Million-dollar dispensaries could soon be worthless

If you think it’s hard to make a profit by selling cannabis, it’s equally hard to make a profit selling a cannabis business. Valuations for West Coast cannabis properties have dropped tremendously, according to Green Life Business CEO Drew Mathews.

Mathews said one store he’s selling would have sold for $2 million last year, but now it’s listed for only $500,000. Another business he recently had a hand in selling went for less than $4 million, despite generating $10 million in annual revenue, according to Green Life’s website.

A key factor in the valuation decline, according to Mathews, is  that the California market is shifting away from basing valuations on top-line revenue to EBITDA (earnings before interest, taxes, depreciation and amortization) and net income. In other words, buyers are less likely to be interested in the gross sales of a dispensary and more focused on whether it is profitable. Mathews said that 40-50% of his buyers no longer even ask what the top-line revenue is for a store.

“I personally believe a dispensary in California that does a million dollars in sales is going to be worthless next year,” Mathews said. “I say that because for a store to break even (obviously depending on which market, because some rents are higher than others), a $2 million grossing store is breaking even or bleeding. So if you do the math, a store in LA doing $2 million in sales today, I could still get that guy between $850,000 to a million bucks for a store.

“I think around the first or second quarter of next year, especially if 280e goes away, that same store doing $2 million might go for a couple hundred grand.”

Mathews also thinks the market is shifting from five times EBITDA to two times EBITDA. “That’s what people are willing to pay for these volatile cannabis businesses, two times EBITDA,” he said.

New Buyers

Despite the fire sale prices and deep discounts, Mathews said first-time cannabis buyers are still jumping in.

“Some of the best fortunes are made during chaos,” he remarked.

While some multistate operators can do deals with little cash down, Mathews that’s not true in the broader market.

“We just sold a cultivation to these Chinese billionaires where this was their very first cannabis grow – in Desert Hot Springs of all places. $4 million, all cash,” he said. “They’re buying the real estate within one year for $6 million, all cash. We haven’t seen these all-cash deals since the good old days, 2018 to 2020. What that tells me is there’s a huge wave of new buyers that have waited for these valuations to get to rock bottom. They’re willing to run into the fire and are doubling down.”

Mathews said he has more new cannabis buyers than ever and 50 deals in escrow right now; 10-12 of them are buying their very first cannabis business.

“We’ve never seen that in history,” he said. “I think it’s worth talking about because I think in cannabis, we can always talk about how it’s doomsday all the time. There’s clearly a group of people that have been waiting on the sidelines, that have been waiting for these numbers to get this low to start jumping into it.”