How to Perform a Business Valuation of a Cannabis Business (2 of 8)

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

Welcome to the second blog post in 4 Corners’ Cannabis Valuations in Washington State series! Throughout this eight-post series, we’ll be sharing information about the local cannabis industry and walking through the key concepts and challenges of a cannabis business valuation.  

Our first post in the series provided an overview of the Washington cannabis industry, and today we’ll discuss valuing cannabis-related businesses. It’s important to realize that the underlying concepts supporting these types of valuations are the same as when valuing any business. 

When valuing a business at fair market value, three major valuation approaches are generally accepted by the valuation community: 

• Adjusted Net Asset Approach 

• Market Approach 

• Income Approach 

The Adjusted Net Asset Approach is a valuation methodology that estimates the fair market value of a company by subtracting total liabilities from the total assets of the entity, after adjusting the balance sheet to fair market value. This form of value will generally not capture the value of any intangible assets created by the business, such as goodwill. 

The Market Approach is a valuation methodology premised on the theory that a business can be valued with reference to transactions involving comparable companies in an open and unrestricted market. Using publicly traded stocks or reported transactions from the market, the valuation expert will apply a calculated earnings multiple, adjusted revenue multiple, or other activity multiple observed in the market to the subject company to determine an indicated value. 

Finally, the Income Approach is premised upon the concept that the value of an asset is equal to the present value of expected future benefits realized through ownership of that asset. The Income Approach considers a company’s cash flow stream and applies a discount rate based on the anticipated risk and growth opportunity to arrive at an indicated value of the company. 

Regardless of the industry – cannabis included – the principles of a business valuation will not change. Rather, it is the key inputs for these approaches which will be affected by the new and largely untested legal cannabis industry. 

In the next posts in the Cannabis Valuations in Washington State series, we’ll walk through how each valuation method is impacted by the cannabis industry. 

If you own or represent a cannabis business in Seattle, Bellevue, or elsewhere in the Pacific Northwest and need a business valuation or financial expert, call 4 Corners Financial Forensics at 425-998-7690 or schedule a video call here; we’ll listen to your situation and help you scope your project. We’d love to help you.