Determining the fair market value of an interest in a cannabis business is a difficult task. Existing and potential clients frequently ask us how cannabis businesses should be valued and whether or not there are any “trends” in assessing value. These questions are not surprising given the various instances where a valuation is important. You may find yourself asking how much a cannabis business is worth in any of the following circumstances:
- Estate Planning
- Business Succession Planning
- Shareholder/Member Agreements
- Business Disputes
- Securities Offerings
- Dissenter’s Rights
- Mergers & Acquisitions
- Lending & Finance
- Tax Planning
- Transfer Pricing
Certified appraisers generally use three different approaches to valuing an asset, including a cannabis business. Those approaches are:
- Asset Approach —Also known as replacement cost. How much would it cost to rebuild the asset?
- Market Approach — What are the value-comparable businesses? Relies heavily on the availability of comparable datasets and subjective adjustments.
- Income Approach — Commonly used for income-producing real estate. Value is determined using the expected future cash flow of the income-producing asset.
There are advantages and disadvantages to each approach. Furthermore, business owners and potential investors should make valuation adjustments given the inherent risks involved and the speculation of federal legalization. It may be appropriate to discount the value of a business given the inherent risk of federal enforcement. However, it may also be appropriate to inflate the value of a business given the potential impact of federal legalizations.
We encourage our readers looking for additional information from the experts themselves to check out this great blog.