Exit multiple on cannabis acquisitions

22.07.21 12:03 PM By Sandy Kronenberg

As many of you already know, Koach Capital buys retail dispensaries from operators in order to unlock growth capital. But, what you don't know is that inevitably, during the first transaction with a new operator, the question is posed "if we sell our real estate - how does that affect our valuation". In other words, the executives are considering their exit strategy and they want to know if not owning their own dispensaries will hurt them when determining the enterprise value. It's a fair question as the merger and acquisition (M&A) activity of late has been staggering and we are convinced that it will increase. 

Before cannabis organizations go down the road of M&A, they often prepare a year or two in advance to maximize the sale price. We suggest they reach out to us or other capital advisors to avoid many mistakes. We have seen time and time again where operators seek equity raises before doing sale-leaseback of their real-estate. This only serves to dilute their equity prior to maximizing the valuation based on operations.

So, maybe you own a cultivation facility and/or a few dispensaries in a limited licensure state, regardless of whether your state is medical only or medical&adult use, the larger MSO's (Multi-State Operators) are looking to increase market share and will often pay a premium to get that market share. Typical valuations are looked at from a revenue perspective as opposed to a profit / earnings perspective as all operators are subject to IRS code 280E and can't deduct their ordinary business expenses from many aspects of the business (this topic is worthy of a few articles). As such, we have seen valuations range from 1x revenue in competitive markets to as high as 4x revenue in extremely limited licensure markets. In addition to these values consider the premium paid for licensure that is limited and yet has no revenue associated with it yet. Note that the values of these operations is not tied to owning the real-estate. It is necessary is only to control the real estate of limited license locations through long-term leases.

In essence, these valuations are irrespective of owning the real estate. In fact we believe that owning the real-estate is in fact a detriment to the perception of value the business. The real estate when sold as part of a sale-leaseback often yields enough capital to open more dispensaries - where each dispensary has the potential to provide 10x more enterprise value for each dollar earned as opposed to dollar for dollar and often the real-estate is not given a true cannabis value during the transaction (yet again another topic we will address). 

Let us help you be as accretive as possible for you and your investors.