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There are Zero Cannabis Buy/sell Agreements:
Implications For Cannabis Founders & Investors

When we first got started building Evergreen Annuity & Life, we knew there was pent up demand for life insurance to use for cannabis buy/sell agreements.

What we didn’t realize then was there are no cannabis buy/sell agreements in force in the United States. I remember assuming back then (circa June 2021) some creative financing structure had to exist – surely somebody had to have already solved this specific element of the source of funds problem in cannabis. The legal cannabis is booming and there’s no way all these business risks were left unaddressed. I was wrong, the reality is there isn’t a single buy/sell agreement set up in legal cannabis. 

That has huge consequences for successful cannabis founders, partners and investors. Read on or watch the video to understand the peril and how to manage it. 

Table of Contents

What Are cannabis Buy/Sell Agreements & Why would Entrepreneurs want to Use Them?

What?

Buy/Sell agreements are legally binding contracts that stipulate how partners’ or co-owners of a business will be handled in the event of one of their deaths. Generally, the specify how the business will be valued and are structured with life insurance to provide the capital to exercise the transaction as described. 

If you want to get into the weeds (not sorry), Investopedia has a great definition here.

Why?

Most partners setting up a buy/sell agreement are doing so to remove business related stresses for their family during an already difficult time, to provide liquidity for estate or tax planning, and to maximize business continuity by keeping the operators at the helm. They also help establish fair value for the business.

Accounting Today went in-depth about the powerful benefits of buy/sell agreements in their article here.

Why are there no cannabis buy/sell agreements?

It turns out there are no elegant financing structures or complex transactions that can cost effectively solve the problems addressed by buy/sell agreements. 

Admittedly, Evergreen hasn’t surveyed the entire industry. We have spoken to dozens of CPAs across the country who specialize in cannabis businesses and none of them have ever seen one put in place. Just today I was speaking to a prominent CPA in the industry who’s offices are here in Michigan about a client we share, and they admitted this is a significant risk affecting business continuity across the country. 

The truth is the incumbent life insurance companies have simply chosen not to enter the space. Insurance is regulated by the States, so they’re not restricted from helping like banking, brokerage or investment advisory firms are.  It’s a calculated decision, the potential benefits of helping the nascent cannabis industry are far outweighed by the potential brand ramifications. In one way, it makes sense from an industry that is built on risk-aversion and intentionally emotionless decision making. 

Entering the legal cannabis industry has real costs – which we know all too well. Insurers have to develop rigorous cash compliance protocols and effectively ensure they’re followed. This requires significant investment of capital and time building out a department to integrate into the rest of the org chart. From cannabis friendly banking, according to Peter Su on the In The Rotation podcast, we know they’re hiring a full time employee for every 5-8 firms they take on. In insurance – those kind of numbers can break the math. 

On the other, it feels like a violation of the spirit of an insurer. There are real risks, and the nature of the business is to give people ways to plan for them.

Obviously, we think differently and know that we can profitably operate our insurance business while bringing these fundamental solutions to this massive, yet neglected, industry. 

What Are the Risks?

For Entrepreneurs, Co Founders & Partners

The risks inherently intertwine your family, business and wealth. As in life, so in death – or something smart sounding like that. 

For your family, setting up a buy/sell takes some complication and stress off the table when the worst happens. Instead of having to pick up where you left off, your family has the comfort and capital that come from your planning in advance. More often than not the kids aren’t ready to or simply do not want to get into the business. 

For your business, it’s all about continuity and clarity through a tumultuous time. There’s no questioning who’s in charge or clashing between survivors in the business or in the family. 

For your wealth, in a vacuum, the benefits are substantial. You’ll have set a fair market valuation method that you agree upon beforehand – you’re probably a seasoned deal-maker already. It also allows your estate and tax planning professionals to optimize your strategy, typicaly ensuring that the generational wealth you’ve created is diversified and protected for your progeny.  

In my experience as an agent in the entrepreneur niche, risk takers aren’t predisposed to act on this until they realize they have something to lose. Often that’s too-late. To this end, I’ll say that if you don’t end up using your buy/sell financing, and you ever choose to sell the business, you’ll have a bad-ass asset that the acquirer is not focused on which you can take with you (talk to your advisors/cpa/lawyers!).  

For Investors, LPs etc

Investors often love their holdings, especialy when they’re doing well. The risks buy/sell agreements address endanger this fondness. Without managin them, there’s a possibility of souring as a successful position changes to source of work and stress. 

In small to mid size businesses, the risks are most prominent. Liquidity is low or completely absent and the team isn’t typically large enough to continue unabated. I’ve already spoken to an investor who was burned by the loss of an operating founder; there were competing interests between the family and the business/stakeholders which rippled through the business and ultimately led them to an outcome none of them anticipated or walked away happy from. 

What's the solution?

At Evergreen, we’re attacking these risks today and are bringing the first cannabis friendly life insurance products to market. This means we’re also bringing the first cannabis buy/sell agreements to market. The risks and reasoning described here are just the tip of the iceberg that drives us to act. We believe ours is a noble cause. 

Out in the rest of the world – our attitude is aligned with the cannabis industry at large. Federal legalization needs to happen, for so many reasons. 

DISCLAIMER

We’re not an admitted carrier yet, and our products have not yet been approved for sale. None of this is financial advice, and we make absolutely no binding commitments, warranties, or promises etc. This is our blog, and where we talk about a lot of things at the intersection of cannabis, entrepreneurship & insurance. We’re in a highly regulated business, so please forgive us. We have to use legalese like this.