While many of the cannabis retail license winners in New York to date have been working excitedly toward getting their shops open, others have been trying to figure out ways to sell and exit – and such deal making is on the rise, industry insiders say.
For instance, one of the 463 conditional adult use retail dispensary (CAURD) winners from last year is actively looking for a buyer willing to pony up $2.5 million for a license in Long Island, said broker Christopher Stefan, a principal with Colorado-based Cannabis Capital Advisors.
Stefan said he’s representing the CAURD license winner, who wants to find a financial partner who will both put up capital to get the shop running and then take ownership after four years, which is how long each CAURD licensee is required to hold onto their permits before they can sell 100% of their companies.
Stefan declined to identify the license owner, but said it’s a “sophisticated social equity group.”
“They decided it would be better to sell the license than to stand it up themselves,” he said.
There are a lot of caveats to such a deal in New York, however, attorney Lauren Rudick said. Rudick is trying to line up buyers for Stefan’s client.
And selling the license outright to just anyone is against the law in New York, attorney Benjamin Rattner said.
But there’s been a lot of activity on the investment and deal-making front, both Rattner and Rudick said, including CAURD winners who want to simply sell and exit rather than spend years running a marijuana store.
“There’s definitely deal work going on, and there is a real opportunity here, when you make the right match,” Rattner said. “There are definitely people looking at what their exit strategy is. ”
But, Rattner noted, CAURDs “can’t sell their 51% stake right now, right this second.”
That means any deal to transfer ownership of a CAURD license from the current holder to another party has to be structured carefully to ensure approval from state cannabis regulators. Without that regulatory sign-off, no such sale will ever close, Rudick pointed out.
“It’s all subject to (Cannabis Control Board) approval. And nobody’s gotten approval for anything yet,” Rudick pointed out.
That aside, she said, “There’s ways to work through it,” Rudick said.
Devil in the Details
Stefan said his CAURD licensee would have to stay on with the company for that four-year period, at least, whether in an operational or symbolic role.
“You could do a convertible note, and the new buyer comes in, and they build out the store, and all the money they use to build it out, they loan to the CAURD,” he said. “Then when that note converts years later to equity, it’ll convert” the ownership.
Rudick said there are other methods as well, with the most obvious and easiest option being selling to another CAURD permitholder.
“I represent one that is actively looking for CAURDs to acquire, because they know they can take up to 100% (ownership),” she said.
But there are also very strict rules that limit who’s eligible to buy any of them and who isn’t, she added.
For instance, New York’s “True Party of Interest” rules prohibit the purchase of any CAURD license by businesses that operate in other parts of the supply chain, in order to protect the two-tiered market.
It’s also more difficult – though not impossible – to arrange a sale to any non-CAURD player, Rudick said.
In addition, there’s a bit of a hurry for the CAURDs, Rattner said, because they technically face a 12-month deadline following their permits’ issuance to get shops open to the public.
“You do have to make progress toward opening, or at least demonstrate it, or else you forfeit the license. You can’t just hold it indefinitely,” Rattner noted.
The counterpoint to that issue, Rudick said, is that New York regulators have been very lax with extensions on that timeline, given various legal troubles that have stalled shop openings, including a court order that lasted from August to November last year.
Rudick thinks there will be even more churn in the secondary market as the year goes on, with the potential for significant consolidation, with well-capitalized CAURDs buying out their peers.
“Some (CAURDs) are very eager to unload and have zero desire and have their day jobs are willing to take a lower valuation,” she said. “Others are willing to wait.”
A spokesman for the New York Office of Cannabis Management didn’t respond to a request for comment for this story.