Cannabis, It’s Not “Up in Smoke” Anymore!

The classic 1978 film Up in Smoke relates the misadventures of Pedro and Man (Cheech and Chong) who unwittingly smuggle a truckload of marijuana from Mexico into the US. Today, marijuana is a highly-respected and highly profitable business. An evening stroll in many areas typically includes inhaling secondhand smoke!

Bank of America Securities reports industry sales at $25 billion in 2021. Industry experts see it rising to $100 billion by 2030. While these stats include CBD which is more readily available and less regulated, the dollars are quite staggering. Many believe this industry is not influenced by the trials and tribulations of the economy.

Cannabis companies include retailers, cultivators, and processors. Several companies participate in all these segments. With some exceptions, such as those in California and Colorado where legalization has been around for several years, these companies report low or no profits. Their investors are betting on the future.
While challenges exist on the local and federal levels, more states are legalizing medical and recreational use. Local governments can impose their own restrictions. Landlords are frequently reluctant to lease to cannabis shops, fearing those store “attract the wrong kind of people.”

Valuations of cannabis companies are challenging for some. The data out there to support a valuation, while growing, is limited. Much of this data sources from Canada. The various restrictions that can differ by state lead to issues of comparability with databases of private transactions. Many cannabis companies are startups. Not only is there the higher risk of failure, but operating profits are also often low or nonexistent.

When considering the value of these firms, an analyst must look to the future. What will the company earn over the next few years? This is a valid valuation technique that, in its best form, can be speculative. A lesson many learned from COVID is the future may have a very unexpected twist. With cannabis companies, add in the struggles between entrepreneurs and legislators, the still-extant federal restrictions, and the growing inflow of competitors. Add to that the possibility that Big Tobacco will become increasingly involved!

JBVal has successfully performed valuations for cannabis companies ranging from dispensaries to cultivators to cannabis conglomerates. Our valuations have been vetted by auditors and have been utilized buy sell agreements, gifting and more.