409A Valuations for the Cannabis Industry
CannaBlog by Cory Parnell, COO of Bridge West CPAs & Advisors to the Cannabis Industry
If you’re a new business owner looking to perform essential functions such as raising cash, offering equity, or incentivizing employees, you may have come across the term “409A.” An independent appraisal of your business’s value, the 409A is a critical tool used to determine the actual value of a privately held company. If your venture is public, the market will, in large part, determine the value of your enterprise. But for privately held companies—which constitute the bulk of all U.S. small businesses—the 409A is a must. While it’s a relatively straightforward process for most companies, getting a 409A can get sticky when it comes to assessing a cannabis company’s valuation. What are the determining factors and how can you set yourself up for success? Let’s dive in.
Ins and Outs of Cannabis Company Valuation: The 409A
As you’re undoubtedly keenly aware, the cannabis industry isn’t like any other. On top of continuing federal prohibition, there are other factors that make obtaining a straightforward 409A valuation difficult. One of the major challenges is the volatility and highly dynamic nature of the industry, which can thwart accurate revenue forecasting. Another—as we’ve written previously—is the special regulatory and tax environment as it pertains to the cannabis industry. Naturally, this makes the process of preparing a 409A valuation on a cannabis dispensary or other cannabis business more challenging, but not impossible. There are several ways a skilled appraiser will approach the problem. Let’s examine the three most commonly considered factors.
Cannabis Company Valuations: Three Ways to Form an Accurate Picture
Different appraisers will lean on the methodologies of each approach we’re about to share to varying degrees. Arguably, the best approach is to combine and cross-reference each factor to get a broader and more balanced picture.
The Asset Approach
Perhaps the most intuitive approach to a 409A valuation, this method tabulates all the given business’s liabilities and subtracts them from its assets. These liabilities and assets can be adjusted for fair market value. Alternately, the assets and holdings can be given a net liquidation value to provide a reasonable snapshot of the company’s current valuation if it were to instantly be liquidated.
The Income Approach
This strategy anticipates future revenues by studying current income and extrapolating projections. One way these can be constructed is based on a single cash flow period that’s judged to be representative of the business as a whole. Some businesses will instead rely on a discount rate to calculate the present value by assessing future earnings projections.
The Market Approach
This strategy focuses on the most similar-seeming comparison: Other cannabis companies that are structured in similar ways and with similar sales histories. Drilling down further, appraisers can compare a given company with existing publicly traded ones, if available, or they can analyze similar companies that were merged or acquired close to the date of valuation.
Bridge West CPAs: Special Expertise in Cannabis Company Valuations
As we indicated above, valuing a cannabis industry venture demands skill and experience with the many peculiarities of this fast-moving and highly changeable industry. If you’re seeking a thorough, skillful, and clear-eyed valuation of your venture, we invite you to call on us. Now into our second decade of helping entrepreneurs with the challenges of cannabis company valuations, Bridge West CPAs can help set you on the road to success.
Do you have further questions about how to value a cannabis company (or any other topics in the cannabis industry)? Don’t hesitate to reach out; we’re here to help.
