Insights Gained from Performing Cannabis Industry Valuations in the United States
The cannabis industry is experiencing unparalleled growth due to the confluence of several interrelated factors, including a dramatic shift in public opinion, the emergence of state-sponsored regulatory and legal frameworks, and the recognition by the business community of the vast potential of consumer products and commercial uses of the plant.
Following the national legalization of cannabis in Canada, the legalization of hemp in the U.S., and with a growing majority of U.S. states approving marijuana for medical and/or recreational use, the industry is positioned to have a significant impact on the American economy if and when federal prohibition is lifted. Companies jockeying for position to become the major players in this new economy need reliable valuation opinions to make informed transaction decisions that can tip the scales between an organization’s success or failure.
Supportable data is essential for a company's valuation and because cannabis has been outlawed in the U.S since the 1920's, the lack of historical data is a major impediment. FTI Consulting Managing Director Lincoln Eckhardt has been developing a database of empirical data from his experience working on dozens of U.S. cannabis company valuations. He says the industry is at a critical juncture:
“A ‘land grab’ is underway where companies are quickly acquiring assets to access capital markets … or to be first-in-line when industry consolidation via the entrance of large corporations inevitably occurs.”
Mr. Eckhardt outlines the critical factors that are distinctly relevant for cannabis company valuations:
- Existing regulatory frameworks
- Financial benchmarking
- Market pricing and risk assessment
- Human capital