The cannabis industry is growing from virtually nothing to tens of billions of dollars in revenues in just a few short years. Contrasting to other rapid-growing industries, the projected explosive growth in recreational marijuana is not the result of any technological innovation or discovery, but it simply results from the changing attitude of society.
Kotzin Valuation partners are very familiar with the cannabis industry, as they are been engaged on various assignments for offering the appraisal and the consulting services for dispensaries. They have also been engaging into the ancillary businesses. Their experience is suggesting that the industry is unique in many respects, offering and challenges. They have seen this industry from the perspective of a business owner, investor and valuation professional, which are both intriguing and frustrating.
If you are providing the professional services to the clients in Arizona but did not have any dealings with the cannabis industry that will likely change in the coming years. This article will explore the unique issues, which are associated with the legalized of marijuana, which includes both recreational and medical cannabis, especially from the perspective of estimating the value of the operation or when you are considering the investment opportunity in the marijuana business.
Risks, Opportunities and Value Drivers
According to the article in Fortune Magazine dated February 2016, marijuana is legalized in the US. It is will to the revenue of 6.7 billion dollars in 2016 from 5.4 billion dollars in 2015. According to one industry resource, it is estimated to reach 21.8 billion dollars by 2020. Expressed in those terms the investment company and the business opportunity will speak for itself.
There is some perspective, which is from both the ends of opportunity spectrum. First the ability of both the individual and entity which are directly involved in the sale if a product that will be governed by the state license largely. There are some legalization opponents that contents the licensed marijuana business will have a monopoly. These few people are accused to be the owner of a liquor store, licensed bar, and the pharmacy of monopolistic practices.
Many people are assuming that if you got the license for operating marijuana dispensary then it is the golden ticket for becoming riches. This assertion is also flawed as the profitability and the ultimate success will still be subject to the sound business practices, adequate capitalization, and the supply and demand. This can be seen in Colorado very easily.
In Colorado, the population is around 5.4 million in 2014. The Kotzin Valuation Partners has performed the valuation analyses of marijuana businesses; the ratio of citizens to marijuana dispensaries is approximately 7700 to 1. Marijuana is legally sold at approximately 700 establishments, which is more than the number of McDonald’s, 7-Eleven and Starbucks stores combined. With so many dispensaries, they all are struggling for making the profit.
Contrasting to that, Populated Washington State around 7.1 million has also legalized the recreational marijuana. They are having a very higher citizen-to-dispensary ratio which is about 17,200 to 1. They are providing a more favorable competitive environment for that state which is the licensed investors and sellers.
Industry knowledge, prospects, and risks are a very important part for valuation process. No business can be valued in the vacuum. The performance of the business is dependent on the industry trends and various other external factors. This is relevant to the marijuana industry trends. The myriad of the industry-specific risks and uncertainties need to be incorporated into the valuation process.
Beyond the competitive issues, there are various other factors which need to be considered
When valuing and considering the investment in the marijuana dispensary.
Under the federal law, medical and recreational marijuana is remained classified as a Schedule I substance, technically this is illegal. The administration of Obama has publicly stated its policy of not enforcing the federal law in the states, which have legalized the use of marijuana. This policy can also be changed under the next president.
In the odd twist, the illegality of the product at the federal level is also providing some benefits to the current, the prospective growers, and the dispensary owners as it is discouraging the major national tobacco companies, pharmaceutical and national retailers for entering in this industry.
If the federal government is lifting its illegal classification then the Big Tobacco or Big Drug may force the minor operator in the cannabis industry out. This is the one more and important risk, which needs to think about. However, for now, the continued classification as an illegal drug under the federal law is the catalyst for the host of other risks.
Most of the banks and the credit card issuers have nothing to do with the industry, due to the concerns over enforcement at the federal level and fears which they will fall victim to the charges of money laundering and other alleged felonies. Consequently, most of the dispensaries are operating in the all-cash environment, which will make the operation more susceptible to the crimes by employees and outsiders.
Further, the banking industry is reluctant to accept this industry which makes it harder for potential marijuana businesses for purchasing the real estate, due to the shortage of lenders. Similarly, it is very difficult to persuade the potential property owner to lease the space, as the property owner would worry about the seizure of his property. The good news for the operator is that there are limited banking options are reportedly involved at the slow pace in both Colorado and Washington.
The illegality of marijuana at the federal level also presents various serious problems with respect to paying income taxes. Internal Revenue Code Section 280E is disallowing the deductions incurred in trafficking the controlled substance, which is prohibited under federal law.
Presently only income that is getting deducted for income tax reporting purpose are those costs which are directly involved in producing the product. Any cost that is related to the sale of the product like retail labor, dispensary rent, advertising and operating cost is not deductible. Because of this, owners of the dispensary are abiding by the regulations, which is ending up in paying taxes at the rate of 80% or more than the actual profits.
The other concern is advertising, as options are very limited. The social media sites like Facebook is also not allowing the dispensaries to post the company sites and advertise. At the time when this article is written, there are only two major online resources is available Leafly and Weedmaps, which is allowing the dispensary owners to advertise their promotions and products. Having the presence on this websites is very costly. This will change when the industry will continue to evolve and the new options will surely emerge.
This article is touching the surface of the unique factors that will pose the challenges to the participants in the cannabis industry like investors, valuation professionals who are seeking to establish value in the business.
The marijuana industry is having both risk and opportunities. For a small business, owners who can tolerate the risk, heavy regulatory scrutiny, significant tax bills, and the lingering moral stigma would be the efficient operator with good locations could make significant returns.
Things that can be learned while working in the Marijuana Industry
After spending short time while working in Marijuana Industry in the state of Washington, a small medical marijuana access point in the suburbs of Seattle, there you can find how the industry is thriving to the gray market. There you will be able to see the first-hand full-scale legalization was debated forth and back among the people themselves and between the policymakers in Olympia. As Washington has become the first state for voting the legalization measure, simultaneously with Colorado all of the old rules were thrown out of the window.
The bet has been paid off because the federal government has allowed the stated to dictate their own rules and the economic benefits to the states has been enormous. Entrepreneurs are making money, jobs are been created and the law enforcement agencies are conserving the resources which are very good news for the taxpayers.
Still, the industry is up and against some of this serious issues. The federal government has not pulled the plug on legalization laws in Washington, Colorado, Alaska, Oregon, and various other places, so the threat is still looming. The business regulations are still keeping them in check, despite the fact that the money from the big businesses and venture capitalists is starting to find there way.
Now the industry has the roots, so the rapid change will take place. Many other states are also looking for legalizing and this year likely bring hope to many voters to fruition around the country.
Many people are still unsure of the prospect of legal marijuana. But here a few interesting things have been picked up and share which may or may not influence your thinking.
The experience is very positive in fact it would be interesting and worthwhile which you will ever get. Below there are few things mention from the experience that is to be learned as an outsider.
Many People are not crazy about legalization
In the community of medical marijuana, there is a good number of people who are not crazy about the legalization of marijuana. This seems to be ironic, but there is still some legitimacy, which needs to be a worry. Prior to the legalization, Washington medical cannabis industry was much unregulated; this may also vary from state to state. People are purchasing and donating to get what they needed was unobstructed by the Government. There was also the fear of high taxes and difficulties what they will need were the focus of patients against the legalization push.
These fears are not unfounded and now even the minor producers and the processors are worried about the bigger businesses who are taking over the market. Of course, these minor producers only exist because big business was not willing to risk the money and time on the gray market, which could be shut down. They had been beneficial for a time from the protection of the government. It is very unclear how this will play out in the long term but there are real concerns among medical marijuana activities.
Customers are not whom you suspect
You are probably imagining teenagers, old hippies and the tie-dye clad Gen-X who are very frequent to the marijuana stores and the access points. The truth is that these folks are the makeup of the customer base. Bu by large the people coming and going are not who you did suspect.
Men in the business suits, blue-collar people and even a good deal of stay at home moms and dads are the majority of face that is coming in. Most of them are simply wanted something to help them deal with the specific issue like chronic pain, problem regulating the appetite and to get on with their day. They are normal and everyday people. Even seen various managers who have to stop here one time.
People using cannabis for treating real addiction
One of the biggest reasons the people are opposing the legalization because they are thinking that marijuana is posing the risk to health. This is not true, as cannabis is much safer than other legal substances, like alcohol and tobacco. Ironically, many people are coming for shopping and seeking treatments for addictions to these substances and others as well.
People are trying to escape the addiction form other substance by taking help of medical properties of cannabis. Cannabis has helped in treating addiction and working as an alternative for the people who are looking for getting away from booze and other drugs. There are people who are trying to escape the opioid addiction are trying cannabis as the treatment option. So there are worries about health and addiction are bound to the legalization debate, the people who are seeking treatment from the addictive properties of a perfectly legal substance are caught in the middle.