The law of supply and demand is at work in the marijuana industry with the price of acquiring a business that has a marijuana license rising to a premium. That’s because in most of the states where marijuana has been legalized for medical and/or recreational use, the supply of licenses is limited while the number of customers continues to grow.
So just how much is a marijuana license worth today? Based on recent transactions, marijuana licenses are an intangible property with real value. According to Robert McVay of the Canna Law Blog, “Marijuana businesses are selling every week at six and seven figures.”
Many of these businesses haven’t been in operation for more than a couple of years, but they’re commanding big bucks from acquirers. And it’s not necessarily because they’ve set up amazing companies with the best talent in the world. It’s because of the marijuana licenses that they hold.
Yes, a marijuana business gets a better deal when it sells if it has a proven track record of sales success, no liens or security interests tied to its license, no pending legal claims, and no other causes for concern from an acquiring company. However, even a struggling marijuana business could still hold a marijuana license that has real value.
In most states, a marijuana license-holder can’t simply sell the license. By law, the license can only be transferred as part of a sale of the business entity that owns it. At most marijuana-related businesses, employees have to be licensed as well as the business entity, and owners and investors must also be licensed. State liquor boards typically have to approve purchasers before they can own an equity stake in a business that has a marijuana license. All of these obstacles make marijuana licenses even more valuable.
Marijuana License Valuation
Determining the actual value of a marijuana license depends on a variety of factors, just like determining the value of other types of business licenses does. For example, a financial analyst needs to consider:
- The number of licenses that are available in the industry
- The cost to acquire and maintain the licenses
- The cost to replace the license
- The license owner’s history of prior license renewals or terminations
- The restrictions placed on license renewals
- The ease of transfer of the license from the owner to a buyer
- The average life of the license
- The micro- and macro-economic environment and the company’s financial and market health both now and in the future
These are just some of the considerations analysts need to think about when valuing a marijuana license. But given recent news about Califonia’s Blum Oakland marijuana dispensary, a market- or income-based valuation calculation might not be good enough to accurately value marijuana licenses. Blum Oakland was acquired by Terra Tech earlier this year for 1.5 times forward-looking revenue for the 12 months following the closing of the merger. In simpler terms, the purchase price should be $12 million.
Nothing about Marijuana Licenses is Set in Stone
The marijuana industry is expected to grow exponentially in the coming years. As supply increases, the value of a marijuana license is likely to go down, but it won’t disappear completely.
Licensing rules and quantities vary by state making it much more difficult to get a marijuana license for a business in some states than it is in others. It’s also more expensive to get and maintain those licenses in some states.
In other words, we’re a long way off from seeing the value of marijuana licenses decrease significantly. In fact, their value will likely go up first – a lot.