We often hear the word buyout and partnership in the same sentences, but what does this mean exactly in the hemp and cannabis industry? An agreement for a buyout is when one party purchases another partner’s share of the business. While it’s not a common occurrence with startups because new hemp businesses are mostly made up of two or three business partners, more established companies may have to deal with this issue down the road.
Reading business publications, such as Info Hemp magazine, people may wonder if buyouts are becoming more common in the hemp or cannabis industry? The short answer is yes. Many adult-use businesses are still forming. But as these organizations grow, things can get a little more complicated. Ownership can shift. As they continue to expand, businesses will need to plan for every possible outcome, even buyouts. That means planning for one partner to leave the company, which could be for various reasons, including:
If a business entity is failing, and it looks as though the current partners can’t turn it around, a buyout may provide a way to reorganize the business and start fresh. Someone else may want to make the call about how the company runs. In certain states, this approach can even bring in cash to jumpstart the business as states tax those who wish to remain and invest in the marijuana industry.
The first thing to take into consideration is what your current partnership agreement states on this topic. Make sure you read the fine print. If your agreement says nothing about buyouts, then you’ll have to take a longer road to a buyout. When partners are going through these negotiations, it’s best if contract terms are outlined on how to approach a buyout. This will ensure things are as clear-cut as possible.
One aspect of a business partnership that is often overlooked is the need for a buy/sell agreement, which is a legal contract in which the partners or owners agree to terms under a possible buyout scenario. This contract includes the following:
As a newer business owner, you want to purchase insurance for your business to protect it. Insurance can even help your company rebuild after a natural disaster. However, it’s also important to note what type of partnership do you have. Some buyers don’t invest or buy until business is critically failing, so many states collect tax breaks. But as soon as you put your name on that dotted line, sometimes your insurance policy will not allow it. A buy/sell agreement covers your bases in this kind of deal. Your insurance brokers will go into detail on developing an indemnity option, or coverage that protects you if a liability, such as a legal action, occurs. This can be a tamper-proof way to secure an investment.
A hemp business is like any other company. To get noticed, it must brand itself. Not all stake owners are the same. They have different skills. They also want to be unique. A hemp company must show people why it’s different from another competitor. The American government differs from state to state. In a new or growing market, changing some state laws can be much easier than doing so on a national level. It may mean reworking the narrative to gain support and funds. After the deal, the new stakeholder may leave, or choose to stay, which would obviously have different outcomes. So again… it’s best to have a strong and concise partnership agreement in place.
Business partnerships can get tricky, especially when a sale or buyout becomes involved. That’s when exception-minded strategic action needs to go into place. This is meant for investors, those involved in the cannabis industry and public. We remind you that it’s always recommended to contact a legal professional if you’re exploring a buyout.
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