Unlocking the Value of Early-Stage Cannabis Businesses
CannaBlog by Cory Parnell, COO and Principal at Bridge West CPAs and Advisors to the Cannabis Industry
Figuring out the worth of an early-stage cannabis company can be a daunting task, yet it remains an integral part of your capital formation process, especially if your business is in the pre-revenue phase. Having a credible and comprehensive valuation enables potential investors to understand the worth of your firm and accurately assess their potential risk and return.
Why Do Cannabis Companies Need a Valuation?
A valuation is not merely a number; it’s a narrative about a company’s worth, expressed in financial terms. It is essential to both the company’s internal management for strategic planning and potential investors who use this information to make informed investment decisions. For cannabis companies, valuation is particularly critical due to the volatile and ever-evolving nature of this emerging industry.
Understanding the “Standard of Value”
The “Standard of Value” is a critical term in valuation. It represents the hypothetical conditions under which the business value is determined. This could be fair market value, investment value, fair value, or liquidation value, depending on the purpose of valuation.
The valuation process is a systematic approach that certified business valuation professionals undertake to estimate the economic value of a company. This procedure includes analyzing financial statements, forecasting future cash flows, examining market trends, and utilizing appropriate valuation methodologies.
Information Considered in Valuations
In a valuation, multiple factors are considered. These include the company’s financial data, the status of its intellectual property, the size of its target market, the competitive landscape, its growth prospects, and much more.
Approaches to Valuing a Cannabis Company
Valuation professionals typically use a mix of methods to value a cannabis company. This can include discounted cash flow (DCF) analysis, net present value (NPV) computation, comparative multiples method, and more. The choice of method is driven by the unique circumstances of each company and the available data.
What is a 409A Valuation?
A 409A valuation is a formal report that ascertains the fair market value (FMV) of a private company’s common stock. Startups often need 409A valuations to set the strike price for stock options.
As you delve into the intricacies of company valuations, you’ll encounter a multitude of terms – DCF, NPV, Multiples, Comps, COG, CAC, Cash Burn, WACC, Runway, Weighted Averages. Each of these terms plays a crucial role in the valuation process and understanding them is key to navigating the complex landscape of company valuations.
Lastly, remember that a business valuation should be conducted by a knowledgeable and experienced professional. When it comes to cannabis businesses, the dynamic nature of the industry and the unique challenges it poses necessitate a specialist’s expertise. Conducting a valuation at the right time is also critical—ideally, it should be done before significant capital raises, changes in company structure, or crucial financial decisions.
Since 2009 our valuation experts have been helping cannabis operators navigate the intricate process of valuing cannabis companies, and providing the insights needed to make informed financial decisions. To learn more about how Bridge West can assist you with your company’s valuation and other financial needs, please contact us today. We’re committed to helping your cannabis business reach its full potential. Your journey to success begins with understanding your cannabis businesses worth—let’s discover it together.