CANNAINVESTOR Magazine October / November 2016 - Page 83

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License Valuations for Investors and Sale

If you want to invest it, buy, or sell a marijuana business license, you will need to determine what that license is worth. So how do you put a value on a license? Affixing a value to your license is called a valuation. Valuations are used to assist buyers and sellers in establishing a market rate for a particular asset, in this case, a license. While the licenses themselves have substantial value because there are a finite number of licenses issued by each state, in most cases in the marijuana industry, the license comes tied to the business entity that holds it, which can affect the license valuation in several ways.

Generally, there are two common methods for valuing a business: an asset-based valuation or an earnings-multiplier valuation.

Asset-based Valuation

An asset-based valuation takes into account all of the business assets, such as physical property, but also including non-tangible things like brand recognition, customer base and existing employees, competitors, and location. All of these items can have a value affixed to them, and the sum total becomes your valuation.

Earnings Multiplier Valuation

However, for most people in the marijuana industry, a return on investment is based significantly on exit value rather than just net profits. In these cases, the earnings multiplier method may be more useful. Using the earnings multiplier method, a base multiplier (usually somewhere between two and ten times the business’ annual net income) is used to determine the valuation of the business. This method is usually more effective for business and license owners because it can factor in levels of risk involved in the industry.

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