How to Perform a Business Valuation of a Marijuana Business
By: Eli Neal
Recent News Update:
Before continuing our blog series on valuing marijuana companies, it’s worth noting that since our last blog post (February 23, 2017), White House spokesman Sean Spicer answered a question regarding the legal conflict at the State and Federal level regarding marijuana.
Mr. Spicer said that the marijuana issue has two distinct components – medical marijuana and recreational marijuana. He cited a congressional appropriations bill that directed the Department of Justice to not pursue legal action against medical marijuana.
In regards to recreational marijuana, however, Mr. Spicer had a different tone. He compared recreational marijuana to the opioid crisis affecting many states and that the government should not encourage citizens to smoke marijuana.
On Monday, February 27, 2017, Attorney General Jeff Sessions was asked about his feelings on legalized marijuana and told reporters, “Most of you probably know I don’t think America is going to be a better place when more people of all ages and particularly young people start smoking pot. I believe it’s an unhealthy practice and current levels of THC in marijuana are very high compared to what they were a few years ago.”
The Attorney General continued to condemn marijuana usage and tied its use to violence. “Experts are telling me there’s more violence around marijuana than one would think and there’s big money involved,” Sessions said.
The claim of an increase in violence is heavily debated. The same Forbes article cited that Colorado’s crime rate dropped over 14% after legalization and violent crime dropped in the state of Washington as well.
Either way, the momentum of marijuana legalization has definitely slowed. These statements could be a precursor to future policies proposed by the White House or could be much ado about nothing. There have been no policy changes related to marijuana.
So far, the entire industry is waiting to see how its future will develop. In the meantime, valuation analysts will have to think about the industry risk and how that risk affects the return required by potential investors.
We’ll continue to keep you updated.
Business Valuation – The Marijuana Chronicles #2
It’s important to realize that the underlying concepts supporting a marijuana business valuation are the same as valuing any business.
There are three major valuation approaches that are generally accepted by the valuation community to value a business at fair market value:
- Adjusted Net Asset Approach
- Market Approach
- Income Approach
The Adjusted Net Asset Approach is a valuation methodology that estimates the fair market value of a company by subtracting total liabilities from the total assets of the entity, after adjusting the balance sheet to fair market value. This form of value will generally not capture the value of any intangible assets created by the business, such as goodwill.
The Market Approach is a valuation methodology premised on the theory that a business can be valued with reference to transactions involving comparable companies in an open and unrestricted market. Using publicly traded stocks or reported transactions from the market, the valuation expert will apply a calculated earnings multiple, adjusted revenue multiple, or other activity multiple observed in the market to the subject company to determine an indicated value.
Finally, the Income Approach is premised upon the concept that the value of an asset is equal to the present value of expected future benefits realized through ownership of that asset. The income approach considers a company’s cash flow stream and applies a discount rate based on the anticipated risk and growth opportunity to arrive at an indicated value of the company.
Regardless of the industry – marijuana included – the principles of a business valuation will not change. Rather, it is the key inputs for these approaches which will be affected by the new and untested legal marijuana industry.
We’ll walk through how each valuation method is impacted by the marijuana industry in the coming blog posts. If you missed our first blog post, titled “An Introduction to the Oregon Marijuana Industry”, you can find that post here.
If you’d like to know more, email me at email@example.com and I’d be happy to talk through any questions you may have.
Written by: Eli C. Neal