired, ATB’s Gomes said.
He pointed to Canopy Growth Corp.’s $125 million acquisition of MTL Cannabis Corp. in March, which brought in a chief grower who now runs cultivation.
How can you tell if a cannabis acquisition is successful?
For Vireo’s Macdonald, same-store sales are the simplest test to determine whether a merger is successful.
Vireo’s Nevada, Utah and Missouri acquisitions each posted state-level same-store sales growth. Vireo’s same-store sales growth was about 7% in the second quarter, according to Zacks Investment Research.
But even with success, the best operators remain disciplined when it comes to buying other companies.
“There’s a lot of irrational exuberance that can go into a merger or acquisition,” Powell said.
“Those who do it really well are those who cut through the biases and emotional part of it and take a hard look at what’s going to be required, what it takes and what the expected value is at the end of the transaction.
“That means a lot of transactions don’t get done.”
Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.
