How to Value: Marijuana Dispensaries

Industry Description

The Marijuana Dispensary industry in the U.S. contain establishments primarily engaged in legally retailing specialized lines of cannabis products for medicinal and recreational use (NAICS 453998). Product lines include flower, concentrates, edibles, infused, topicals, and many more.

The following are some basic characteristics of the legal Cannabis industry:

  • Cannabis industry has a combined annual sale of $26.5 billion in 2021, with a growth rate of 11 to 32% in 2020-2030, depending on the analyst source
  • There are approximately 8,550 retail licenses in 2021
  • The Cannabis industry employs approximately 428,000 full-time equivalent jobs, a 33% increase from 2021

Currently, the US Department of Labor’s Bureau of Labor Statistics is not required to publish demographic data for the cannabis industry. The above are estimates from third parties.

Industry Trends

The cannabis industry is highly fragmented and in the growth phase of its industry lifecycle. Some key factors influencing this industry are: (i) expanding state and federal legislation, (ii) increasing competition among key players, (iii) evolving demographic and buying habits and (iv) investing in end-to-end sustainable practices. Each of these is described in further detail below.

In the US, cannabis is fully legal (medical and recreational) in 11 states and Washington, DC. For medical use, it is legal in 37 states plus Washington, DC. In 2022, Arkansas, North Dakota, Ohio, and South Dakota have proposed adult-use initiatives, and Florida, Idaho, Missouri, Nebraska, and Oklahoma have proposed adult-use and medical ballot measures. On the federal level, the House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act (H.R. 3617) in early 2022. The MORE Act would decriminalize cannabis and impose two new taxes: (1) an occupational tax on cannabis production facilities and export warehouses, and (2) an excise tax on cannabis products produced in or imported into the US. In addition, the MORE Act would remove cannabis from the Controlled Substances Act, provide an avenue for the expungement of federal cannabis arrest and convictions, and require the Bureau of Labor Statistics to regularly publish demographic data on cannabis business owners and employees. It is uncertain whether it will pass the Senate; however, 48% of Republicans and 83% of Democrats are in favor of legalizing marijuana according to 2020 survey by Gallup. In October 2022, President Biden pardoned those federally charged or convicted for simple possession of marijuana and encouraged state governors to follow suit.

While there is growing public support for legalization at some level, states also benefit significantly from cannabis sales tax revenue. According to Marijuana Policy Project, sales tax revenue across states totaled more than $3.7 billion in 2021. From 2014 to March 2022, the total amount of tax revenue collected from recreational sales was $11.2 billion. It varies by state, but typically these funds collected are funneled into public health, environmental and service initiatives such as public transportation, child-care, education, and reentry programs for incarcerated individuals.

In the coming years, the cannabis industry is expected to have significant growth and consolidation at all levels – from small marijuana dispensaries to firms joining isolated supply chains under one cannabinoid entity. In 2021 alone, there were 37 major mergers and acquisition deals among the largest publicly traded multi-state operators (MSOs), nearly double from 2020, according to New Frontier Data. The federal wholesale tax of 5-25% outlined in the Cannabis Administration & Opportunity Act (CAOA, S.4591) will likely negate key cost efficiencies of vertical integrated cannabis business. However, inaction on the federal level gives these major players time to compete for market position.

There are generational and gender-specific trends and preferences for cannabis consumption. While Millennials represent the largest consumer demographic, approximately 45% depending on medical or recreational, tetrahydrocannabinol (THC)-users come from all generations. Gen X and Baby Boomers represent approximately 25% each, while Gen Z are a rapidly growing consumer base as they become of legal age. Flower is and always have been the best-selling cannabis product category, but edibles and concentrates are growing in popularity. Gen Z and Millennials prefer vape pens, at a rate of approximately 20%, while older generations prefer edibles according to Benzinga. In the US, cannabis sales have increased for both male and female consumers, but females on average are spending more.

According to Gallup, 14% of Americans use cannabidiol (CBD)-products in 2019. CBD is a wide category and the CBD-derived products from a hemp source containing less than 0.3% THC is federally legal under the 2018 Farm Act (H.R.2-115), but those derived from cannabis is currently illegal. While the FDA is still researching the uses and effectiveness of CBD products, marketers claim a broad variety of medical and therapeutic benefits. The Americans who use CBD products cite the top reasons for use are pain (40%), anxiety (20%), sleep/insomnia (11%), and arthritis (8%). As consumers become more educated about cannabis-related products, the intended use and product type breakdown is likely to change.

Online ordering, curbside pickup and delivery boomed in 2020 during the COVID-19 pandemic closure and has continued to be a common trend. Of dispensaries that offer cannabis online ordering services, 31% respondents have 10-25% of sales were made by online ordering, according to State of the Cannabis Dispensary Industry report. In addition, stores with order ahead enabled, sold 22% more on average compared to stores without order ahead. Lastly, stores with e-commerce saw 8% more transactions and a 13% increase in average order amounts. It is likely that e-commerce will become the dominant medium for selling recreational cannabis products in the years ahead.

According to NASA, 2020 was the hottest year recorded in the US since recordkeeping began in 1880. In addition, the US is experiencing the worst drought conditions in decades. Arizona, California, Colorado, Nevada, New Mexico, and Oregon, who collectively account for 71% of the nation’s total cannabis supply, both legal and illicit, are particularly impacted by this water scarcity, according to the National Oceanic and Atmospheric Administration’s Drought Monitor. This has destabilized water sources and increased energy-production costs in key markets. As a result, many farmers are investing in optimizing their operations and committing to sustainable farming practices. This includes end-to-end supply chain across manufacturing, processing, and transportation.

Key Performance Metrics

In evaluating a Marijuana Dispensary business, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.

  • Cannabis Product Sales and Margin, by Category including consumption method and strain type
  • Average Basket Size and Purchase Value
  • Cannabis Retail Sell-Through Rate
  • Traffic Flow Trends and Patterns, including in person and online
  • Customer retention and demographics

Industry Organizations & Publications

The following organizations publish useful information:

  • Marijuana Policy Project (MPP)
  • Leafly
  • Whitney Economics
  • U.S. Cannabis Council (USCC)
  • Flowhub
  • Marijuana Business Daily
  • Brightfield Group
  • State of the Cannabis

Guideline Information: Private Purchase Transactions

Most cannabis operators are privately owned and there is considerable M&A activity in this industry. Data regarding the sale of 100% of closely held cannabis operators is generally the best source of information to appraise a subject company. The following are typical appraisal multiples from sale of cannabis operators:

  • Revenue multiples between 0.30 and 0.81 times
  • Gross Profit multiples between 0.58 and 1.4 times
  • EBITDA multiples between 2.1 and 6.6 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.

Guideline Information: Publicly Traded Companies

Most cannabis operators are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.  

The five largest publicly traded global Cannabis operators, which include retailing cannabis-related products, ranked by market capitalization are:

  • Curaleaf Holdings, Inc (OTC: CURLF) – $4.5 billion market capitalization
  • Green Thumb Industries Inc (OTC: GTBIF) – $3.2 billion market capitalization
  • Trulieve Cannabis (OTC: TCNNF) – $2.4 billion market capitalization
  • Tilray Brands, Inc. (NASD: TLRY) – $2.0 billion market capitalization
  • Verano Holdings Corp. (OTC: VRNOF) – $1.7 billion market capitalization

The Price-to-Earnings (P/E) ratios of these five companies range between 8.1 times to 69.3 times. The above companies are cannabis-lifestyle and consumer packaged goods companies, with multiple business segments, including cannabis cultivation, production, distribution, and sales. Additional business segments can also include pharmaceutical/ wellness products, alcohol beverages, and hemp-derived products. As a result, using the above information requires further consideration.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Cannabis operators are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.