What Buyers Pay For in a Licensed Grow Operation

Canopy, yield and cost of production

The first thing a buyer looks at is how much licensed canopy the operation can use and how well it is used. Canopy is the plant-growing area, and a buyer will want to know what part of it is built out and running, how many flowering rooms and vegetative rooms there are, how many harvests the facility completes in a year and how much finished flower it produces per harvest. A cultivator who talks about yield per light, per square foot and per cycle is speaking the language buyers expect.

From there the focus shifts to cost. Buyers ask for the cost of production per pound, built up from labor, nutrients, electricity, water, rent, packaging, testing and waste. Energy is usually the largest line in an indoor grow, so lighting type, HVAC design, dehumidification and utility contracts are examined closely. A greenhouse or a light-deprivation setup has a different cost profile from a sealed indoor room, and each has a different risk. Outdoor growers are tied to the season, and a buyer will want to see how many harvests were sold at which prices.

Wholesale prices for flower have moved a lot in many markets as more licensed supply has come online. A buyer will ask what the operation sold at in each of the last few years, by grade, and will probably underwrite the next few years at a more cautious price than the current one. A grow with low cost of production keeps earning when prices fall, and one with high cost may not.

Genetics, quality and testing

Cultivars matter here the way menu items matter in a restaurant. The genetics a grow holds, whether it owns them or licenses them, and how reliably it can reproduce them are among the most valuable assets in the building. Buyers ask for the mother plant inventory, the tissue culture or cloning process, the testing history for each cultivar, and who among the staff knows how to keep the library healthy. Genetics held in one head are a risk the buyer will price.

Lab results receive equal attention. Potency, terpene profile, and passing results on contaminants, pesticides and heavy metals all show up in a buyer's review. A grow with a record of failed batches, recalls or remediation will be asked a lot of questions. A grow with a steady record of clean results and a premium reputation with the customers who buy its flower has a different conversation.

Who buys the product

A cultivator's customers are other licensed businesses: dispensaries, manufacturers who make extracts and edibles, distributors and sometimes a related retail group. A buyer will want a list of each customer, how much they buy, how they pay and how long the relationship has lasted. Standing purchase agreements are valuable because they reduce the chance of unsold inventory. Informal arrangements, where the owner sells to a handful of friendly stores on a handshake, are common, and a buyer will check how much of the sales they cover.

Collections are an issue here that owners in other industries do not face to the same extent. Payment terms in the cannabis trade can stretch, and unpaid invoices from struggling dispensaries are a known problem. Expect a buyer to ask for an aging report and a history of write-offs. Our post on customer concentration explains why a business that sells a large share of its product to one or two customers is valued with caution.

The license and the regulator

The license is the center of the sale, and it follows different rules in every state. In most states a change of ownership needs regulatory approval, the new owners go through background checks and financial disclosure, and the review can take months. The sale usually has to be written to survive that wait, with a closing that depends on approval and a plan for who runs the operation in the interim. Rules vary by state and your attorney confirms what applies. We work with owners and their counsel on timing, and we screen buyers early for the ability to qualify.

Compliance records get a close look. Buyers ask for inspection history, track-and-trace reports from the state's tracking system, inventory reconciliations, waste logs, security records, employee registrations and any notices of violation. Gaps between what the tracking system shows and what the books show cause the most trouble. Anything unresolved can delay approval or become a condition of the sale.

The books themselves are unusual. Because of federal tax treatment, cannabis companies often cannot deduct ordinary expenses the way other businesses do, and their returns look different. Buyers experienced in the industry understand this. Buyers who are new to it will lean on their advisors, and the better your records, the less friction that creates. Cash handling is also a topic for scrutiny, since many operators still deal in large amounts of currency. Reconciled deposits and clean ledgers matter more here than in almost any other trade.

Financing and deal structure

Conventional bank loans and SBA programs are generally unavailable to buyers of cannabis businesses, which changes who the buyers are and how they pay. Expect buyers to use their own capital, private investors or seller financing. Seller notes are common, and sellers should treat the buyer's financial strength as seriously as the price. Our post on seller financing covers how notes are structured and what protects the seller.

Buyers will also look at the real estate. Many cultivators lease from a landlord who is willing to rent to the industry, and those landlords are not easy to replace. The lease needs enough term, a landlord who will consent to the change, and no clause that lets the landlord end it when ownership changes. If the owner holds the building, the sale could include the property or a new lease, and the way that is handled changes the price. See real estate attached to the business.

What tends to sink a sale

Deals in cultivation fail in a few predictable ways. The regulator's approval takes longer than the financing can wait. The track-and-trace records do not match the books. The buyer cannot find lenders and the seller will not carry a note. A key grower, who holds the genetics and the process in their head, leaves. Wholesale prices fall during the sale and the buyer asks to reprice. A facility problem surfaces, such as a failed mold test, an aging HVAC system or an electrical service that cannot support expansion.

Confidentiality is difficult in a small industry where everyone talks. We market a cultivator without naming it, and buyers sign a nondisclosure agreement before they see identifying details. The post on how we market a business confidentially walks through the process.

Getting ready

Reconcile the track-and-trace system to the books and keep them reconciled. Write down the grow protocols, the feeding schedules, the sanitation steps and the harvest, drying and curing process, so the knowledge lives in documents. Secure the genetics with proper backups and cross-train at least one other person. Collect lab results, inspection reports and customer agreements in one place. Talk to your attorney about the regulator's process before a buyer asks.

Business Advisors of America builds the valuation from your own records, prepares the package for buyers and screens them for financial strength and the ability to qualify. If you want to start with selling a cultivation or grow operation, a short call with us is a good first step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.