Cannabis: Valuation Approaches in an Evolving Market

The Federal Government of Canada adopted the Cannabis Act, Bill C-45, on October 17, 2018, legalizing cannabis for recreational use in Canada. As the second country in the world to legalize cannabis nationwide, Canada is in a position to lead the way for cannabis companies across the globe. Further, Canadian companies have an opportunity to capture a meaningful share of the global market, resulting in tremendous growth projections across the value chain. To capitalize on this opportunity, Canadian cannabis companies are actively pursuing growth through acquisition, which has placed increased emphasis on the importance of business valuations in this sector.

A range of complexities exist for corporate valuations in the nascent Canadian cannabis industry. These include uncertainties around industry fundamentals, the regulatory environment and a lack of historical financial data. Traditional valuation multiples have proven to be less meaningful in the current expansionary phase of the Canadian cannabis industry as companies are experiencing high revenue growth and widespread operating losses. Consequently, business valuators are increasingly reliant on expected future cash flow analysis to derive valuations.

Furthermore, a wide array of risk factors must be factored into any corporate valuation. As it relates to the cannabis industry, these include regulatory risks such as licensing and compliance, industry consolidation and profitability, supply chain frictions, demand growth and the potential for agricultural failures, among others.

In this whitepaper, we discuss traditional business valuation approaches and analyze their application in the cannabis industry.