In Washington State, there is currently an active market for the purchase and sale of businesses that have a valid state marijuana license or pending marijuana license application. Our firm has handled a number of these transactions for both sellers and purchasers. One thing that can be overlooked both in negotiating the sales price as well as in conducting due diligence is careful review of the lease agreement.
Often marijuana businesses lease their premises from third party landlords. Anyone considering the purchase of a marijuana business needs to carefully consider whether the marijuana business’ existing lease agreement will suit their needs.
For example, consider the term of the existing lease agreement. If the selling business only has a year left on its lease, a new purchaser may be faced with either renegotiating a new lease agreement or finding a new location. In this case, a purchaser would likely want to have the purchase of the business be contingent upon a lease extension/renewal.
What if the leased premises are just not suitable for the purchaser’s intended business model? If that is the case, the purchaser will likely want to secure its own premises and move the business. To do this, the purchaser will need to file a change of location application and other necessary documentation with the Washington State Liquor and Cannabis Board (the “LCB”). The new premises will have to be inspected and approved by the LCB prior to moving the marijuana business. The timing of these steps will need to be coordinated with the closing of the purchase. The purchaser will also want to make sure that any prior leases are terminated and that the seller takes care of any liabilities (i.e delinquent past rent or utility payments) prior to the closing of the purchase.
Consequently, in determining the price for the marijuana business, it is important to take into consideration the value of the lease itself. A long term lease for premises upon which a potential purchaser can fully operate will likely add value to the marijuana business. Whereas, a soon to expire lease or a lease for sub optimal premises may end up negatively affecting the value of the business.
Finally, it is important to determine where the local jurisdiction stands in regard to marijuana regulation. If the leased premises is located in a jurisdiction that has recently prohibited marijuana businesses, then the marijuana business may be prohibited from expanding and/or face other legal restrictions.
Purchasing a marijuana business requires a full investigation of all aspects of the business and lease review is just one component. So, do your due diligence and don’t forget the old adage – location, location, location.
For more information on the regulation of marijuana businesses, please contact Heather Wolf.