What to Think About Prior to Entering into an LOI for an Acquisition of an Ohio Medical Marijuana Company Thumbnail

What to Think About Prior to Entering into an LOI for an Acquisition of an Ohio Medical Marijuana Company

Acquiring a company that holds a medical marijuana license in Ohio can be very similar to any other M&A transaction but with several added considerations to account for state regulations. The deal documents will contain many common representations, warranties and covenants that you may find in other purchase agreements, but there are many aspects of the deal, both legal and logistical, to talk with your attorney about prior to structuring the deal and entering into a letter of intent.
The License
As a baseline, you need to understand whether the company holds a processor license, a cultivation license, a dispensary license, or some combination of the three. Put simply, the Ohio Department of Commerce largely licenses and regulates the processor and cultivation licenses, while the Ohio Board of Pharmacy licenses and regulates the dispensary licenses. It is also important to understand whether the target company holds a provisional license or if they have received their Certificate of Operation. Because of the requirements imposed by both the Ohio Department of Commerce and the Ohio Board of Pharmacy, whether or not the target company has received a Certificate of Operation will impact the entire structure of the transaction. If the target company only has a provisional license, then you will need to enter into an option to purchase the assets or equity (more on this in the next section), which can be exercised if and only if the company receives its Certificate of Operation.
Equity or Assets
The next consideration is whether the deal will be structured as an equity sale or a sale of the assets. This is a consideration in any M&A deal, however, with the sale of a company holding a medical marijuana license, the question becomes whether state regulators will be willing to treat the license as an asset that can be transferred. There is the added obstacle in an asset sale of dealing with the inventory. If the target company has its Certificate of Operation and is operating as a dispensary, for example, it cannot simply sell its inventory to anyone. There are strict requirements that pose issues for the lawyers to work through with state regulators about how to transfer the inventory.
Real Property
Another large issue to consider is the real property where the license holding entity is operating or plans to operate. Whether you plan to purchase the real estate alongside the underlying transaction or lease the property, there are state requirements to comply with and plan for.
Intellectual Property
Often a selling entity will have other medical marijuana licenses or will be seeking to obtain other licenses after closing the transaction, so it will be important to them that they retain their intellectual property (i.e. the information on their license application). This creates a need for the licensed entity to assign its intellectual property to an affiliate prior to consummating the transaction. What is important for you as the buyer, however, is to license the intellectual property from that affiliate entity. The reason being that you will need to comply with the information provided on the application in order to be in compliance with state law once you close the transaction and are operating the medical marijuana business.
A few other issues that commonly arise relate to getting employees properly badged with the state, obtaining bank accounts, and ensuring all branding is in compliance with the state’s advertising regulations for medical marijuana companies. These are not the only issues that may arise during negotiations, but they are some that may require more time and thought to resolve or to work through with the regulators. Having a game plan on how to tackle these aspects of the deal ahead of time will allow for smoother negotiations throughout the duration of the deal.

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