What factors drive the worth of a cannabis company?
Cannabis company valuations are based on a number of factors, both tangible and intangible. A qualified valuation advisor can help assess a cannabis company’s current position, and will examine the following:
The market is seeing a decline in the value of companies in the cultivation space and a rise in value of companies in the extraction or distribution space. Within the extraction/research space, value is gained with a unique concept that solves a specific problem or fills a specific need.
Cannabis companies require proper licences for cultivation, production, and/or distribution, as well as certifications for facilities to export medical cannabis to international markets. By increasing the number and types of licences, a company can operate more freely under the Cannabis Act, which opens the door to diversification and may increase the company’s value. For example, facilities that have the good manufacturing practices (GMP) certification are typically able to export to international markets and may attract a higher valuation.
Cannabis companies can focus on cultivation, extraction, research and development, or a combination thereof, which means output metrics are critical. A company focused on cultivation, for example, needs to know how many square feet of growing space it has and how many grams per square foot it can produce. For those focused on extraction, the amount of kilograms processed per day is an important benchmark. Companies in the distribution or retail space should understand the unique supply and demand issues in a specific location, including its monthly throughput.
In addition to its current capacity, it’s important to consider the possibilities for expansion. Will the cultivator have access to more space? Does the extractor have other products in the pipeline? Can the distributor leverage additional channels?
A solid business plan
The cannabis industry is attracting a lot of people with ideas, but anyone can have an idea. A company with a clear vision of where they want to go and how they are going to get there is more valuable than a company with only an idea and no defined path. The vision should include a business plan that demonstrates an understanding of the industry, market, and regulatory limitations. In most cases, a plan should also include a reasonable valuation supported by a realistic financial outlook or projections based on industry and market metrics.
Money in the bank
How much capital have the founders or management team invested? How much third-party capital has the company raised and where has this capital come from? A strong cash position and ability to access additional finances is critical for the success of most cannabis companies.
The founders and the team
Belief in the people behind a company plays a large role in any valuation, but especially so in the cannabis industry because it’s new, highly regulated, and subject to speculation. Have the founders demonstrated an ability to iterate and pivot? Does the management team have a strong background and documented success in similar fields? Are they individuals with integrity and a good reputation? Answers to these and similar questions can influence the market’s perception, outlook, or view of risk as it relates to a cannabis company and thereby affect a valuation.
As the cannabis production market becomes more saturated, investors may look towards retail. Retail licences for recreational use are handled at the provincial level. The Cannabis Act mandates that Canadian provinces regulate distribution of cannabis, including store licensing. Therefore, valuation fundamentals are based on the unique characteristics of each province.
Consider your overall retail strategy. Will you be a pure-play online or bricks and mortar retailer, or an omnichannel one? Which provinces do you plan to operate in? How will you develop your retail brand? Answering these questions can help you build a strong plan for business growth.
As the market enters the Cannabis 2.0 phase, more products will be available to consumers, such as edibles, vape oils, or other concentrates. Cannabis company owners may see new opportunities for business expansion and growth by diversifying their products, which can ultimately lead to higher multiples.