At my end postal In this series, I discussed the structure of the purchase price in cannabis M&A transactions and how to use escrow related to the purchase price. Today, I want to discuss how the purchase price is usually adjusted before the transaction (between the signing and the transaction) and after the transaction. I will break these down below to discuss some of the more common adjustments we see at a high level.

One of the most common adjustments to purchase prices we see is compensation. Compensation is a legal concept, which may force one party to the contract to pay certain expenses of the other party in the third-party litigation. For example, if the seller did something wrong or breached the contract, and a third party sued the buyer for the seller’s actions, the cannabis business seller might agree to “compensate” the buyer.

The compensation clause may be one of the most negotiated clauses in any M&A transaction. If someone buys a business, they want a guarantee of compensation, for example, if something promised by the seller is false. In other words, if the seller says that all taxes have been paid, but in fact there is still unpaid taxes, the buyer will want the seller to pay.

There are many ways to negotiate the compensation limit, which I can discuss in a later post. Returning to the concept of purchase price adjustment, if there is a compensable loss, in some cases—especially in the period between signing and closing—it makes sense to offset the loss with the purchase price. So, for example, if the buyer agrees to pay US$1 million at delivery but has a compensable loss of US$400,000 during the pre-delivery period, the purchase price can be offset by the loss, resulting in a delivery payment of US$600,000 (if the buyer does not or cannot Go away).

What about compensable incidents after the closure? It is not uncommon for buyers to request that a portion of the purchase price be retained for a certain period of time after the transaction is closed as a compensation fund. In this case, the funds in the escrow will be released to the seller at the end of the escrow period after the closure, no matter how long it is. However, if a compensable event occurs during this period, the payment will be refunded to the buyer or a third party entitled to the payment. If there is no escrow for compensation after delivery, the buyer’s sole remedy (subject to the applicable statute of limitations and the lifetime limit in the purchase agreement) will be: 1) make a request and sue the seller if necessary or 2) offset according to this Tickets or any future payments owed to the seller’s similar obligations, if the structure of the transaction is corresponding.

Another common purchase price adjustment is inventory adjustment. When a buyer acquires an already operating cannabis business (especially a retail cannabis business), it wants to ensure that the seller operates it in the normal course of business during the period before closing, and has sufficient inventory to continue in the normal course of the closing period Operations. A common way to solve this problem is to set a target for the specific inventory value that the company holds at the close of the market. Since inventory is always a moving target, the purchase price can be adjusted upwards or downwards based on whether the inventory target is met or exceeded.

Another form of purchase price adjustment we see (if you may call it that) is transaction fees. For many reasons, the seller may require that a part of the purchase price be used to pay for various forms of transaction costs incurred when selling the business, even including attorney fees. Usually, the seller will provide the buyer with a statement of such expenses at the time of the transaction, and the buyer will pay. In the sense of a price increase or decrease, this is not entirely a purchase price adjustment, but it will definitely change the way sellers pay at the close of the market and the mechanism of the amount.

The last adjustment I will talk about today is working capital. A bit like inventory, buyers who operate cannabis companies may want the company to maintain sufficient working capital without the buyer’s need to inject cash in order to continue operations after the closure. Whether working capital is included in the purchase agreement will change the purchase price, and the specific amount is usually evaluated based on the company’s historical data. Like inventory targets, working capital is liquid, so targets are usually negotiated based on the possibility of upward and downward adjustments based on whether they are below, met, or above the target.

For more information on cannabis mergers and acquisitions, please stay tuned. You can also read some of our other posts below: