In the last couple of months following President Trump’s executive order to reschedule cannabis, we've seen significant debt capital markets activity amongst the largest US multi-state operators. Curaleaf, GTI, and Verano have all upsized their debt facilities, adding meaningful cash to their balance sheets. There are really only a few credible explanations for this: they intend to pursue acquisitions again after a multi-year pause, investing to expand their footprints in existing markets, or ”greenfielding” into new markets, Texas being a prime example in the case of Trulieve. It's also worth noting that rescheduling will make interest expense on debt fully tax deductible for the first time, a benefit every other industry has enjoyed for decades, and one that makes levering up right now an even more attractive proposition for these MSOs.
We are all excited about rescheduling. We think it's going to happen this year, and it represents a massive step forward for an industry that has operated under an unfair federal tax burden for far too long. There's an obvious irony that hasn't been lost on operators: the federal government has refused to recognize cannabis as a legitimate business yet has been more than happy to collect taxes on it, just without extending the same deductions every other legitimate business enjoys. The elimination of 280E alone will be transformative. Some operators should expect their effective tax rates to be slashed by 50% or more. And for those businesses that have been accruing 280E liabilities on their balance sheets, that uncertain tax position has been growing like a weed! The good news: upon rescheduling, it stops growing. The open question is what the IRS ultimately does about the accrued balances. That outcome is uncertain. Many operators are reasonably choosing to wait it out, hoping to outrun the statute of limitations before the IRS moves to collect is a rational play for now, especially when you consider that the cost of carrying that liability, in interest and penalties to the government, can be lower than the cost of debt capital for most cannabis operators… go figure. We will certainly be keeping a close eye on the situation.
That said, excitement about rescheduling and a favorable environment for sellers are two different things. The MSOs loading up on cash aren't doing it to go out and pay top dollar for assets, they're raising capital to buy businesses at discounts, not premiums – those days are gone. They're deploying it strategically: targeting distressed assets and accretive acquisitions of businesses they can acquire multiples below their own stock prices. From where they sit, this is an exceptional time to be a buyer, profitable businesses available at compressed valuations, motivated sellers, and a regulatory tailwind on the horizon. That's a powerful combination if you're the one writing the check, especially if you are among the small cohort with cash left in your checking account!
There's also a structural constraint that doesn't get discussed enough: many of the largest MSOs are at or near their license caps in the states where they're already operating. That limits where they can invest, regardless of how much they've raised. The acquisition targets they can and would pursue are more narrowly defined than you might be led to believe.
For a profitable, independent operator, the arrival of well-capitalized MSO buyers sounds like good news. And it can be. But "buyers are getting active" is very different from "buyers are paying fair value." Historically, deal structures have been stock-heavy transactions, which haven't delivered great outcomes for sellers, or, more recently, seller-note-heavy deals that introduce real uncertainty around whether the buyer will actually be able to make good on those notes over time.
An ESOP transaction can be structured differently. Sellers can take a portion of the sale consideration in cash at closing, with the remainder in seller notes, but critically, the selling shareholders and their team continue running the business. You're not relying on a third-party to generate the cash flows to service your seller notes. You're relying on yourself, which is a fundamentally different risk profile. It's also commonplace in an ESOP transaction to structure the seller notes with warrants, allowing the selling shareholders to participate in the future upside of the business they built. If rescheduling arrives and valuations improve, that upside is real and yours to capture. If the M&A market takes longer than expected to normalize, you've already monetized a meaningful portion of your equity at fair market value, without betting on a buyer who may not show up at the price you have in mind.
If you'd like to understand what an ESOP transaction could look like for your business, Sharp stands ready, willing and able to put together a preliminary analysis covering valuation, structure, and potential proceeds. Contact us to schedule a consultation.
