Every cannabis acquisition comes down to a fundamental structural choice: buy the assets, or buy the entity. An Asset Purchase Agreement (APA) transfers specified assets and listed liabilities. A Membership Interest Purchase Agreement (MIPA) transfers the LLC i
tself — everything in it, including the license. That difference looks like a technical legal detail until you realize that in most states, how you structure an APA vs. MIPA cannabis transaction determines whether the license survives the deal, who pays the tax bill, and which party absorbs a decade of regulatory history. Get it wrong and you have closed a transaction that either triggers a new license application or hands the buyer a liability they didn’t know existed. This guide explains both structures, the cannabis-specific factors that make the choice non-obvious, and what experienced operators typically do.
What You’ll Learn
How an Asset Purchase Agreement Works
In an APA, the buyer identifies specific assets it wants to acquire — inventory, equipment, trade names, customer data, intellectual property, lease rights — and negotiates a purchase price for those assets. The seller retains the legal entity. Liabilities transfer only if they are explicitly listed in the agreement and assumed by the buyer. Everything else stays with the seller’s entity.
For buyers, this is a clean deal structure in conventional M&A. You get what you pay for, you don’t get what you don’t want, and you take on only the obligations you have specifically reviewed and priced. Post-closing, the buyer typically forms a new entity to hold the acquired assets and operate the business.
The buyer also receives a significant tax benefit: the purchase price is allocated across the acquired assets according to a schedule (typically governed by IRS Form 8594), and the buyer takes a stepped-up tax basis in those assets. A buyer who pays $3 million for assets with a collective fair market value of $3 million can depreciate and amortize those assets from a $3 million basis — a meaningful tax benefit over the life of the assets.
For the seller, the tax picture in an APA is less favorable. Different assets receive different tax treatment: inventory and depreciated equipment may generate ordinary income; goodwill and going-concern value typically generate capital gains; but the blended result is often less tax-efficient than the seller would receive in a MIPA.
How a Membership Interest Purchase Agreement Works
In a MIPA, the buyer acquires the membership interests in the LLC — the ownership stakes themselves. The legal entity continues to exist unchanged, now owned by the buyer rather than the seller. All assets, contracts, licenses, and liabilities of the entity transfer with the ownership change. Nothing about the entity itself changes; only who owns it.
For sellers, the MIPA is typically the preferred structure from a tax standpoint. The seller recognizes the entire gain as capital gain — the difference between the purchase price and the adjusted basis in the membership interests — which is taxed at preferential capital gains rates rather than ordinary income rates. For a seller who built a cannabis business from the ground up with a low tax basis, the difference between capital gains treatment and ordinary income treatment on a multi-million dollar exit can be substantial.
For buyers, the MIPA creates a different risk equation. The buyer acquires everything the entity owns, including liabilities that may not be fully known at closing. A history of regulatory violations, unpaid payroll taxes, unresolved vendor disputes, or a pending state enforcement investigation all travel with the entity in a MIPA. Extensive due diligence and well-crafted indemnification provisions are the only protection.
Unlike an APA, a MIPA does not give the buyer a stepped-up tax basis in the underlying assets. The entity’s pre-existing tax basis in its assets carries forward to the new owner — which means the buyer inherits whatever depreciation or amortization schedule the seller had established, rather than starting fresh from a higher current-market basis.
APA vs. MIPA: Side-by-Side Comparison
| Factor | APA (Asset Purchase) | MIPA (Membership Interest Purchase) |
|---|---|---|
| What transfers | Specified assets + listed liabilities | Entire LLC entity + all assets and liabilities |
| License continuity | License typically stays with seller entity; new license may be required | License stays with entity; subject to regulatory ownership-change approval |
| Tax basis for buyer | Step-up to purchase price (favorable) | Seller’s existing carryover basis (less favorable) |
| Seller tax treatment | Mixed ordinary income + capital gains depending on asset type | Capital gains on entire gain (generally favorable) |
| Liability exposure for buyer | Only assumed liabilities (buyer-favorable) | All known and unknown entity liabilities (buyer risk) |
| Regulatory process | Often triggers new license application | Ownership-change approval; existing license maintained |
| Contract/lease assignment | Each contract must be assigned or renegotiated | Contracts remain with entity (no assignment required) |
| Closing complexity | Higher — more document transfer work | Simpler — entity continuity reduces paperwork |
The License Continuity Problem
In cannabis, the license continuity question overrides most other structural considerations. This is what makes the APA vs. MIPA analysis in cannabis so different from conventional M&A.
A cannabis dispensary license is not a freely assignable business asset like a lease or a trade name. It is an authorization issued by the state to a specific legal entity. In most states, the license does not leave the entity — it cannot be extracted and transferred to a new buyer entity the way a commercial lease can. If you structure a cannabis acquisition as an APA, the seller’s entity retains the license after closing. The buyer’s new entity has the assets but lacks the license to operate. Operating without a license is a criminal offense.
The path forward in an APA scenario typically requires the buyer to apply for a new license in its own name — a process that may take months to years, involves its own regulatory scrutiny, and may not be approved depending on the state’s current licensing posture. In a state that has closed its licensing round and is not accepting new applications, an APA simply may not be a viable structure for a dispensary acquisition.
A MIPA solves this problem because the entity — including the license — continues to exist. The regulator’s approval process focuses on the new owner’s qualifications and background, not on issuing a new license to a new entity. Most state cannabis regulators have a formal change-of-ownership approval process for MIPAs. The license remains active throughout (in most states), and the business can continue operating while the regulator processes the ownership change.
The MIPA approval process is not automatic or fast — regulators scrutinize the new ownership for criminal history, financial suitability, and compliance with state residency or other requirements. But it is categorically different from a new license application, and the license is not at risk of non-renewal during the process in the way it would be if no license existed at all.
Tax Treatment for Buyers and Sellers
The tax analysis in cannabis M&A has an additional dimension beyond the standard APA/MIPA comparison: Section 280E of the Internal Revenue Code. Because cannabis businesses cannot deduct most operating expenses, the value of a tax step-up from an APA structure — which would normally allow the buyer to depreciate acquired assets from a fresh, high basis — is partially undermined in cannabis.
Depreciation is a non-COGS expense for a retailer. Under 280E, depreciation on non-production assets is not deductible. A buyer who pays $500,000 for fixtures and equipment in an APA, expecting to depreciate them over seven years for meaningful tax savings, will find that much of that depreciation is disallowed under 280E. The tax benefit of the step-up is real but smaller than it would be in a conventional retail acquisition.
For sellers considering which structure maximizes after-tax proceeds, the MIPA’s capital gains treatment almost always wins. Long-term capital gains rates (0%, 15%, or 20% depending on income) versus the ordinary income rates that apply to inventory and depreciated assets in an APA represent a meaningful difference on a multi-million dollar exit.
Both parties should engage cannabis-specialized tax counsel before finalizing structure — the interaction between 280E, state cannabis taxes, and the federal capital gains rate is complex and the optimal structure is fact-specific.
Liability Exposure Under Each Structure
The liability question is where buyers most often push for APA structures and sellers resist. In an APA, the buyer’s due diligence list is focused: verify the condition of acquired assets, confirm the seller’s authority to transfer them, and ensure no third-party restrictions on assignment. Unknown liabilities that belong to the seller’s entity stay with the seller.
In a MIPA, the buyer inherits the entity’s entire legal history. Undisclosed regulatory violations, unpaid sales taxes, outstanding vendor claims, and employment law exposure all travel with the entity. The buyer’s protection comes from three sources: pre-closing due diligence that surfaces known liabilities, seller representations and warranties that cover unknown liabilities, and indemnification provisions that specify the seller’s obligation to make the buyer whole if post-closing liabilities materialize.
Cannabis-specific MIPA indemnification provisions should address regulatory violations and compliance history, any pending or threatened enforcement action from the state licensing authority, unreported cash transactions that could create tax liability, and employee claims related to the cannabis industry’s historically informal employment practices.
Escrow holdbacks — where a portion of the purchase price is held in escrow for 12 to 24 months post-closing to cover indemnification claims — are standard in cannabis MIPAs and provide the buyer with practical recourse without requiring litigation to collect. For a full discussion of the transaction process, see our guide on cannabis business valuation and our overview of consulting services for cannabis acquisitions.
Frequently Asked Questions
Why do most cannabis acquisitions use a MIPA instead of an APA?
The primary reason is license continuity. A cannabis dispensary license is issued to the legal entity, not to the individual owners — it cannot be extracted and transferred in an asset purchase. If you use an APA structure, the buyer’s new entity typically needs to apply for a new license, which may take months or years and may not be approved. A MIPA allows the entity (and its license) to continue in existence with a change in ownership, subject to regulatory approval of the new owner’s qualifications.
What are the main risks of a MIPA for a cannabis buyer?
In a MIPA, the buyer acquires the entire legal entity — including all known and unknown liabilities. Regulatory violations, tax arrears, vendor disputes, and employment claims that belong to the entity transfer with ownership. Buyers protect themselves through thorough pre-closing due diligence, seller representations and warranties covering unknown liabilities, and indemnification provisions with escrow holdbacks. Cannabis MIPAs should include specific provisions addressing the entity’s regulatory compliance history and any pending enforcement matters.
Does 280E affect whether you should use an APA or MIPA?
Section 280E reduces but does not eliminate the tax advantage of an APA’s asset step-up for buyers. Depreciation on non-production retail assets is generally disallowed under 280E, which limits how much the buyer benefits from having a higher depreciation basis in acquired assets. For sellers, the MIPA’s capital gains treatment is usually more attractive regardless of 280E. Both parties should consult cannabis-specialized tax counsel to model the after-tax proceeds under each structure before committing to a deal.
Next Steps
In cannabis, the APA vs. MIPA question is rarely a close call for operating dispensaries in limited-license states: MIPAs dominate because the license is the most valuable thing being sold, and MIPAs are the only structure that transfers it cleanly. The buyer’s job is not to argue for an APA on liability grounds — it is to perform due diligence thorough enough to price and allocate the risks that come with entity ownership. The seller’s job is to maintain a clean regulatory record and financial history that makes the MIPA a defensible choice.
Collateral Base advises cannabis operators on deal structure, acquisition due diligence, and regulatory strategy in over 30 states. Schedule a consultation to discuss your specific transaction.
Disclaimer: This content is for general informational purposes regarding cannabis deal structures as of 2026. It does not constitute legal or tax advice. Cannabis laws and deal structures vary significantly by state. Consult qualified legal and financial professionals before structuring any cannabis acquisition.
