What Buyers Are Looking For – Metrics For Determining Value In A Cannabis Business

“Accounting numbers are the beginning, not the end, of business valuation.” – Warren Buffet

Business valuation, especially in the cannabis space, is an art form, as you have to not only follow the fundamentals of valuing a business, much like Mr. Buffet has done hundreds of times over his incredible tenure as a businessman, but you have to know the nuances and curvature of the cannabis market. There are some unique industry-specific considerations that can make that valuation more nuanced and require a more qualified eye.

Here are factors to consider when valuing a cannabis business and even when assessing your own business:

  1. Financial Performance: The first question we receive at Green Life Business Group from a buyer is “What is the EBITDA?” The financial health of your business is inextricably tied to its value, and while short term tax savings may be appealing, this does not help with providing a meaningful valuation on the part of a buyer. We always analyze a company’s financial statements, including revenue, profitability, and cash flow. Understanding the company’s growth trajectory and its ability to generate consistent earnings assists our team with determining a proper valuation. Maintain quality financials, and you’ll receive a quality valuation.
  2. Regulatory Environment: What do your municipal or state legislators have in mind for you and your business? We always assess the legal and regulatory landscape in the region where a business operates. Is there a vote for recreational use on the horizon? What are the odds of it passing? Is there a consideration by the legislature to institute a moratorium on new licenses? This all can push or pull a company’s value higher or lower. Licensing requirements, tax increases, burdensome regulation changes, or arbitrary increases in compliance fees can also affect the value of your business. The staff at Green Life Business Group stays up to date with these market shifts, so you don’t have to.
  3. Market Position: Are you fortunate enough to hold multiple locations? Do you have a brand that is recognized state-wide? Evaluating the company’s market share, competitive advantages, and barriers to entry can increase or decrease its value. We consider the strength of a company’s brand, customer base, distribution channels, and relationships with suppliers as a means of determining the value of aspects that cannot be surmised by simply looking at the Profit and Loss statements of a company.
  4. License and Permitting: We remember a time when a piece of paper in Los Angeles sold for $9,000,000.00. The value of a cannabis business license is another factor unique to this space. When cannabis licenses are thoughtfully limited in a well regulated market you can find a lot of value in the license alone, our team understands the local regulations so we can determine what the intrinsic value of a license actually is. The transferability and expiration terms of these licenses also factor into our and a buyer’s valuation of a business.
  5. Supply Chain: Buyer’s will most certainly consider a target company’s position within the cannabis supply chain. Is it vertically integrated? What are its production capabilities, distribution networks, and relationships with suppliers? These questions, and more importantly the answers to them, can greatly impact the valuation of a business.
  6. Location: Location, location, location. This old adage resonates when it comes to a cannabis business. Location plays an absolutely crucial role in the cannabis industry. We apply value to a company by evaluating the local market demand, the number of licenses within a jurisdiction, and its proximity to key markets. Through an understanding of the demand to operate in a specific area, we can determine just how valuable a cannabis business is, for better or worse.
  7. Risk Factors: Finally, we assess risks that are specific to this industry, such as federal legal uncertainties, changing public opinion, banking limitations, and potential shifts in regulations. These factors can influence the valuation and perceived risks associated with buying a cannabis business. Think of the recent down vote on recreational cannabis in Oklahoma as a prime example for how public opinion can decrease the value of business.

It’s important to note that the valuation of a cannabis business can be challenging due to the evolving nature of the industry, varying regulations across jurisdictions, and limited historical data, and that’s where an experienced cannabis business broker comes in. Engaging a specialized appraiser or industry consultant such as Green Life Business Group can provide valuable insights and help ensure a more accurate valuation.

2023, June 12. What Buyers Are Looking For – Metrics For Determining Value In A Cannabis Business. Benzinga

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