*Finally, the industry itself is complex. There are different stages in the cannabis pipeline, with different rules governing each stage, each emanating from one of several different sources. For example, there are cultivators, processors, distributors, retailers, marketers and accessory manufacturers all at different niches in the cannabis pipeline, each dealing with their own regulations and the regulations of other niches they interact with. To further complicate things, there are a variety of products in this space such as hemp, combustibles, edibles, oils, and topicals. The rules are varied for each of these products at each of the stages of the cannabis pipeline.
All these factors combine and interact to create a kaleidoscope of rules, a house of mirrors of legislation and regulation. Without an understanding of these variables in the regulatory landscape, a company contemplating an M&A in this space could quickly have the sand shift beneath their feet. At the very least, they could expose themselves to significant legal and business risk down the road which sufficient foresight could have prevented. We have seen some highly publicized cases of companies running afoul of the regulators early in the creation of this industry.
How are companies valued in the cannabis sector?
In an M&A, everything is negotiable.
Since we are discussing M&A’s between privately held companies, benchmarks to follow are less available (or in some cases, not available at all). This is compounded in the cannabis industry where there are significantly fewer private transactions which might allow you to calibrate your deal based on historical data. Even if there are available models, you will unlikely be privy to all the relevant information.
There are several key factors to contemplate to help you to work towards an agreeable price for both parties: