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Accounting, Tax, IRS & Marijuana

How to Value a Marijuana Business?

How do you appraise the value of a marijuana company?  It’s extremely difficult to come up with an accurate valuation given all of the moving targets within the Industry, as well as lacking historical information. Mix in the risk from the federal level, and it may seem close to impossible.

Let's take a step back. What is a valuation anyways? A valuation helps business owners ascertain how much they will sell their company for and, on the other hand, gives potential buyers an idea of how much they should pay for the business. Something to note, for many marijuana business owners, return on investment is based more on its exit value than on its net profits. For instance, this is especially true for minority (or passive) stakeholders not involved in the business’s day to day operations; their goal is to build up the business as much as possible so as to maximize its sale value.  

With any closely held business, one of the most important parts of the valuation is to figure out a proper risk-adjusted rate to apply to cash flow. Often times, an income approach is used where the projections take into consideration the future cash flows, and then calculate what someone would be compensated - given all the uncertainty in the cannabis industry.

There are other common methods for valuing businesses too. The easiest ones are an asset-based valuation or an earnings-multiplier valuation. A business that’s been operating for a few years and has brand recognition, regular customers, trained/licensed employees, customized facilities, good location, and many other assets that can have accurate dollar figures attached to them and are relatively easy to value. And don't forget, in valuing a marijuana business that there are states with a limited number of marijuana licenses, and therefore, the license itself has its own inherent value. 

For ongoing and profitable business concerns, the earnings multiplier method may be be more useful. Using this method, a base multiplier (generally two to eight times the business’s annual net revenue) is used in determining a business valuation. For example, an adult-use store with $150,000 in net revenue per year would yield a $750,000 valuation using a multiplier of five. When using this method, the hard part is deciding on the multiplier. More often than not, the multiplier reflects business risks and industry standards. As pointed out above, there are many moving targets in the Marijuana Industry so there isn't an easy answer to determine which multiple should be used. It is on a case by case basis and your valuation expert should be consulted. There are currently no reliable benchmarks in the marijuana industry so some valuations might require a combination of valuation methods.

In summary, there a few high level concepts to begin looking at for valuations. Some of them include location, competitors, the experience of the management, whether the company has good operating procedures (and documented) and a understanding their lease or property ownership details.

There's a lot of due diligence that goes into the mergers and acquisition based on the valuation. It’s extremely important to do site visits and management interviews. If you're looking to sell, please make sure you have good records, have current financials and you're in compliance with your state and local regulations. If you need help with your marijuana business valuations contact us here and we would be glad to help you (whether on the buyer or seller side).