The gradual legalization of Cannabis in the US, on a state level, has led to the establishment of new businesses and the repurposing of certain assets, such as real estate. As the Cannabis industry takes root in the US, it has led to new investment, financing, merger, and acquisition activity.
The valuation of Cannabis industry businesses (agriculture, production, sales and distribution), debt and equity instruments, intangible assets, machinery and equipment, and real estate requires an understanding and appreciation of industry specific nuances for the valuation analyses to be truly representative.
Cannabis Industry-Specific Nuances
A few key considerations when valuing Cannabis businesses are:
- Federal Limitations: The federal prohibition of Cannabis has handicapped the potential economic return of the industry since Cannabis businesses are restricted from transacting across state lines and access to the services of federally insured financial institutions is not available.
- Federal Tax: An important consideration in performing a discounted cash flow analysis in the valuation of Cannabis businesses is IRS Code Section 280E. Section 280E does not allow Cannabis businesses to expense normal business expenditures, expenditures that every other business is permitted to write-off.
- Licenses: Cannabis licenses can take multiple forms, including cultivation, dispensary, or a combination thereof. The value of any license is driven by several factors including its cash flow generating potential and more importantly its availability. As with the valuation of any asset, value increases as the ability to acquire the asset is limited.
Typical valuation needs for Cannabis business owners are:
- Purchase price allocation (ASC 805, IFRS 3) relative to a change in control transaction.
- Valuation of equity compensation (IRC 409a/ASC 718)
- Valuation of equity in the business for investment purposes (typically private equity), or to buyout an investor.
- Real estate and equipment valuations for buy/sell/lease consideration.
For more information or a discussion about the valuation of Cannabis industry businesses, tangible and intangible assets or real estate, please see the service sheet to the right or contact any of the professionals listed below.