By John Schroyer
Cannabis industry mergers and acquisitions have been on the rise over the past year, and industry watchers say the number of sales and transactions is almost certain to continue as the marijuana trade at large matures.
A few examples from recent months:
- One of the oldest marijuana dispensaries in Denver was sold to a Colorado chain.
- The two top-selling recreational marijuana retailers in Washington state went on sale with an initial price tag of $50 million.
- A 58,000-square-foot MJ production facility in Las Vegas was put on the market.
- A longstanding California company advertised a 7-acre marijuana cultivation and production site with an asking price of $3.5 million.
- One of New York’s five licensed MMJ producers was sold in January to a California-based management company.
Such deals are a natural part of a new industry’s evolution, as business founders execute exit strategies, new entrants seek to buy up solid assets, and existing companies look to expand. Experts said it points to the cannabis industry’s underlying strength.
“This M&A activity, including that in the secondary markets for state licenses, points to continued demand for assets in the cannabis industry,” said Harrison Phillips, an analyst with New York-based Viridian Capital Advisors.
Marijuana M&A deals nationwide
Viridian launched a “Deal Tracker” service in September that lists weekly mergers and acquisitions that have closed. According to the firm, there’s been at least 126 such successful deals since January 2016. The actual number of M&A deals is likely far higher, since many private companies don’t disclose such sales and about 80% of the transactions tracked by Viridian were by public companies.
But, in general, the numbers are a good sign for the industry.
“A worrisome trend would be lower demand coupled with declining prices for these licenses and assets,” Phillips said. “However, what we have seen is sustained demand for licenses and assets in this space, although the demand varies depending on the sector of the market.”
That dependence on state markets – since there are huge differences between MJ business opportunities in, say, Colorado as opposed to Delaware – is also a key distinction when it comes to mergers, acquisitions and asset sales, said New York attorney Lauren Rudick, who advises clients on marijuana space investments.
“The corporate hygiene of these entities that you’re acquiring is all over the board, so it might seem like you’re getting a good deal, but you have a good bit of legwork to do when you get in there,” Rudick said. “Or it could be that you’re picking up an entirely proficient, well-oiled machine, in which case you might pay a lot more for it. It’s hard to tell, since we don’t have a reliable method of valuation at this point.”
The difficulty in obtaining reliable valuation numbers stems from 280E, the controversial provision in the U.S. tax code that increases the federal tax burden on marijuana plant-touching companies. The provision essentially means revenue streams don’t equate to profits, which can make it difficult to compute a cannabis business’ worth.
Consequently, prices for cannabis business assets can range from a few hundred thousand dollars to several million.
Rudick began exploring possible acquisitions of Colorado retailers in 2016.
“You could probably get three or four of them … for less than $2 million. And that seems to be priced right,” she said. “Sometimes you’d see one come out for $1 million – but with a $400,000 tax liability attached to it. You’re seeing a lot of that as well.”
Geography and rec MJ
Among the keys to analyzing the seeming ramp-up in mergers and acquisitions are the motivation for a company that’s looking to sell and the market potential for the businesses or assets for sale.
Rudick said, for example, she’s unsure whether California-based MedMen’s acquisition of financially troubled New York licensee Bloomfield Industries was the best strategic purchase, given the state’s highly restrictive medical marijuana program and an inability to compete successfully with the black market.
Bloomfield’s problems, she noted, can be attributed to state regulations that have resulted in low patient counts and inflexible business models for New York’s MMJ licensees.
By contrast, Rudick said, acquisition opportunities in states with existing or upcoming recreational marijuana programs could easily prove more lucrative.
“You’re going to find valuations all over the place, and it has to do … with the likelihood your state will eventually go rec,” Rudick said. “If you were looking at investments that were happening in Nevada and California and Massachusetts before November, it was very, very hot. … They knew those environments were likely to change in a rec direction and the people who held medical (business) licenses would be the first to enter the rec market.”
Motivation for buying, selling
There’s also not a clear delineation why cannabis businesses or their assets may be for sale. Reasoning can run the gamut from owners being fed up with burdensome regulations to the timing simply being right for them to sell and make the most of a short-term business investment.
“It’s really across the board,” said Jason Thomas, the CEO and managing broker of Avalon Realty Advisors, which specializes in the sale of marijuana business assets in Colorado.
“We have clients and new groups that are new market entrants looking for a single store, new market entrants looking for multiple stores, existing operators wanting to grow through acquisition, and on the sale side, there’s a variety of reasons. It’s really just churn in the market.”
The deals Thomas’ firm helped close in 2016, for instance, included four different Denver cultivation facilities that ranged from 15,000 square feet ($1.45 million) to 33,000 square feet ($4 million).
Avalon sends out weekly notices of more cannabis businesses and properties for sale, such as two Colorado Springs MMJ dispensaries priced at $650,000 for both, and a Denver retail storefront, which offers medical and recreational marijuana near an interstate, with an asking price of $4.5 million.
The bottom line, Thomas said, is for companies to find solid, long-term business models that work for them.
“As the market expands into other states, and as the floodgates open, there’s going to be people that come in for the short play, develop something, get a license and sell it,” Thomas said. “In terms of who’s going to be the winner, it’s going to be anyone who can sustain.
“You can have 100 stores across the country, like the biggest players will have, or you can have one store in a local market that suits your needs for standard of living.”
John Schroyer can be reached at [email protected]