In April of 2016, we covered the basics of marijuana business valuation on this blog. At that time, we were aware of just one accounting firm–or, more accurately, one accountant at one accounting firm–who claimed to have any interest in marijuana business appraisals. This was likely due to a couple of factors: 1) CPA firms were slower than attorneys to offer services to cannabis businesses historically, due to complications with CPA ethics rules (there were no CPA firms in Oregon or Washington with cannabis clients when we started, seven years ago); and 2) business valuation is a uniquely specialized and accredited field, even among accountants.
But things are changing fast. Recently, we were excited to see Cogence Group PC, one of Oregon’s best financial forensics and valuation firms, publish a no-paywall series of excellent articles on cannabis business valuation. The first article, “How to Perform a Business Valuation of a Marijuana Business,” gives a high-level overview of the three approaches appraisers commonly take: the asset approach, the market approach and the income approach. Each of those approaches, in turn, comes with a dedicated article of its own. Those links are here, here and here.
In our 2016 blog post, we briefly described each of the three valuation approaches as follows:
- The asset approach looks at the business as a sum of assets and liabilities used to determine its value. This approach asks, “what would the cost be to create another business that would produce similar economic output?”
- The market approach looks at similar businesses, and asks “what are other, similar businesses worth?”
- The income approach considers the expectations of someone participating in the business. This approach asks, “what economic benefit will an investor of time or money receive?”
The Cogence series expands on these descriptions with valuable insights and considerations for industry entrepreneurs and investors, who may take interest in this topic for any number of reasons, including: a pot business is making an allocation of intangible assets; the business is creating an employee stock ownership plan; the business is the subject of an ownership dispute, etc. Throughout the life cycle of a pot venture, as with any business, questions of value are common.
As cannabis business lawyers and litigators, we often work closely with CPAs, alongside our in-house tax attorney. Over the past year or two, we have been encouraged to see an influx of high-level professionals and blue chip vendors beginning to serve the industry. These service providers include not just accountants and business appraisers, but also qualified lawyers, realtors and others. The Cogence valuation series is a good example of the expanding pool of legitimate resources available to the cannabis industry. Doesn’t hurt that it’s free.