The marketplace for licensed marijuana companies is warming as consumers purchase retail shops and different actual property

The market for buying and selling licensed cannabis companies may never have been as hot as it is today. Demand has been fueled by new entrants, hopes for federal marijuana reform, and multi-state operators looking to expand their presence.

On the other hand, marijuana entrepreneurs who sell their properties in the secondary market want to capitalize on the boom, according to industry officials.

Asset change of ownership spans everything from vertically integrated businesses with retail stores to grocery kitchens and growers to commercial properties dedicated to marijuana businesses.

Also included in the mix are hemp stores, licenses for non-real estate marijuana businesses and standalone cannabis stores, cultivation, manufacturing facilities, and other assets.

“The cannabis business is very hot right now,” said Ryan George, founder of 420Property.com in California, a website that lists marijuana businesses and properties for sale across the country.

“Those who sell get higher premiums because of a lack of inventory.”

George said his website, which launched in 2016, received unprecedented attention over the past year.

He estimated that user traffic in 2020 increased by 60% compared to 2019. Currently, George said, his website has around 3,500 entries for cannabis industry assets.

Several factors generate interest

A primary reason the secondary market has grown steadily over time is that most US marijuana markets have limited the number of business licenses issued.

These caps mean that it is easier for new entrants to get in by buying an existing business than trying to win a competitive bidding process for often coveted licenses.

Other factors also play a role. Industry officials said they saw a surge in interest because:

  • Closure of restaurants, bars and other service sector businesses during the COVID-19 pandemic that has led many entrepreneurs with newly closed businesses to jump into cannabis.
  • The hope that federal legalization is in sight – and with it the end of Section 280E, which would instantly make any operational business more profitable by allowing legal operators to deduct their business expenses from their taxes.
  • Better performance of listed companies in recent months, which means a return on investor money and thus more options for financed transactions.
  • An ongoing buying frenzy from multistate operators (MSOs) looking to cement their national industry preferences.

At the same time, entrepreneurs are motivated to sell, according to the sources, attracted by:

  • The prospect of becoming part of an MSO whose share price is rising.
  • Tough business conditions that eliminate profits in some markets.
  • Steadily falling prices for long-standing cannabis companies facing increasing competition.

“We sold 12 companies in the past 90 days,” said Drew Mathews, a San Diego-based broker and CEO of Greenlife Business Group, noting that the retail stores in California are in high demand. “There have never been fewer pharmacies for sale.”

Market activity

The number of cannabis companies and assets for sale rose in several established state markets in 2020, including Arizona, California, Colorado, Massachusetts, Nevada, Oklahoma, and Washington, according to Seattle-based CannaMLS, another listing website for MJ Business and Real Estate.

That includes a roughly 100% increase in California listings from 216 to 459 between 2019 and 2020, said Jade Green, CEO of CannaMLS.

Oregon was the only state with a sizeable marijuana industry, where listings dropped from 2019 to 2020.

However, Green pointed out that the decline was due to the government moratorium on new cultivation licenses for 2019, which led to a “buying frenzy” this year.

By the end of January 2021, CannaMLS had approximately 5,000 listings nationwide, including 1,287 for licensed marijuana companies in 21 states and Puerto Rico that were up for sale.

The rest was a mix of hemp stores, marijuana business real estate, or related assets.

Most of the companies for sale – 528 – were in California, followed by 230 for sale in Oregon and 186 in Michigan.

A variety of factors can cause the number of assets for sale to increase, such as a transition in the state market from medical to recreational or some other kind of regulatory change, such as the moratorium on the cultivation license in Oregon, Green said.

Prices can also range from around $ 100,000 on the low end to $ 30 million or more, according to Green, depending on factors like the number of licenses available in a particular state.

In markets like California and Oklahoma, where there are no statewide license caps, prices are lower than in Arizona or Florida, where the number of marijuana business permits is strictly limited.

For example, according to Green, the average asking price in Michigan for a retail store rose from $ 2.8 million in 2019 to $ 4.3 million in 2020, largely due to the start of recreational marijuana sales in December 2019 .

In California – which was an exception to average national price increases – many company valuations in the secondary market fell from $ 5.7 million to $ 5 million for a standalone retailer between 2019 and 2020.

“We have anecdotally heard that many operators have been unable to keep pace with California’s market challenges, including high taxes and operating costs, and increased competition from both regulated and black market companies, forcing many companies to sell their operations instead of continuing. ” Said Green.

The drop in prices is another reason many business owners are selling there – to get a solid price before the market devalues ​​their businesses any further.

Prices vary depending on the market

Despite all activity, it is important to realize that every US market is unique and has separate characteristics that add or detract from company valuations.

In short, a cannabis store in one state may sell for a very different price in another.

“I’ve seen equivalent licenses being sold for a difference of up to 50%. It’s really about how they value it, ”said Alex Freedman, a Los Angeles-based advisor and attorney who also brokers business.

One of the main trends noted by several market watchers was the entry of entrepreneurs leaving another industry that had been hit by the coronavirus.

“A lot of the buyers we deal with aren’t even in the cannabis industry. For example, most of the people we sell have 15 or 20 restaurants in the Midwest. Gym owner, “said Mathews, who said he saw deals” exploding “after California labeled its MJ industry” essential “last March.

“They’re leaving the industry they’re in, like the restaurant or the service industry, and they’re jumping straight into cannabis,” because they think it’s recession-proof.

It’s also, Mathews said, an increasingly attractive time to sell for a variety of reasons.

For example, he has seen many existing retailers sell their stores in favor of indoor growing because social equity programs in cities like LA and San Francisco are diluting the value of retail stores while wholesale prices for growing have increased in recent months.

Consolidation drives demand

CannaMLS ‘Green also noted the large number of MSO acquisitions.

“We are seeing a rapid and substantial consolidation in the cannabis industry that is driving the secondary market for these licenses to an all-time high,” Green wrote in an email to Marijuana Business Daily.

“From single locations to mid-cap mid-market operators, we’ve seen a significant surge in M&A activity, which I believe is being driven by new investor capital encouraged by recent policy changes in favor of the long-term success of the industry.”

Colorado-based broker Christopher Stefan, principal at Desarollo Real Estate, echoed this view.

For most of 2019 and 2020, according to Stefan, there was little investment money to finance acquisitions.

However, investors have returned to the table after public companies such as Curaleaf and Green Thumb Industries posted solid results. This has led to a renewed increase in M&A activity.

“Now that the money is back, we go back to these salespeople and say, ‘Hey, now we have money, are you still selling?'” Said Stefan.

“We see a lot of new sellers because the money comes in. When the capital goes into the market, it will increase the value of those assets.”

And he pointed out that the opportunity to be acquired by a large MSO – in part for stocks that could only get more valuable over time – has become an attractive exit for mom and pop entrepreneurs.

This has resulted in an increase in the number of companies being sold for a combination of cash, stocks, and debt, roughly one-third of which is each, according to Stefan.

“This share can double,” said Stefan. “You put your company’s sales into this company, and now it’s worth five times what it was, and your stock has risen accordingly.

“It’s a great way of creating wealth.”

By the same token, Freedman said, existing businesses had plenty of reasons to sell, especially in California, despite the record sales the state saw for 2020.

“A huge chunk of that is people who step into the industry, chase the ‘green rush’ and have no idea how to run a business,” Freedman said.

“Most of the time, these people will find that they have to get out.”

John Schroyer can be reached at [email protected]

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