California's Trusted Lawyers for Cannabis Business Valuation

Whether you are considering starting your own cannabis business and are wondering about the long-term value of your investment, or you are evaluating the possible purchase of another company, it is important to understand how valuation works in the cannabis market.

Because the cannabis industry is still a new industry, with a significant amount of legal risk and potential fluctuation – valuing a company that you have started, or that you hope to purchase, can be challenging. As the industry continues to grow, certain markers have developed for evaluating value and growth potential, and making an educated decision about good business opportunities.

Analyzing Business Valuation in Rancho Cucamonga

Any successful purchase or sale of a cannabis business requires that the seller and buyer agree on a fair value for the business. For obvious reasons, a buyer will naturally want a lower price in order to increase potential profitability, while a seller will want to sell for the highest price possible. In order to make sure that both parties are satisfied, it is often necessary to conduct an independent valuation.

There are two primary means of valuing cannabis businesses. But due to the newness of the industry and the lack of publicly available data, both are still somewhat speculative. These two approaches are:

  • Asset-based valuation

  • Earnings-based valuation

Asset-based valuation looks primarily at the assets that the company has in its possession. This can include tangible assets such as equipment, plants, and staff. However, it also includes intangible benefits like brand name recognition, a loyal customer base, and relationships with government regulators and administrators.

In the cannabis world, a license to operate a cannabis business can also be of significant value, particularly where such licenses are difficult to come by. In Washington for instance, the restriction on the number of licenses to be issued has meant that ownership of a license itself is valued at upwards of $500,000.

What asset-based valuation does not take into account is the unique opportunities for potentially explosive growth in the cannabis industry, and what this might mean for potential earnings. Some buyers may appreciate the more conservative asset-based approach because it acknowledges the inherent risk in the industry and that growth is not guaranteed.

Others, however, may prefer to take an earnings-based valuation approach, which does consider the possibility of significant future earnings returns. Under an earnings-based approach, a base multiplier amount, such as two or five, is applied to the current net revenue of the company to be sold. For instance, a company with $200,000 in revenue would be worth one million dollars with a multiplier of five.

The difficult aspect of the earnings-based approach in the marijuana industry is that no set base multiplier has yet been established. In more developed industries, such as retail, with far less potential for risk, valuation experts have generally agreed on the appropriate multipliers that should be applied during a sale.

In the cannabis industry, the sale of a business is still new, and a great deal of risk and uncertainty remains within the industry. Therefore, disputes continue over the appropriate multiplier that should be applied, and one can anticipate that a seller will always want a higher multiplier than a buyer in an earnings-based valuation.

Do Your Due Diligence

No matter which valuation approach you decided to use, there are certain fundamental due diligence steps that every potential buyer should take when considering a cannabis business purchase.

First, ensure that you have received all of the necessary and important documentation related to your potential purchase. For an earnings-based valuation this should include detailed documentation to support all earnings figures for the years that the company has been in business, as well as any outstanding debts and liabilities. For an asset-based valuation, this should include documentation to verify ownership and value of all purported assets.

Second, you will need to obtain verification from the seller that the business is in compliance with all applicable California regulations and restrictions and has all necessary approvals and licensing. Given the strict controls on the cannabis industry, the last thing a buyer wants is to purchase a company acting illegally.

Third, the cannabis industry faces unique challenges that make particular aspects of a business, or assets, very important. For example, the cannabis industry faces unique challenges in acquiring adequate storefront and warehouse space, with location and potential industrial space quickly requiring payment of a significant premium. For this reason, verifying the details of any deeds or leases for the company you want to acquire can be very important.

Likewise, with the rapid expansion and growth in the cannabis industry, and so many new businesses entering the arena, the protection of brands and trademarks is also particularly important for continued growth. Any potential buyers should make sure that the business they are acquiring has properly registered all applicable trademarks and is not facing any pending trademark disputes.

While hiring a lawyer and/or valuation expert to help you navigate the purchase or sale of a cannabis business is not mandated, it is highly recommended.  Given the inherent risk in the industry – as well as the highly specific factors mentioned above – handling a cannabis business acquisition comes with significant challenges.

California Attorneys Guiding You Through the Cannabis Valuation Process

While business purchases always involve a degree of risk, and require meticulous attention to detail, this is particularly true when dealing with a cannabis business. Because the industry is a new and growing one, with significant potential and also heavy regulation – properly valuing a company for sale requires the input of experts familiar with the unique needs of the industry.

At CKB Vienna LLP, our cannabis attorneys are at the forefront of industry trends in California and can help you develop an honest assessment of the value of your company, or a company you are considering purchasing.  We will work with local valuation experts, industry professionals, and your staff to help you make the best possible purchase. For more information, contact us online or at 909-980-1040.