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Asset-based Valuation
An asset-based valuation takes into account all of the business assets, such as physical property, but also including non-tangible things like brand recognition, customer base and existing employees, competitors, and location. All of these items can have a value affixed to them, and the sum total becomes your valuation.
Earnings Multiplier Valuation
However, for most people in the marijuana industry, a return on investment is based significantly on exit value rather than just net profits. In these cases, the earnings multiplier method may be more useful. Using the earnings multiplier method, a base multiplier (usually somewhere between two and ten times the business’ annual net income) is used to determine the valuation of the business. This method is usually more effective for business and license owners because it can factor in levels of risk involved in the industry.
The challenge, however, is determining which multiplier to use for the marijuana industry. This is due primarily to the inherent industry risks and relevant industry standards, which include risk of federal prosecution, relative youth of the industry nationwide, and a lack of historical evidence on which to base valuations. While early license acquisition deals in Washington state for licenses fell anywhere between $250,000 and $1 million, some deals nationwide have gone up in the $2 million range for established businesses with real estate. However, the 2016 Marijuana Business Factbook predicts that the cannabis industry will becomes a $44 billion market by 2020, which could dramatically increase the value of an average marijuana business license.
Licensees—what can you do to increase the value of your license? Buyers and investors—what sorts of things should you be looking for in a business?
First and foremost, take a look at the business records; are they well-kept and transparent? Do they demonstrate profitability over time, and show future potential? Make sure you do your own due diligence on any parties involved; check out their financing sources and backgrounds in particular, so you know who you are doing business with.
Secondly, take a look at the health of the business itself: look at employee records and discipline, make sure the business is compliant with all relevant state and local laws. Make sure management is effective and did their due diligence in setting up the business and hiring. It is also important to learn if there are any pre-existing debts that you may inherit should you purchase that business.
Next, look at intangibles, such as intellectual property rights and the legal obligations of the business such as leases or sale contracts. Having a protected brand by registering your trademarks with the state and/or federal government goes a long way towards maintaining some of the valuable assets of the business. Similarly, make sure all business leases and contracts are in good order, or you may be on the hook (or leave your buyer on the hook) for a bad deal made earlier.
Finally, use any resources you can to take a look at what business are going for in your areas. For example, Washington licenses can go for a whole range of prices but has been hovering in the six-figure range. A license with property can go for upwards of seven-figures in the right location, if it is fully operational.
Until the marijuana marketplace settles down and there is more historical data of what businesses are worth and what is being paid for them, much of a valuation is guesswork. At the end of the day, however, good recording keeping and doing your due diligence go a long way in proving that your marijuana business is worth what you are asking of potential buyers.
Anne van Leynseele is strategic legal counsel for select group of entrepreneurs in the cannabis industry. She is a Cannabis Business Lawyer and founding partner at the full service law firm NWMJ Law, PLLC. www.nwmjlaw.com
License Valuations for Investors and Sale
If you want to invest it, buy, or sell a marijuana business license, you will need to determine what that license is worth. So how do you put a value on a license? Affixing a value to your license is called a valuation. Valuations are used to assist buyers and sellers in establishing a market rate for a particular asset, in this case, a license. While the licenses themselves have substantial value because there are a finite number of licenses issued by each state, in most cases in the marijuana industry, the license comes tied to the business entity that holds it, which can affect the license valuation in several ways.
Generally, there are two common methods for valuing a business: an asset-based valuation or an earnings-multiplier valuation.