Deal volume in hemp‑derived THC rebounded in 2025, but the underwriting playbook changed. Buyers are no longer valuing brands purely on revenue multiples and “distribution velocity.” They’re valuing them on regulatory survivability: can your SKU set legally stay on shelves across the U.S. as state caps, channel restrictions, and enforcement expand?
In 2024–2025, multiple states tightened rules for intoxicating hemp products (commonly including delta‑8 THC and “converted” cannabinoids). California moved to restrict intoxicating hemp products in general retail through state public‑health action, and federal appellate courts in the 4th and 8th Circuits added momentum by affirming that states can impose restrictions even where federal law defines “hemp.” Buyers now routinely discount portfolios with:
- SKUs that are illegal (or likely to become illegal) in meaningful states
- Weak chain of custody for COAs and batch testing
- Misclassified shipping and fulfillment flows
- Noncompliant labels and high‑risk marketing claims (FTC/NAD exposure)
- Coverage gaps in product liability insurance or exclusions that make the policy unusable
This post provides an M&A‑grade hemp THC M&A due diligence 2025 checklist—what sophisticated buyers are requesting, where sellers commonly fail, and how to remediate issues before an LOI so you preserve valuation.
Informational only—not legal advice.
Why compliance became the valuation driver in 2025
Three forces converged:
1) State bans, caps, and channel restrictions accelerated
States increasingly distinguish between non‑intoxicating hemp items and intoxicating hemp products (often defined by total THC per serving/package, or by the presence of certain isomers/synthetic/conversion processes).
- California: The California Department of Public Health (CDPH) moved to prohibit or sharply limit certain intoxicating hemp products in mainstream retail channels, pushing them into licensed channels and/or restricting products with intoxicating cannabinoids. Start with CDPH’s hemp cannabinoid information and rulemaking resources: https://www.cdph.ca.gov/Programs/CEH/DFDCS/Pages/FDB/FoodSafetyProgram/Hemp.aspx
- Minnesota: Minnesota’s “edible cannabinoid products” framework (per‑serving and per‑package limits; labeling/testing expectations) became a model many diligence teams benchmark against. See Minnesota Office of Cannabis Management / state resources: https://mn.gov/ocm/ and Minnesota statutes/rules resources via Revisor: https://www.revisor.mn.gov/
- New York: New York has operated a cannabinoid hemp program with robust testing and labeling requirements and has taken enforcement positions on certain intoxicating cannabinoids. Reference NY Office of Cannabis Management: https://cannabis.ny.gov/ and NY cannabinoid hemp program materials.
The key diligence takeaway: a “50‑state” hemp THC portfolio is often a myth. Buyers want a state‑by‑state legality and channel map tied to each SKU and formula.
2) Federal appellate courts reduced “Farm Bill preemption” optimism
A common seller narrative used to be: “Federal law defines hemp; therefore states can’t ban these products.” Courts have been less receptive to that framing.
Buyers cite recent federal appellate decisions (including in the 4th and 8th Circuits) that generally support state authority to restrict intoxicating hemp products under state police powers (public health/safety), even when those products fall within the federal “hemp” definition.
Practical implication: if your investment thesis requires winning a preemption argument, buyers will treat it as litigation optionality, not base‑case value.
3) Advertising, labeling, and safety scrutiny increased (FTC/NAD + state AGs)
Even when a product is “legal to sell,” the claims can create material risk. Diligence teams now include a mini “consumer protection audit” because:
- The FTC continues to pursue deceptive health claims, especially where companies imply diagnosis, treatment, cure, or prevention.
- NAD challenges can force claim substantiation, label changes, or discontinuation—often leading to costly packaging reprints, channel friction, and retailer indemnity claims.
Start with FTC business guidance and enforcement updates: https://www.ftc.gov/ and NAD case library overview: https://bbbprograms.org/programs/nad
The 2025 M&A diligence playbook: what buyers ask for (and why)
Below is a diligence checklist structured the way buyers and their counsel/compliance consultants typically run it.
1) SKU‑by‑state legality mapping (the new “quality of earnings”)
Buyers increasingly request a SKU legality matrix that answers:
- Where can each SKU be sold today?
- Under what channel constraints (general retail vs age‑gated specialty vs licensed channels)?
- What testing, labeling, and registration requirements attach by state?
- What is the expected change under pending bills or proposed rules?
What to deliver in diligence
- A SKU list with: formulation, cannabinoid profile, per‑serving and per‑package totals, and whether cannabinoids are converted or synthetically derived.
- A 50‑state “go/no‑go” map plus notes on age gating, retailer licensing, online sales constraints, and required warnings.
- Copies/links to the primary legal authorities supporting your position.
Buyer red flags
- “We sell everywhere” with no written analysis.
- Reliance on outdated memos that don’t track 2024–2025 rule changes.
- SKUs that depend on delta‑8 or other isomers that are restricted in key states.
In 2025, diligence teams ask not only “is it legal?” but “will it still be legal in 6–18 months?” They run formula stress tests against:
- Proposed total THC caps per serving and per package
- Bans on specific isomers (delta‑8) or conversion processes
- Restrictions on inhalables
- Child‑appealing product prohibitions
- Mandatory age‑gating and retail channel limits
What to deliver
- A “versioned” formula file for each SKU (v1/v2/v3) showing ability to reformulate into compliance.
- A product roadmap: which SKUs can be reformulated, which must be discontinued, and which can be migrated to compliant channels.
Buyer red flags
- Single‑point‑of‑failure SKUs (one hero product becomes noncompliant and revenue collapses).
- No R&D documentation or supplier capability to adjust cannabinoid inputs.
3) Testing, COA integrity, and chain of custody (COA isn’t enough)
Buyers have learned that a PDF COA is not a compliance system.
What buyers request
- Full COA set by batch/lot, tied to production records and distribution lots
- Lab accreditation documentation (where required) and method summaries
- Policies for:
- sample retention
- out‑of‑spec handling
- rework/retest rules
- complaint trending
What they validate
- COAs match the exact lot codes shipped to retailers
- COAs include the analytes required by each state (not just potency)
- No “COA shopping” patterns
Seller prep actions
- Implement a document index with immutable links (data room discipline)
- Tie COAs to invoices, Bills of Lading, and retailer ship notices
4) Supply chain diligence: imports, FSVP exposure, and ingredient controls
If you import inputs (e.g., distillate, isolates, minor cannabinoids, terpenes), buyers examine import compliance and FDA‑adjacent controls.
Key concepts buyers probe
- FSVP (Foreign Supplier Verification Program) obligations for importers under FDA food safety rules can create exposure if you are the “importer of record” for ingredients used in ingestibles.
- cGMP alignment (dietary supplement, food, or cosmetic—depending on product type and claims).
What to deliver
- Supplier qualification files (COAs, audits, specifications)
- Import records, Harmonized Tariff Schedule codes used, broker documentation
- Written procedures for supplier approval and change control
Reference FDA’s FSVP overview: https://www.fda.gov/food/food-safety-modernization-act-fsma/foreign-supplier-verification-programs-fsvp
5) Label, claim, and marketing audit (FTC/NAD and state AG risk)
Buyers now treat marketing as a regulatory asset—or liability.
What buyers check
- Front‑panel and PDP claims (e.g., “pain relief,” “anxiety,” “sleep,” “anti‑inflammatory”)
- Structure/function vs disease claims distinctions
- Social media, influencer scripts, affiliate landing pages
- Substantiation files (studies, consumer perception testing, expert reviews)
What to deliver
- A claim inventory: every claim and where it appears
- Substantiation binder for each claim category
- A corrective action log for removed claims and reprints
Reference FTC advertising substantiation principles: https://www.ftc.gov/business-guidance/advertising-marketing
6) Shipping, fulfillment, and “restricted product” controls
A major diligence failure point is shipping operations that treat intoxicating hemp products like ordinary consumer goods.
What buyers ask
- Carrier policies relied upon (USPS/UPS/FedEx) and confirmation the product class is accepted
- Age‑verification methods for direct‑to‑consumer shipments where required by state law or retailer contracts
- State “do not ship” list with system controls (hard blocks, not just SOPs)
USPS guidance on mailing hemp (documentation requirements) is a baseline reference: https://pe.usps.com/text/pub52/pub52c4_019.htm
Buyer red flags
- “We don’t know where our 3PL ships”
- No state restrictions logic in checkout
- Misdeclared commodity codes that could trigger seizures/returns
7) Retailer and distributor contracts (channel legality + indemnities)
Buyers treat contracts as a compliance artifact.
What they review
- Warranties/representations about legality and testing
- Indemnities and recall cost allocation
- Chargeback terms for noncompliance
- Channel restrictions (age‑gated placement, locked display, online rules)
What to deliver
- Top 20 customer contracts + distributor agreements
- Side letters and email amendments
- Evidence of retailer compliance requirements (portal attestations)
8) Product liability insurance and coverage reality
A “policy in force” can still be functionally useless.
What buyers request
- Policy forms (not just certificates)
- Exclusions review (intoxicants, controlled substances, ingestion, inhalation, recall exclusions)
- Limits, deductibles/SIRs, retro dates, claims‑made vs occurrence
- Loss runs and notices
Buyer red flags
- No coverage for ingestibles/inhalables or for your key channels
- No contractual liability coverage where retailer agreements require it
9) Recall history, complaints, and safety governance
Recalls and complaint handling are central to valuation because they predict future enforcement and litigation.
What buyers ask
- Complaint logs, adverse event handling process, escalation criteria
- Recall plan, mock recall results, traceability speed
- Historical recalls, withdrawals, regulator correspondence
Seller prep actions
- Run a mock recall and document results
- Implement complaint coding and trend review minutes
A practical red‑flag matrix: how buyers price (or escrow) compliance risk
In 2025 M&A, buyers tend to convert diligence findings into three buckets:
Tier 1: “Deal breaker” (walk‑away risk)
- Material revenue from SKUs that are clearly unlawful in core states or channels
- No reliable COA chain of custody / evidence of systematic mislabeling
- Known regulator enforcement action with unresolved corrective actions
- Insurance exclusions that leave core products uninsured
Typical buyer response: terminate, or require major restructuring and re‑papering before signing.
Tier 2: “Valuation haircut” (price reduction)
- Portfolio depends on formulas likely to be capped/banned under pending laws
- Patchy testing program (some lots missing full panel)
- Marketing claims that create FTC/NAD exposure but can be fixed
Typical buyer response: reduce EBITDA multiple, lower earn‑out ceilings, or discount projections.
Tier 3: “Escrow/indemnity” (quantifiable but uncertain)
- Potential shipping noncompliance in certain states
- Isolated label deviations with low consumer harm risk
- Minor historical complaints without injury
Typical buyer response: special indemnity + escrow, or representation and warranty insurance with carved‑out exclusions.
If you are on the sell‑side, the best time to fix compliance is before buyers find it.
Step 1: Build a defensible legality position by SKU
- Create a written 50‑state assessment with citations
- Identify restricted states and implement system shipping blocks
- Document channel rules (general retail vs age‑gated) and retailer placement requirements
Step 2: Re‑engineer COA traceability
- Tie every shipment lot to a COA and production record
- Standardize lot coding
- Audit your labs and retain method summaries
Step 3: Clean up labels and claims
- Remove disease claims
- Add required warnings and age statements per state
- Keep substantiation files ready for the top 10 claims
Step 4: Confirm insurance actually covers the business you’re selling
- Obtain policy forms and negotiate endorsements
- Align coverage with contract obligations (additional insureds, recall riders)
Step 5: Prepare an “M&A compliance binder”
A high‑quality data room improves speed and valuation. Include:
- Corporate compliance policies and training
- State legality memos and change logs
- Testing program SOPs + COA index
- Complaint/recall program documentation
- Contracts, insurance, and shipping SOPs
Takeaways for buyers and sellers
- For buyers: treat compliance like product‑market fit. Model revenue under a “restricted state” scenario and require lot‑level traceability.
- For sellers: valuation protection comes from documentation and controls—not assurances.
- For both: legal status is increasingly state‑specific and channel‑specific; federal definitions do not prevent states from tightening rules.
Next step: operationalize diligence into ongoing compliance
If you’re acquiring or preparing to sell a hemp‑derived THC business, you need a living system—state tracking, SKU legality mapping, label governance, testing oversight, and shipping controls.
Use https://cannabisregulations.ai/ to monitor fast‑moving U.S. rules, build a defensible compliance program, and stay ready for diligence—so compliance becomes a valuation enhancer, not a deal risk.
