As the industry continues to mature, cannabis company mergers and acquisitions (M&A) are becoming more frequent. Vertically integrated, multi-state operators are consolidating to establish massive cannabis footprints across multiple markets — and once the U.S. goes legal federally, even more opportunities will abound.
All this M&A activity means that cannabis business owners need to be prepared in the event they’re approached about investment or a buyout. Whether you’re holding a coveted cannabis retail license or are operating a fully built-out and branded dispensary business, you need to know what it’s worth and, ultimately, whether you’re being offered a good deal or not.
That’s exactly what we’re discussing today — how to value your cannabis retail license and dispensary business.
How to Value Your Cannabis Retail License
Cannabis retail license values vary greatly depending on your particular market and its regulatory structure. For instance, a license on its own in Oklahoma may not be worth much more than the $2,500 application fee, since there is no limit to the number of retail licenses available in the state. On the other hand, Ontario retailers are seeing investment offers north of $5 million due to the limited number of retail licenses available.
The following factors should be considered when determining the value of your cannabis retail license:
- Jurisdiction and regulatory structure
- License availability
- Projected market size
- Future profitability potential (med to rec, federal legalization, etc.)
Let’s examine each of these a little more closely.
Jurisdiction: When it comes down to it, the regulatory structure of your particular jurisdiction will be a big determining factor in the profitability of your dispensary license. For example, in markets like New York and Florida where vertical integration is currently required, license values are inherently higher than those in markets with horizontal integration — that is, separate licenses for cultivation, processing, distributing and retailing.
License availability: The most fundamental law of supply and demand applies here — the lower the number of available licenses in any given market, the more value each license holds. Some states, like Oklahoma, have no cap on the number of dispensary licenses it can issue; meanwhile, in Florida, the current regulatory structure combined with the extremely limited number of available licenses has driven values as high as $50 million for a license alone — and even more if infrastructure and operations are already in place.
Market size: Naturally, the size of your market’s projected customer base will factor into your license’s value as well. For instance, Ontario is estimated to have a consumer base of nearly 2 million; on the other hand, the estimated number of cannabis consumers in Saskatchewan is less than a quarter million.
Future potential: Finally, you’ll want to consider the future potential for greater profitability and expansion in your particular market. If you’re a license holder in a state that currently only allows medical marijuana, you can leverage the fact that the purchaser will be in an advantageous position to capitalize once recreational use becomes legal.
Federal legalization along with domestic and international export opportunities are other factors you could potentially play into your cannabis retail license valuation. Of course, these would be speculative and not weighted as heavily as the other four factors we’ve discussed here.
How to Value Your Cannabis Retail Business
When it comes to valuating an operational cannabis retail or dispensary business, the same factors that you used to determine your license’s value still apply. However, as a functional business with infrastructure and operations in place, you’ll also need to consider the general principles of business valuation that apply across all industries and verticals.
To help determine the value of your cannabis retail or dispensary business, you should consider:
- Regulatory landscape
- Market size
- Future opportunity
- Current and projected income
- Company assets
- Current market values of other dispensaries
We’ve already discussed the first four, so let’s look at the last three.
Income valuation: One of the most basic ways of valuating a business is by simply looking at its annual revenue. Oftentimes, brokers will value a business based on a multiple of its annual income; however, a myriad of other factors can affect future profitability, particularly in a nascent and rapidly changing market like cannabis. But your current earnings can at least provide a decent starting point for determining your dispensary’s value.
Assets: What physical assets does your business own? From equipment to inventory, the cash value of any property and resources that will accompany the sale should be considered.
Market value: Finally, you’ll want to take into account the estimated values of other cannabis retailers in your market. Higher valuations of comparable businesses can demonstrate earning potential and help drive up your own company’s value. Of course, if you have a well-established brand or a business model that is blowing away your current competition, you’ll definitely be able to leverage that fact in the negotiation as well.
Cannabis Business Valuation Resources
Conducting research into the current cannabis retail business market can help you validate and adjust your valuation as needed. Groups like Greenlife and CannaMLS provide cannabis business listings that can give you an idea of what the market is willing to support.
Here are a few examples of some Michigan and California cannabis retail businesses currently listed for sale:
Ultimately, a cannabis retail license or dispensary business is worth what a buyer is willing to pay. As long as you can justify your valuation with data and metrics, you’ll be in a good position to reach a deal you can be happy with.
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