Inventory and biomass at closing

What counts as inventory in a cannabis deal

Inventory means every tagged plant and package under the licence, plus untracked supplies. It falls into groups that are priced differently:

Category	Examples	Usual treatment
Finished goods	Packaged flower, pre-rolls, vapes, edibles on the shelf or in the vault	Counted and priced; the core of a retail inventory adjustment
Work in process	Drying or curing flower, bulk oil, unpackaged edibles	Priced at cost to date or an agreed bulk rate
Biomass and trim	Fresh-frozen material, trim held for extraction	Priced per pound at a current market rate; quality and age matter a lot
Living plants	Clones, vegetative and flowering plants, mother stock	Negotiated per plant or at cost; often low value
Non-cannabis supplies	Packaging, hardware, nutrients, accessories	At cost, usually with a cap

Genetics are a separate question. Mother plants are inventory, but a strain library with brand value is closer to intellectual property and is dealt with elsewhere in the agreement.

How is closing inventory priced?

There are three common structures.

1. Target, or peg, with adjustment. The price assumes a normal level of stock. If the closing count is above the target the price rises, and if below it falls. Cannabis deal lawyers describe this as one of the most common purchase price adjustments, because it assures the buyer of enough stock to keep trading.

A public example: in a June 2021 Colorado asset purchase filed with the SEC, the target was $65,000, described as roughly two weeks of marijuana inventory at wholesale value. The count began the day before closing. The price moved only if the count differed from the target by more than $6,500. Inventory had to be unexpired, of merchantable quality, and free of pests, mould, and impermissible contaminants.

2. Price plus inventory. Common in small retail deals. The headline price excludes stock, and the buyer pays for the count at closing, usually at the seller’s cost and often subject to a cap so the seller cannot overstock.

3. Part of net working capital. Larger deals fold inventory into a working-capital target with receivables and payables. The same logic applies, across more line items.

Which value: cost, wholesale, or retail?

The valuation basis is where most disputes start. For the same package:

• Seller’s cost is what the seller paid or spent to produce it. It is verifiable from invoices, but it can be above today’s market if prices have fallen.
• Current wholesale value is what it would cost the buyer to replace it today.
• Retail value is never the right basis for a buyer, because it includes margin the buyer has yet to earn.

Falling prices make this a live issue. Colorado’s official average market rate for retail flower was $607 per pound for April to June 2026, against $1,721 in early 2021. A seller carrying flower at last year’s cost may be holding stock that is worth less than its book value. A fair clause uses the lower of cost and current replacement value. Market data sources are covered in how oversupply and price compression affect value.

Illustrative adjustment. Target inventory is $180,000 at cost. The closing count at cost is $212,000. Of that, $14,000 is product older than the agreed age limit and $6,000 does not reconcile to the tracking system, so both are excluded.

Item	Amount
Counted at cost	$212,000
Less aged product excluded	($14,000)
Less unreconciled product excluded	($6,000)
Eligible inventory	$192,000
Target	$180,000
Price increase to seller	$12,000

What is excluded from the count

Write the exclusions into the agreement, not the closing-day conversation:

1. Expired product, and product within a set number of days of expiry. Colorado ties expiration dates to stability testing at intervals such as 6, 9, and 12 months; other states set their own rules.
2. Product older than an agreed age, often 90 to 180 days for flower at retail.
3. Anything that failed testing, lacks a required test, or is on administrative hold or recall.
4. Packages that cannot be matched to the state system by tag, weight, or count.
5. Damaged, opened, or returned goods and display samples.
6. Quantities of any one item above an agreed number of weeks of sales.

The closing count

1. Freeze the record. Close open manifests, finish pending adjustments, and record waste before the count. Unexplained corrections just before closing draw attention from buyers and regulators.
2. Count together. Two-person teams, one from each side, count against the active inventory report. Large cultivation and manufacturing sites need one to two days, so start before closing day.
3. Reconcile. Every variance is either corrected in the system by the seller with a documented reason or excluded. California licensees must already reconcile physical stock to the system at least every 30 days; ask for those records in diligence. See verifying revenue with track-and-trace data.
4. Sign the count sheet. Both sides sign. It feeds the funds-flow memo.
5. True up. Agreements usually give the buyer 30 to 90 days to deliver a final statement, with a dispute process that ends at an independent accountant.

Getting inventory into the buyer’s name

Tagged product belongs to a licence number in the state system. It does not move because a bill of sale says so.

• In a membership-interest sale with an approved ownership change, nothing moves. The licence and the tags stay the same.
• In California, when every owner changes and a new licence is issued, the former owner’s inventory is moved to the new licence’s account when that licence is issued.
• In Oklahoma, the prior owner has 15 business days after the buyer’s OBNDD registration to transfer all inventory to the new owner.
• In Michigan, the agency authorises the system vendor to move remaining inventory from the old licence to the new one once the new licence is active.

The mechanics by structure are set out in track-and-trace systems and transactions. The buyer must not take possession or control of product before approval, even if the price has been agreed. Where closing happens in stages, the inventory payment is normally held until the transfer is recorded; see staged closings and escrow pending approval.

Cultivation and extraction: crops in progress

A retail count is a snapshot. A grow is a moving target, because plants gain value every week and the harvest date may fall either side of closing. Points to settle in the agreement:

• Who owns the crop in the ground. Either the buyer pays for plants at a formula, or the seller is paid a share of the first harvest after closing. The second approach looks like an earn-out and may need regulator disclosure as a financial interest; see earn-outs in cannabis deals.
• Biomass quality. Price per pound varies with potency, age, and storage. Tie the price to test results and a dated market reference, not to a number agreed months earlier.
• Crop failure between signing and closing. Risk of loss stays with the seller until closing unless the agreement says otherwise. Check that crop or stock insurance exists; many cannabis policies exclude living plants.
• Excise and cultivation taxes. Some states tax the first transfer from a grower. Confirm whether moving inventory to a new licence is a taxable transfer in your state.

Tax treatment of the inventory payment

In an asset sale, inventory is a Class IV asset on IRS Form 8594. Consideration is allocated to it, at fair market value, before equipment and goodwill. For the seller, the amount allocated to inventory is ordinary income, not capital gain. For the buyer, it becomes cost of goods sold as the stock is sold, which is one of the few costs that remains deductible for an adult-use operator under 280E. The two sides therefore tend to agree on inventory value more easily than on other classes. See purchase-price allocation in cannabis deals.

This page is general education, not legal, tax, or accounting advice. Inventory transfer procedures are set by each state’s regulator and change by bulletin.