Our cannabis lawyers are often asked what it takes to purchase or sell a marijuana business license. This question from our clients sometimes comes up during their license application phase and it sometimes comes up after their licensing has been finalized. People tend to think of marijuana licenses as fungible commodities. This makes sense, as most people equate licenses, especially in states where they are limited in number by law, to something like New York taxi medallions. People also assume that a license to operate a marijuana business has inherent market value. To some extent, this is absolutely true. Any commodity for which there is a demand has some sort of dollar value. This is particularly true for something with a limited supply, like a marijauna business license. So it makes perfect sense for people to assume that something as intangible as a marijuana business license has real value.
But just because something is in demand or valuable does not mean that it can be bought or sold and it certainly does not mean that buying or selling it can be done easily. As is taught to all first year law students, property is a bundle of rights that the government recognizes an individual has with regard to tangible or intangible goods. Without government recognition of those rights, property does not really mean much. In New York, the government treats taxicab medallions as intangible property that can be bought or sold on the open market, similar to intellectual property like trademarks or patents. Once a taxicab medallion or trademark is sold and transferred to someone else, the government recognizes that someone else as the rightful new owner.
Marijuana licenses are different. Eventually states may treat marijuana licenses like taxicab medallions, but that is not the reality anywhere today. State governments treat cannavbis licenses as something more akin to an endorsement on a business’s tax registration, almost like a certification. These rights are tied to the business entity or owners; the government does not recognize that there can be a separation of the two.
Yet, transactions are still happening. Primarily, this occurs through the purchase and sale of the business entities that control the licenses. Though this can sometimes feel like the same thing, — a corporation or an LLC is no more tangible than a marijuana business license — it is not. First, the state still has to recognize the property transaction and it can block the transaction if it wants. In Washington State, for instance, all new purchasers of a business that pocessses a marijuana license must be approved by the State Liquor Control Board before the purchaser can take any equity stake in the company.
Additionally, purchases of entities come with all sorts of extra baggage. If I am buying a license free and clear, I know what I am getting. I can check state records to see if there are any liens or other security interests tied to the license, but it is no different than other property. But if I am buying the entity itself, through either a cash or stock transaction, I am also buying the entire company’s history. If the company has a pending claim for damages against it, that claim would come along for the ride; it would not be wiped away by virtue of the transaction. What that really means is that my due diligence costs in buying a marijuana company versus buying a marijuana license will be significantly higher. Even if I perform really good due diligence on the company I am seeking to buy, I can never be positive that the company will not have some issue that will come back to haunt me. How can I know whether one of its employees will be suing it one month from now for sexual harrasment that happened a year ago? How can I know if a product it sold three months ago might be found to have been contaminated? I can require that the seller indemnify me for such costs, but what if the seller goes bankrupt in the meantime?
Marijuana businesses are selling every week at six and seven figure prices. But before you come to a handshake arrangement on a deal you had better make sure that you know exactly what it is you will be buying and, equally importantly, how you will be accomplishing that.
