The cannabis industry has grown from back‑alley hustle to billion‑dollar marketplace, and now the inevitable next phase has arrived: consolidation. Investors, multistate operators and distressed owners are eyeing mergers and acquisitions (M&A) as a way to survive the tax burden, expand into new markets and exit gracefully. In this guide I cut through the hype and explain why M&A matters, who’s buying, who’s selling, and how to avoid getting fleeced. I’m Thomas Howard, a lawyer and cannabis consultant; I’ve seen enough failed deals to know that due diligence—not wishful thinking—protects your capital. Let’s talk about cannabis M&A like adults.
What Is Cannabis Mergers and Acquisitions and Why It Matters
Mergers and acquisitions sound glamorous—CEOs shaking hands over glossy pitch decks—but in the cannabis world they’re often driven by desperation. The industry is overbuilt, taxes are crushing profits and capital has dried up. As a result, larger well‑capitalized players are scooping up smaller, distressed operators. Think of it as farming season: the survivors are consolidating their plots while weaker farms sell their land to pay the tax collector.
The consolidation wave is real. In California alone, the number of inactive or surrendered cannabis licenses recently surpassed active ones. When half your competitors throw in the towel, it’s not a sign of success—it’s a warning that oversaturation and mismanagement have ravaged the market. Meanwhile, investors who sat on the sidelines are finally moving in, buying distressed assets at pennies on the dollar. The current phase of the cannabis “consolidation curve” marks the shift from chaos to scale.
Market Conditions Driving M&A in 2025
Why are so many deals happening now? Three drivers dominate the 2025 landscape:
1. Oversupply and falling sales
Retail sales in California—a bellwether for the U.S. market—fell to a five‑year low of $1.088 billion in the first quarter of 2025. Too many licenses and not enough consumer demand mean lower prices, slimmer margins and shrinking bank accounts. Smaller operators that expanded aggressively in 2021–2022 are now underwater and looking to sell. Buyers see an opportunity to pick up prime locations and licenses for a fraction of their original cost.
2. Heavy taxes and regulatory burdens
Section 280E of the Internal Revenue Code forces cannabis businesses to pay federal income tax on gross profits rather than net income. With no access to bankruptcy protection and strict state rules that prohibit license transfers, many deals must be structured as equity purchases—meaning the buyer inherits every liability. That’s a sobering reality for anyone thinking M&A is a quick cash grab.
3. Interest rates and financing constraints
Private capital has retreated from cannabis due to high interest rates and broader economic uncertainty. Banks still won’t lend to cannabis companies because the plant remains federally illegal; congressional reforms like the SAFE Banking Act have stalled. As a result, deals rely on creative financing: earn‑outs, convertible notes, vendor financing and management service agreements. If you don’t understand these instruments, you’ll either overpay or lose control of your business.
Notable Cannabis M&A Deals in Recent Memory
Real data beats speculation, so let’s look at actual transactions:
- Blüm’s dispensary spree: The Nevada‑based operator acquired three California shops for $9.7 million. That’s roughly $3.2 million per store, a fraction of peak valuations in 2019.
- Lowell Farms’ management play: Instead of buying licenses, Lowell signed management service agreements for two Los Angeles dispensaries. It’s a clever way to generate revenue without triggering 280E on the entire retail operation.
- Planet 13’s Vegas expansion: The publicly traded company snapped up a competing Las Vegas shop for $6.9 million. The deal gave Planet 13 additional square footage on the Strip, demonstrating that premium location still commands a premium price.
- Vireo Growth’s multi‑state merger: Four single‑state operators combined to form a nearly 50‑store platform across several states. The new entity boasts economies of scale in cultivation, processing and retail—advantages smaller players can’t replicate.
These examples illustrate a pattern: buyers aren’t gambling on unproven markets; they’re acquiring existing sales, management teams and real estate. They’re also structuring deals to minimize cash outlay up front—often through revenue‑sharing or deferred payments—because liquidity is scarce.
Regulatory and Due Diligence Challenges
If you’ve ever tried to buy or sell a cannabis business, you know the paperwork is brutal. Licenses can’t simply be transferred like liquor permits; the state must approve new ownership, and at least one original owner may need to stay onboard. Meanwhile, Section 280E prevents buyers from deducting ordinary business expenses, which can sink post‑acquisition cash flow. Those realities make due diligence not just important, but existential.
Here are hard‑won tips for buyers and sellers:
Buyer Due Diligence Tips
- Verify licenses and compliance: Confirm that state and local licenses are current, fees are paid and no disciplinary actions are pending.
- Review financials: Demand at least three years of audited financial statements and tax returns. Look for unreported cash sales, outstanding tax liabilities and inflated asset values.
- Inspect inventory and assets: Count plants, finished goods and equipment; adjust the purchase price for stale or overstated inventory.
- Explore flexible terms: Consider earn‑outs, contingent payments or seller financing to bridge valuation gaps.
- Hire specialized advisors: Work with CPAs and attorneys who understand cannabis rules and Section 280E.
Seller Preparation Tips
- Organize your house: Keep meticulous records, from seed‑to‑sale tracking to payroll and vendor contracts.
- Stay compliant: Resolve any licensing violations or tax issues before listing; they’ll surface in due diligence.
- Set realistic valuations: Understand that peak valuations are gone; price your business based on current cash flow, not 2018 hype.
- Be transparent: Disclose all liabilities and operational challenges; surprises kill deals and erode trust.
- Consider creative structures: Be open to earn‑outs or management service agreements if they maximize your payout.
Your diligence determines whether you buy a cash cow or a white elephant. The more questions you ask now, the fewer lawsuits you face later.
Build, Buy or Partner? Strategic Options
Not every growth plan requires buying another company. As MGO CPA notes, cannabis companies have three strategic paths: build, buy or partner.
1. Build
Building a vertically integrated operation—cultivation, processing and retail under one roof—offers control over supply chain and branding. But it demands significant capital and burdensome regulatory compliance. In saturated markets, building from scratch is often the riskiest and most expensive option. You’ll need to secure real estate, local approvals and capital to survive the long run.
2. Buy
Acquiring an existing business can shortcut the licensing process and provide immediate revenue streams. It can also give you intellectual property, skilled staff and vertical integration. However, you inherit the target’s skeletons: outstanding taxes, lawsuits, sagging equipment and worn‑out leases. If you’re not prepared to fix other people’s problems, don’t buy them.
3. Partner
Partnerships—joint ventures, licensing deals or management agreements—offer a flexible alternative. They allow you to enter new markets or product categories without buying a license. For example, an Oregon brand partnering with New York licensees to launch in the Empire State avoids the application gauntlet. Partnerships minimize capital outlay but require careful contract drafting to allocate control, profits and liabilities.
Which route is best? It depends on your goals, capital and risk tolerance. After years of advising cannabis operators, I can tell you that buying or partnering often beats building from scratch in mature markets. You’re paying for speed and regulatory certainty.
Innovative Deal Structures and Financing
Because traditional bank loans remain off‑limits, cannabis M&A deals rely on creative structures. A July 2025 420 Accounting article highlights several approaches:
- Earn‑outs: The seller receives additional payments if the business hits revenue or EBITDA targets post‑closing. This aligns incentives but requires clear accounting.
- Convertible debt: The buyer loans the seller money with the option to convert the debt into equity. This provides downside protection if cash flow underperforms.
- Vendor financing: The seller finances part of the purchase price, often with interest. It lowers the buyer’s cash requirement but gives the seller a secured interest in the business.
- Management service agreements (MSAs): The buyer operates the seller’s store for a fee, effectively controlling operations without buying the license.
These structures reflect the reality that cash is scarce, valuations are compressed and regulatory rules make simple asset sales impractical. If you’re a buyer, use them to bridge gaps between what you can pay and what the seller wants. If you’re a seller, use them to continue sharing in the upside while transferring risk.
Future Outlook: Rescheduling and New Markets
You can’t talk about M&A without discussing federal rescheduling. The DEA is considering moving cannabis to Schedule III. If it happens, Section 280E would no longer apply, allowing cannabis companies to deduct ordinary business expenses and drastically improving profitability. The 420 Accounting article predicts that rescheduling and improved access to banking could spark a second wave of M&A—one driven by growth rather than distress.
Meanwhile, emerging adult‑use states like Missouri, Maryland, Connecticut and New York are experiencing a licensing land rush. Operators are consolidating early to build regional dominance. In Michigan, Arizona and Massachusetts, the story is the same. Market leaders want scale before out‑of‑state capital pours in and dilutes their market share.
Outside capital is also eyeing technology plays: AlphaRoot reports that 2025 will see larger companies buying smaller, specialized firms that develop AI and blockchain tools for inventory, compliance and consumer experience. Diversification—into beverages, edibles and wellness products—is another driver. The bottom line is that consolidation isn’t about empire building; it’s about survival and strategic advantage.
Conclusion: Don’t Sleep on Due Diligence
Mergers and acquisitions can rescue a failing operator or catapult a boutique brand into multistate stardom. They can also bankrupt naïve buyers who ignore tax rules, regulatory risks and cash flow realities. In 2025, the cannabis M&A market is a buyer’s market—if you know what you’re doing. With oversupply crushing valuations and federal tax burdens still in place, distressed deals are abundant. But that will change quickly if rescheduling occurs; valuations will rise and deals will get more expensive.
If you’re considering a merger or acquisition, start with due diligence, hire experienced counsel and structure your deal creatively. My team at Cannabis Industry Lawyer helps buyers and sellers navigate licensing, tax planning and contract negotiations. Schedule a consultation to explore your options and avoid costly mistakes.
