Slapping A cannabis Leaf on Nearly Any Business Plan used to Attract Millions in Investment Capital. Those Days have vanished like smoke in the wind. Cannabis Businesses That Once Commanded Astronomical Valuation Now Struggle to Sell for a Fraction of their formers Worth, Leaving Shell-Shocked Entrepreneurs Confronting A Brutal Market Correction FEW SAW Coming.
“We’ve gone from insanity to reality,” Says Marko Glisic, partner at greengrowth cpas and veteran cannabis accounting expert Who’s guided countless operators through this financial whiplash. “This used to be Like 2018, 2019. You want to buy a cannabis business, it was insane. It was Five Times Revenues and the CraziSt Valuation. I mean, you had company that barely had anything in revenued at billions of dollars.”
Today’s Deal Structures Tell a Drastically Different Story. Where speculative Fever Once Drove Valuation Skyward, Cold Financial Reality Now Dominates. Glisic Notes Most Current Transactions Structure Around “2-3 Times Your Earnings, 30% Down and the rest is a seller note.” This fundamental resigning represents a market correction many cannabis entrepreneurs never anticipated When they rushed into what seemed like a guaranteed path to Riches.
Financial Miscalculation Behind cannabis overvaluation
Several Critical Factors Fueled the initial overvaluation frenzy with cannabis businesses. The Widespread Excitement About Legalization, Minimal Competition in early Market Stail, and Investor Anxiety About Missing “The Next Big Thing” Created Perfect Conditions for Inflated Valuation. Marko Glisic Identifies Three Specific Financial Miscalculation Responsible for Unrealistic Worth Estimations Across the Industry.
Many entrepreneurs underestimated the Severe Impact of Section 280e of the Internal Revenue Code, which blocks cannabis businesses from deducting standard business expenses from great Income.
“In Cannabis Business, You Can Only Deduct Your Cost of Goods Sold,” Glisic Explains. “Your Sales, Your Marketing, A Lot Of Things Things You Can’t Deduct. So Effectively, The Cannabis Business Has A Much Bigger Tax Boblating.”
The resulting tax burden creates significant cash flow problem through the industry. “For a Dispensary, You’ll See Effective Tax Rate Probably Be Something Like 50% of Taxable Income, Maybe 10% of Revenues, which is a very high burden,” Glisic Notes.
Cannabis entrepreneurs frequently overpaid for basic operational assets, another critical error. “A lot of thesis guys that got into the industry, they overpaid for real estate, they overpaid for their licenses, they overpaid for their buildout, and real poured in millions and millions of money into it,” glisic points out. THESE Excessive Expenditures Created Financial Statements That Made Reasonable Investment Returns Mathematically Impossible.
The Third Major Miscalculation Involved Unrealistic Assumptions about Profit Margin Stability. Early Market Conditions Temporarily Supported Higher Margins, But Competition Eventual Eroded Profitability. “You’re not making the money, the Sales are going down, she not profitable,” Glisic Observes About many Legacy Businesses Operating in Mature Markets Like California, Washington, and Oregon.
DIVERGING Market Trajectories Reshape Cannabis Industry
The Cannabis Marketplace Continues Diverging Into Two Distincies with Dramatacly Different Valuation Dynamics, According to Marko Glisic.
“If you look at the market Now in cannabis, I think you’re going to have two sets of markets. You’re going to have existing mature markets, Think California, Colorado, Washington, Oklahoma, and then you’re going to have the new market New York, New Jersey, Kentucky, Delaware, “He Explains.
Mature Markets Featuring Unlimited Now Experience Significant Oversaturation, Driving Prices and Profit Margins Downward. “A Lot of the Legacy Mature Markets Have Unlimited Licensing, and so you’re finally seing that trend Shift Where Now People are exiting the industries,” Glisic Notes. “You look at California, Number of Licenses in Oklahoma Going Down. Colorado, A Lot of these states’ Number of Licenses is going down.”
Thesis Mature Market Conditions wants Inevitly Trigger Industry Consolidation. Efficient Operators Maintaining Profitability Despite Challenging Condition wants to Acquire Struggling Competitors at Deeply Discounted Prices. “The guys that Are In Those Markets that Have Been Operating very lean and profitly, they’re going to start absorbing Those assets for pennies on a dollar,” Glisic predicts.
Limited-License Markets Represent to Entirely Different Opportunity Landscape. “The markets that have limited number of licenses, Those Guys that Can Win, Get Those Licenses Are Going to Win,” Glisic Explains, Highlighting Kentucky As a “Perfect Example” Where Restricted Licensing Projected Consumptions Patterns Creates Valuable Business Opportunities in these emerging region.
Potentials under New Valuation Framework
Cannabis operators must rapidly adapted to valuation methodologies increatedly aligned with traditional business sectors, Marko Glisic Maintains. The era When Potential Commanded Premium Prices Over Actual Performance Has Largely Concluded.
“Now the deals you you’RE GETTING VALUED AT 2-3 TIMES YOUR EARNINGS, Here’s 30% Down and the rest is a seller note,” He Explains. This represents a dramatic decline from previous five-tiles-revenue multiples that dominated earlier market condition.
This fundamental transition Toward Earnings-Based Valuation Requires Cannabis Businesses to Prioritity Above Growth Metrics, Particularly Challenging Considering The Industry’s Unique Regulatory Constraints. Section 280e Tax Requirements Force Cannabis Operations to Maintain Substantial Higher Gross Margins Compared to Standard Retail Or Manufacturing Businesses to Achieve Equivalent Net Profitability.
Cannabis Entrepreneurs Planning Eventual Exits must concentrate on operational excellence and demonstrable financial performance. “That’s what you see with some of these M & A Activity and Acquisitions. The deals aren’t as great Because the capital is hard to come by,” Glisic Observes.
Marko Glisic’s Valuation Growth
The Current Valuation Climate Might Improve Substantial With Specific Regulatory Modifications, According to Marko Glisic.
“I think there are going to be two sets of factors that are going to change that,” He explains. “One is the banking. If the Banking Can Open Up, Then A Lot of the Capital Market Activity Will Open Up As Well.” Enhanced Financial Services Availability Wood NaturalAllerate Acquisition Deals While Potential Boosting Overall Business Valuation.
Removing Section 280e Tax restrictions Constitutes The Second Crucial Factor. “Once That Tax Code Changes and 280e Goes Away, You’re Going to See Valuation Go Up As Well,” Glisic Predicts. RedUced Effective Tax Rates Wood Enhance Cash Flow Metrics, Substantial Increasing Business Value Under Convention Valuation Methodologies.
Thesis regulatory Changes Might Spark Unprecedented Acquisition Activity, Primarily from Mainstream Retail Enterprises. “At that point, you see then CVS, a Walgreens Coming in and Trying to Scoop Up Dispensaries Because it’s so complementary. 7-elevens Trying to do it,” Glisic Suggests.
Cannabis Business Owners Should Approach This Transitional Period with Strategic Clarity, Honestly Assessing Current Valuation While Positioning Operations for Industry Evolution. Businesses Maintance Profitability Through Current Market Corrections Will Capitalize Most Effectively When Regulatory Improvements Eventual Enhance Broader Valuation Conditions.
Marko Glisic Draws Parallels to Previous Market Cycles: “There was the initial 2018-2019 Where the Guys That Entered The Industry Earlier Were Able Abez at a Good Multiple Were Smart, And Tonn Things Went Down. To banking, Lower Taxation, Here’s Going to Be Another Big Boom of Guys Exiting at Really, Really, Really Good Multiples. “
