Valuing a Cannabis Business: Regulations and Assessment
Valuing a cannabis business is one of the most difficult appraisals performed today. We gathered experts for a round-table discussion on the industry and what they see going forward.
In Part 2 of our series on Valuing a Cannabis Business, we talk more about the current state of the industry.
Our panel consists of Quist Valuation seasoned professionals:
- Anas Elmadhun, Senior Financial Analyst
- Brian Van Pelt, Financial Analyst
- Victoria Hall, Corporate Business Development
How do you factor future regulations and projections to provide a valuation for an industry that is shifting and evolving very quickly?
Quist makes assumptions as of a valuation date despite a potential change in government mandates.
Vetting projections and risks become a big challenge when valuing an early stage cannabis company. Investors have been reluctant to look at cannabis companies because there has been a lack of observable market metrics, transactions, and guideline public companies data.
Decisions to invest in cannabis are challenging. The limited operating history of the cannabis companies affects the investor’s ability to understand future operating conditions.
You say there’s a lack of observable market metrics, yet cannabis has been legal in Colorado for 5 years. Why is there no market data?
Because marijuana remains illegal under federal law in the United States and U.S. companies are not able to list on the U.S. exchanges, we can only rely on the market data available for public Canadian cannabis companies. Using a multiple of Revenue and EBITDA methodology is not very strong or reliable either.
A big hurdle for the cannabis industry in the U.S. remains the IRC 280E Tax Code regulation, particularly the rule about the deductibility of business expenses. This rule applies differently to specific business categories (grow vs. retail) and there are different applications of the IRC 280E in relation to the taxation of grower vs. an operating company. Cannabis companies need to pay close attention to how these tax rules affect cash flow.
In the United States, cannabis companies do not have access to traditional banking services and financial institutions remain wary and reluctant to get involved. It is challenging to find capital for cannabis businesses.
All these conditions contribute to the lack of verifiable market data.
Can you provide your overall experience working with cannabis companies?
What we learned:
The scalability of the cannabis business and how expensive it can be.
Because of the extensive regulations for the cannabis markets, these businesses are both expensive to start and expensive to run.
What regulations exist in the Canadian market and how they may be leveraged for the US cannabis companies.
The Canadian government controls distribution and sales channels in their national cannabis market. For more information, see Canada just legalized recreational pot. Here’s what you need to know.
It’s the fastest growing industry in the U.S.
In looking at market multiples, we see an emerging industry, with companies going public and dramatic rise in valuations for publicly traded companies. With the industry going public, we see an opportunity for an unconventional industry to become a regular industry.
In part 1 of our series on valuing cannabis businesses, we talk about the history and challenges in assessing a cannabis business. Find part 1 here.
Have questions about valuing your cannabis business? Quist Valuation can help. Let’s set a time for a free 30-minute consultation. We can discuss the specifics of your business and identify the next steps needed to assess the value of your company.
Schedule your free 30-minute consultation here.
November 26, 2018 Strategic Valuations 0 Comment(s)
November 26, 2018