Whether you’re trying to beef up your balance sheet or sell your cannabis business license, you need to put a thoughtful valuation together.
Valuations follow certain frameworks, but cannabis license values can be relatively subjective because there are not a ton of comparables, especially in younger markets.
If you need help with developing a valuation for your cannabis business, its assets such as the cannabis business license, or help with anything else related to the financials of your business, then please reach out to us today.
In this video, we cover:
- Quick framework for calculating a potential minimum value
- 10 factors that can impact your license value
The list above is not the FULL list of factors, just some primary considerations for getting a direction in your valuation.
So we’re going to talk about a topic today about cannabis business license valuations. We’re gonna do a little back of the envelope calculation as well as we’re gonna talk about some factors that impact the value of your cannabis business and the license associated with that. And before we get started, I need to let y’all know that the information contained in this presentation is meant for guidance purposes only, and that is professional legal or tax advice.
And further does not give any personalized legal tax investment or any business advice in general. So without the way, then we’re gonna talk about cannabis business valuations. All right. So the first kind of thing here, I want, I want a framework for valuing your cannabis business license. Now the mindset of a seller they’re to want to recapture the money they spent on either acquiring this license or the process of acquiring that license. Then they’re going to add a premium on top of that, right? So these original holders, these original license, assignees, they’re gonna look at the total costs of originally acquiring that license. Things like rent while going through the entire licensing process. Now, the longer the process, the higher that rent, the more money they’re going to look for. Also things like legal fees build out costs, annual license fees for the city and for the state.
And those can be quite big, you know, in Rhode Island, it’s a half million dollars for the annual licensing fee for a dispensary. So it can vary. It can be 20,000, 25,000 higher, low. Now you also have to look at the application input costs. As you may know, cannabis business license applications, they are not cheap to put together. There are a lot of work to put together, right? There’s a lot of people, a lot of constituents that need to put things into that. So things like security, a person that goes and makes a security plan for you, or you work with an architect who can help you with the design of the space and making sure that’s assigned well, now you have business plans and proforma financial statements. If you cannot produce these yourself, you’re gonna have to pay someone to do that for you also, in other certain States, you need to do a waste removal plan or in viral environmental impact reports or standard operating procedures.
It all depends on the state, but there’s costs associated with inputting those into the license application. Now that’s going to get you your base price, all the costs to get to licensing and how far along that business is. But if you can do it cheaper than that, maybe you don’t have to pay that price, but the X factor or the premium that you’re going to see on these licensing, you know, for sale. When you see these licenses for sale is going to be the value of the, to get the license. Now, certain cities, certain States, it’s very, very fast when I say very fast, I mean, 90 days like Oklahoma, very cheap, very fast because it’s like a 90 day turnaround at the beginning. They were like a 14 day turnaround. Now, when you get to other cities like Los Angeles, that’s been going on for months, years, this whole process, these licenses are going to be worth a lot more money.
Well, not say worth more than people are going to asking more money for them, right? Cause it’s only worth what you’re actually willing to pay for it or what the market is willing to accept for it. Now additional costs once you see this license being sold multiple times is going to be things like the legal fees to do all the due diligence, the inspections and things of that nature. So the older licenses, typically it does grow in value, but there are many factors that can affect that, right? So if there’s more licenses being added, maybe not the most valuable for license. So we’re going to talk about now 10 factors that are going to impact the value of your cannabis license. Okay. So first let’s talk about the stage of your project. If you’re an early stage project, that means that you’re just licensed. There’s no build out.
There’s probably no business as well. You have a mid stage project where they’ve either started the build out and they’re all way up to less than one year of revenue. Now, the last one, the later stage, a more mature ones. They’re going to have one plus year in sales, right? That longer track record. So the later stage the business typically that’s going to mean the higher, the price for that license or for that business. But it does depend on performance. If someone has a license and it’s not generating a lot of revenue, it doesn’t mean they can command some very, very large price. But what you’ll see is that many investors, or I would just say, investors we’ll call them or buyers. They’ll let the illegible original license holder go through all of that stress of building their business of, you know, going through the mental headache of going through the licensing process.
And then they’ll come in and they’ll pay that premium to just have a turnkey solution or almost turnkey solution. Now, the second factor I want to talk about is going to be the type of entity that actually holds the license. Now, usually you won’t buy a license. You’re going to buy an entity that holds a license and you essentially acquire all of the assets. In most cases. Now, sometimes people make the mistake of assigning a license to an individual person. I’ll get to that later. And that’s not the best idea because many regulations don’t allow you to sell or transfer your licenses to a different entity or to a different person. But changing the ownership of that entity does create almost a little bit of a loophole. We’ll say now each entity has its own risk protections and tax implications. So for example, LLCs, it’s a pass through entity.
All the taxes are passed on personally to the person that is a partner or a member of that entity. Whereas a C Corp it’s stopped. It’s locked in at the entity and it’s capped at 21%. Now you’re going to do a lot of SD research on their financial and legal regulatory standing things like their tax filings. Are they up to date and are they filed accurately? You also want to look at the balance sheet. You’re going to really tear that apart. Look at the income statement, tear that apart. We have lots of videos detailing all those different M and a due diligence. Walk-throughs okay. And also are they in good standing with the state? Sometimes entities are not in good standing because they haven’t filed their statement of information or anything along those lines. Now, the last thing I want to talk about entities is look at the way that they’ve raised capital for the entity.
And is there any debt for that entity because you will inherit all this debt when you buy that entity. So really be thoughtful about that. And does it, does this debt actually convert into equities because that’s going to change the cap table potentially later down the road. Now, the third factor I want to talk about here is going to be the scarcity of licenses in that city, in that state. Now, for example, very scarce licensing in the city of Pasadena, California, there are only six dispensary licenses available, but you look at somewhere like Oklahoma. If you have been a resident for two years and have the fee available, you can get a dispensary license. It’s a very open market, but a more scarcity, a more scarce license. That means the value of that license is going to be significantly higher than where there’s unlimited licenses or a lot of licenses.
Now, the fourth factor I want to talk about here is the type of license. Now it depends on what vertical you’re in, and this is going to be more of a subjective type of look at things. Okay? But depending on what vertical you’re in, you know, most sophisticated investors know the estimated income per license. When they look at the macro environment in which that license is going to be operating. Now, if they’re adding a license to their business, right? Say somebody already has a dispensary license, they want to recapture maybe some of that new margin by buying a manufacturing license. So they know what this is going to recapture for them. They know what those markups are. So when you look at something like, for example, a district license, they don’t recap. They don’t capture a lot of margin. It’s razor thin margins in a distro, but it could be for the mental headache of not having to coordinate with another company, you acquire a distribution license, but at any rate, you also have to look at, do certain regulations in that city or state require or prohibit you to have particular types of licenses and you cannot vertically integrate, or you are required to vertically integrate.
So it all depends on the type of license that you’re actually purchasing. When you look at that value, again, this is a little more arbitrary it’s depending on the buyer and the amount of those licenses that are out there, which we’re going to get into next, which is going be the phase of the licensing process in that particular jurisdiction. Now, for example, in LA, they had three phases of licensing. And in that instance, as every phase pass phase one, then phase two, then phase three, the regulations became a little bit more strict on who could own the license. They added social equity parameters and regulations in there. So depending on the phase of that license, right? More regulations, more requirements means a higher cost of ownership, which could then lower the value, but that’s dependent, right? Cause if you really, really want to be in that market, say, you want to be in Los Angeles and you want to be in that market.
You may be willing to pay for that license, even though there are higher requirements for ownership. Now, conversely, as they progress through the licensing process, the city, right? Say for example, LA is going to progress through the licensing process and maybe they were only in phase one and they only had phase one licenses available. Now they go through phase two and phase three. That means there are more licenses available in the market. Now just look at it, total market value of the cannabis industry in that city divided by the number of licenses. That’s like a revenue per license, which means that as you add more to that numerator to the top number each sorry to the bottom, the denominator at the bottom more licenses means less revenue per license, which means the valuation will likely go down based on that. But you also see as later stages of the licensing process, there are more stable prices in the cost of those licenses.
If you’d like to purchase a dispensary right in the earlier stages, let’s say phase one of a licensing, it’s very volatile. And with the valuations of these licenses are because there are not many comparables. And we’ll get to the talk about comparables in a moment here. Now, piggybacking off that phase of the licensing process, you’re seeing a lot of what they call social equity. And essentially what this is doing is trying to right the wrongs of the, uh, war on drugs and people that have been disproportionately affected by the war on drugs. They’re going to go ahead. And the regulatory bodies are going to give, you know, more points in regulations requiring that people that have been there have been impacted by the war on drugs. Disproportionately should get some type of ownership for that. Now, when you look at that, you have to ask yourself, can you even qualify to be an owner or a buyer?
Now, when you look at some of these social equity regulations, the person has to live in this specific zip code for a specific amount of time or in a certain area, or during a timeframe in which they’re looking at this. So you may not be able to qualify as an owner. And if the regulations are very strict on who can actually qualify as a social equity applicant, this could significantly limit the number of buyers for that license. Now, market dependent, right? Depends on where you’re going to be at. This could mean that you could dramatically reduce the value of that license significantly like very, very much because your pool of candidates is very small and you know, you may need to coordinate with other buyers and bring a money person in or someone else or another investor in. So it’s, you know, social equity is a great thing to help out.
Not many of the programs are being implemented, all that well, but having a license it’s under social equity requirements and regulations and parameters could reduce the value of that license relative to the same license without those requirements. Now, one thing I want to jump into now, the seventh factor that it may affect your cannabis business license value is the regulations around sale. And this is at two levels. You’re going to see at the state level and at the city level. Now, for example, in certain cities like West Hollywood, they prevent the sale of licenses all out. So essentially the license is going to be worthless to anybody, but the current owner now is this license going to be assigned to an individual or assigned to an entity as I brought up earlier, you don’t want to, or we would suggest that you do not assign a license to a specific person, but assign it to an entity because in many States you cannot transfer the license to a new entity or to a new person, but there are ways that you can transition from new ownership.
So from old ownership to new ownership of that entity, over a specific period of time, we’ve detailed this in our buying and selling cannabis business licenses, video on our YouTube channel. So check that out. I’ll put that video in the description below of this year. Now, when you look at these things here, you know, if the, if the license is assigned to an individual and people don’t know these things, you know, when they first go into it, right, they’re very excited to get the license assigned to them individually. And it’s like, Oh man, we can’t transfer this, but there are creative ways around that you could potentially, you know, pay the hurt, the assign E you know, some type of revenue share agreement, and then, you know, operate under that. There are many different ways to look at it, but that’s one way to do it.
Now, the eighth aspect, I want to talk about our factor here is going to be the points on that license. Okay. So what does that mean? So when you get a license, just like a driver’s license, right? And you do something bad, you’re going to get points on your license. Now, regulatory bodies has set a various list of regulations and violations. If you commit this and you’re caught, you will have points assessed against your license. Now, the bigger the infraction, the more points. Now, having more points on your license could decrease the value of your license. And then the, also the, you know, the scale and the magnitude of the violations that you’ve had can significantly reduce that. And this is also take into consideration. This is relative to the other licenses in that market, right? And I say a market, it could be really a local market because cannabis is a local business.
As much as it is a large and booming business. People don’t travel 75, 80 or 200 miles to go and buy cannabis. If they’re not, not living in a cannabis desert, they’re going to go to the closest one that they have a relationship with just like their local CVS or their local liquor store, right? You don’t drive a hundred miles to get a bud light, right? You go to the store that has it, that’s, you know, fair value and it’s closest to you, right? So at any rate, looking at the amount of points on the license is very, very important and doing the due diligence into that. Now the ninth factor I want to talk about here is going to be comparable market prices. Now, what does that mean? Comparable market price is essentially looking at what have other licenses in the same vertical and same market under the same conditions sold for in the past.
Okay. Now this is very hard to come by in these newer markets. For example, Illinois, it’s brand new market, not going to have many comparables on sale of licenses. And it’s also important to understand there’s a difference between between medical licenses and recreational licenses. So again, looking at comparable, and when you look at comparables, say a license for dispensary sells for $5 million in the city of Los Angeles. We’ll just say a pre ICO sells for $5 million. Okay. Those will keep dropping essentially because there’s more licenses being added to that market. We’ve talked about that, but when you look at the revenue for those businesses, how do they command that valuation? Typically you do a multiple of either the EBITDA, which is the best way to do it, or it looks, or, you know, or you can do the top line revenue. Top line revenue is really tough because if you don’t have a good tax strategy, you’re really going to be getting hit.
Once you get to the bottom of your numbers here, after you take out the cost of goods sold. So multiples keep dropping. The thing is really when I, the point I want to push here. So four years ago, you could get three, maybe even all the way up to eight X, your top line of your dispensary. But nowadays you’re lucky if you get maybe one to three X, if you’re crushing it. So just be thoughtful that, you know, what are the comparable numbers and how can, you know, I would say in reinforce the value of that license, looking at what’s being sold over time. And then you jump into actually sell your license for something comparable to that, but taking into these, taking into consideration all these other factors, which brings me to the last one. I want to talk about which this is not a full list of all the factors.
There are hundreds of factors, but these are 10 primary factors you should look at. And the last one here is the type of consideration that is going to be exchanged for that license, right? You have things like an all cash sale. You could do a stock, or you could do debt. There’s other options, too, right? But look at cash and stock. Those are the two most common ones. Now you may be able to be able to get a higher price as a buyer sales price as a buyer. If you take a stock purchase, which means that the person who’s acquiring the license is not going to pay you cash, but they’ll pay you stock in their public company that they already have. Now, one thing we suggest is don’t take an all stock sale because you have, you know, they’re not very liquid, most cases you’re going to do, you know, what they call OTC bulletin, board stocks, pink, pink sheets.
And they’re not very liquid. There’s not a lot of trading volume on them. And if you go to dump your stock to go purchase a home or something like that, you may not be able to get the value out of it, right? When you sell, you know, 10 times the market volume, you’re going to depress the price significantly, and you’re gonna lose a lot of value. So what you should do is try to get a component in cash and a component in stock, and look at that and see how you move forward. And those types of decisions, situations. Now, hopefully this video has been valuable to you and helped you to better understand some of the thoughts around valuing your cannabis business license and the business around that and the entity around that. And if you need help with developing a valuation for your cannabis business, it’s assets, the cannabis business license, or anything else financially related to your cannabis business, then please reach out to us via our website at green, grow CPA’s dot com or give us a call at (800) 674-9050 with hundreds of clients around the country.
We have the experience and the knowledge specific to the cannabis industry that you can leverage. We have these connections experience, lots of things that you can tap into when you work with GreenGrowth CPAs. And if you want to increase your valuation of your license or of your cannabis business, then you know, we can help you out with our outsource CFO service and, you know, help you really dial in the numbers of the business and increase that valuation here. Now, I see a question here on Instagram. We’re thinking of from master house genetics, in a sense we’re thinking about starting a nursery license to then build more. I think nursery licenses are one of the most undervalued and under like looked at parts of the cannabis industry, right? Nursery license essentially is allows you to grow immature plants to a certain stage, or you can become a seed breeder, right?
Everyone needs clones. Everyone needs great genetics, and everyone needs to do that before they sell their cannabis. So you’re already baking in that you will have a buyer for your product here. So I think like, um, we would call them the, um, there’s, your licenses are amazing. A hundred percent. I think you should consider that we have a whole video on the nursery business, go to our YouTube channel or type in cannabis nursery business, Google. That will be the first article. And the first video we walked through one of our clients and talk about, you know, the, you know, how much can you make and what is the actual thoughts around setting up a nursery business. So thank you for that question there. Now, if you have any other questions, drop them into the chat. If not, we can hop off here. I’ll stick around for a minute or two taking out any other questions, whether about this specific topic or anything else related to your cannabis business. So let me know, and I’ll hop in here with some other answers to your questions.
All right. So see any more questions here on this chat? All right. Well, I don’t see the questions coming through, so thank you for joining. Hopefully you’ve enjoyed this. Hopefully it’s brought you some value. If you need help with understanding your valuation of your cannabis business, your cannabis business license, then please reach out to us via our website at GreenGrowth CPA’s dot com or give us a call at (800) 674-9050 or one last question. I’ll drop it into here. What’s the name again? To search. It’s going to cannabis nursery business. Just look that up. Or you can go to our website. GreenGrowth cpas.com. And on there, you can search for our, the nursery business, but cannabis nursery business will allow you to find the video. We walked through that and Hey, if you have any questions, reach out to us all, and we can reach out to you, send you the video, go to our website, fill out that form.
I’ll make sure to follow up with you and you’ll have the link to the video, the description, and Hey, set a meeting with our team, right? It’s not all about doing this on your own. Understand that cannabis is a team sport. Okay. And you have to have a team to help you all the heavy lifting so you can focus on, Hey, if you’re great at genetics and you’re great at growing, why worry about the financial aspects? Just let someone who knows about the financial aspects, take care of that, tighten it up and allow you to really plus out the nursery business. Okay, cool. Be in touch. It’s great to see everybody. Thank you very much for your time. Have a great rest of your day and we’ll talk to you soon.