Cannabis Business Valuations are up in Washington State

By: ELI C. NEAL, CPA, ABV, CFF

Harris Bricken’s Canna Law Blog is a fantastic, consistent source of news and information at the intersection of business, law, and cannabis in the Pacific Northwest and across the country.

At the end of February, Jonathan Bench published a fantastic overview of the market for Washington cannabis companies. Based on what Jonathan has seen recently, the market has rebounded from a low point in 2020. The full article is Washington Cannabis: Buckle Up for a Brisk 2021 in M&A Activity.

This type of insight from attorneys and brokers is important to the business valuation community and anyone that needs an business appraisal. Typically, business valuation professionals and appraisers use databases of finalized transactions to inform the market approach of their business valuation. However, the cannabis industry is still in its infancy – great transaction databases just don’t exist yet. Plus, transactions need to be considered on a state-by-state basis, anyway because the regulations are so varied.

In recent testimonies, it’s been clear that triers-of-fact have been initially skeptical of relying on informal data. However, it’s clear from their awards that they ultimately recognize that real-time information from well informed sources should carry more weight than years old cannabis acquisitions made by public companies. That makes sense, even if it’s abnormal.

Market multiples keep changing – that was the case even before a once-in-a-hundred-year pandemic – here’s the update as of early-2021 from Jonathan:

Cannabis Businesses & License Buyers

• MSOs (multi-state operators) and international cannabis companies (especially Canadian public companies) are trying to buy and sell interests in WSLCB licensees.

• The market is shifting away from revenue toward an EBITDA model to reward better companies:

  • For 2021 sales, a current EBITDA of 5-6x is appropriate

  • A $20-30MM revenue company could defend 8-10x multiple of EBITDA

Dispensary Valuations

• We have seen offers for bare retail licenses go as high as $1MM each, while groups of retail licenses with a consistent, solid retail brand go for many times that amount.

• Valuations dropped to 0.75x revenues in 2020 but have already increased to 1.25x revenues in 2021

• EBITDA margins are at least 15% and there is still some room for growth

• Brands still hold the most potential; a good brand can get 2-2.5x revenue 

Producer Valuations

• There is increasing interest in producer and processor licenses, as well, with bare licenses generally topping out around the mid-$400k range for a Tier 3 license.

• Where additional assets are involved, and especially where the seller has created a viable business ecosystem (and not just sat on a license), many other valuation factors come into play in the negotiation process.

We’ve used this type of information in business valuations for estate & gift tax planning, shareholder disputes in legal proceedings, and valuation consulting for the acquirer and seller. We’ll consider it going forward. Thanks to Jonathan for sharing it so publicly for the benefit of the whole industry.

If you’d like to discuss a cannabis business valuation, give us a call at 425-998-7690, we’d love to help you.