The secondary market for cannabis licenses and businesses in Oregon remains buoyant. We have been supporting the industry in buying and selling these companies since 2016. This post is mostly about retail game pricing, which is still an evolving standard but a standard nonetheless.
First, a connection.
In the past few years, there have been two significant regulatory developments that have affected both the demand and pricing of the Oregon Liquor Control Commission (OLCC) marijuana business sales, including retail. The first major change was in June 2018 when OLCC “paused” processing new license applications. People started paying real money for bare licenses not long after, even for a “seat in line.” The second significant regulatory development is and will remain, in my opinion, last month’s announcement on optimized licensing. This administrative hub rocked hundreds of melting “paused” applications two years ago.
We saw some fun things with pricing between 2018 and today. On the production (growth) side, people have bought and sold licenses for $ 125,000 to $ 175,000 in the last year – that is precisely the “right, title, and interest” in a replacement seller license. We flipped a couple of them. If that sounds ridiculous, it is: The state charges around $ 5,000 for one of these licenses. The system there is clearly broken and if OLCC digs out of its hole and starts processing new applications in time, this secondary market will all but disappear.
Prices for producer setups that include other assets (equipment, sometimes inventory, cash, goodwill, lease, etc.) tend to vary, as do prices for other classes of business i.e. H. Wholesalers and Processors. The parties still price the license in these transactions, but in fact every sale is a snowflake. In addition, you have retail. Retail is a world of its own.
What is the retail price? Today in Oregon it’s still mostly done at multiples of sales. In general, this is an odd measure of business valuation: the other place you often see sales prices is technology and software. In this world, the user base is paramount. With cannabis, the revenue model was likely adopted for a number of dire reasons including: a predominant cash transaction model, poor financial reporting, IRC § 280E, and general industry immaturity.
How does the formula work? It’s pretty easy. If the agreed multiplier is 1x sales – which seemed to be an industry consensus by 2018 – your business would sell for it. If your business had $ 900,000 in revenue or just $ 900,000 in execution last year, it would sell for $ 900,000. Easy. The 1x metric eventually went up a bit, and for one hot minute we had a bunch of sales at or around 1.5 times sales (mostly in the city of Portland). Last year, when people began to realize how difficult this industry is, the number seemed to drop to 0.5 times sales and 0.4 times outside of Portland.
Now one could ask from a value perspective: Does any of this make sense? For example, let’s say you have a pharmacy that has annual sales of $ 1.5 million. In an industry where most stores break even or lose money, should a buyer pay as much as $ 750,000 (0.5x) for it? Where even excellent operators have to take their 280E lumps and run away with 10% margins? When do you need capital to survive the intense competition from 692 other active pharmacies? Even a 0.5 multiplier feels pretty steep.
And yet the demand is still out there. Today the sales multiple is rising again in view of the rising pandemic sales. We’re seeing it around 0.8 in Portland lately and 0.65 elsewhere. In a market like Gresham, where zoning restrictions might allow five operators, there would be an upward revision, and in Eugene, with its numerous businesses in trouble, there would be a downward revision.
At some point it seems likely that both demand and price metrics will stabilize. Recently, we’ve seen buyers moving to traditional valuation metrics like EBITDA (adjusted for 280E) and adjusted cash flow. That makes a lot of sense. Maybe not as useful as Oregon shedding a few hundred shops, but that’s a topic for another day.
Below are some early, but still relevant, posts on buying and selling cannabis businesses in Oregon:
For posts that dig deep into scoring, here are a few more: