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Selling a Cannabis Business – Things to Consider

Selling a Cannabis Business – Things to Consider

Selling a cannabis business can generate significant profits that fund future companies or help entrepreneurs find financial freedom. Like selling any type of business, though, owners need to consider several factors before they even start to approach potential buyers.

The following guide will help anyone selling a cannabis business make smart choices that lead to a smooth transaction and tidy profits.

Evaluate the Value Before You Sell a Cannabis Business

The value of cannabis businesses can vary significantly. A successful dispensary may earn strong profits without having exceptional value. Before anyone can sell a cannabis business, it makes sense to evaluate all of the company’s profit potential and the value of its assets.

The Value of Assets

A cannabis business’s assets may include:

  • Products currently in stock, such as cannabis flowers, tinctures, and edibles.
  • Equipment used to make cannabis concentrates.
  • Farmland used to grow cannabis, hemp, and related products.
  • Buildings, such as storefronts, warehouses, and barns.
  • Computers and software that track inventory, invoices, receipts, and how many hours employees work.
  • Items required by states, such as identification card readers and security systems.

Every asset counts, so make sure they all get included in the business’s valuation.

The Value of Current and Future Sales

A cannabis business’s value doesn’t end with the assets that it owns, though. It’s essential to consider the company’s earning potential. When selling a cannabis business with a price-to-earnings ratio of 15 and a projected earning of $500,000, the company could have a value near $7.5 million.

Sellers should consider meeting with valuation professionals to determine how much their businesses are really worth. Ideally, someone with a background in accounting and business should review the company’s projected revenues and debts.

The Value of a Cannabis Business’s Brand Identity

A cannabis business’s brand also has value. If the company has a reputation for providing excellent products and professional services, it has more value than a business with a negative reputation. That needs to be considered when selling a well-known company in any industry.

Gather Proof of Ownership and Licensing

No matter where a business operates, the owner or owners must have documentation. When it comes to selling a cannabis business, owners also need to gather all of the licensing that proves they meet local guidelines.

States have unique licensing requirements. Regardless of location, though, cannabis and hemp businesses must follow strict regulations. Falling short of those regulations can lead to fines and even prosecution.

All potential buyers will want to see the documentation that proves ownership and licensing. Without those documents, it’s too risky for them to take steps toward purchasing the company.

Update Revenue and Expense Documents

Before selling a cannabis business, owners need to collect books and records that show the company’s financial success. No one will take the current owner’s word for it. Update all revenue and expense documents now so interested parties can see the numbers.

Financial records should detail how the business is functioning. It’s not enough to show receipts that say the company had $100,000 in revenue last quarter. Buyers will also need to know things like how much the business spends on:

  • Operational costs (utilities, rent, etc.)
  • Marketing and advertising (including costs connected to website maintenance and content creation)
  • Labor (how much employees get paid in money and benefits)
  • Taxes (including local, state, and payroll taxes)
  • Insurance (policies for your real estate, professional liability, vehicles, workers’ compensation, business interruption, etc.)
  • Payment processing (credit cards, for instance, charge retailers a percentage of their sales)

Expenses, in other words, can add up quickly. That’s why revenue and expense reports are some of the first things that potential buyers will ask for. Without those documents, no one will think twice about purchasing the cannabis company. They will move on to look for an option that conforms to their expectations.

Communicate With Other Stakeholders in Your Business

Cannabis businesses often have multiple stakeholders who need to make decisions together. In some cases, two people might co-own a dispensary or farm. In other situations, dozens or hundreds of people might own stock in the company.

Granted, not every stockholder needs to know about a potential sale. Anyone with significant ownership, however, will need to be consulted. Otherwise, that person could cease negotiations and raise complaints.

The best option is to discuss selling with all stakeholders well before preparing the cannabis business for sale. That way, everyone is on the same page about factors such as the business’s value and how much they expect to profit.

It May Take Time to Get the Right Deal for a Cannabis Business

The cannabis and hemp industries have grown incredibly fast over the last few years. As more states legalize medical and recreational sales, the industry will keep growing.

What does this mean for people trying to sell a cannabis business? In part, it means that they should be willing to wait until they get the right deal. Interested parties may approach owners with low-ball offers or unrealistic expectations about what they will get for their money.

The willingness to wait several months or even a couple of years for the right buyer to come along and finalize a deal could be the difference between making a lot of money and losing a lot of money.

Conclusion

In conclusion, cannabis business owners should recognize that they have a lot of opportunities to grow. It often helps to get advice from a professional who has helped broker several deals. Knowing how to build a business isn’t the same as knowing how to sell one to a reliable buyer. You may even need assistance from real estate agents, appraisers, lawyers, and business consultants. Don’t rush into a sale. Take some time to make a wise decision that rewards the hard work of building a business from the ground up.

May 21, 2020 / by / in
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