There has been a flurry of activity in the emerging legalized cannabis industry, as regulations and restrictions continue to decrease. Given that the U.S. cannabis market is estimated to be approximately $60 billion, with still plenty of room to grow, it is not surprising that many investors are looking at this industry. However, prudent investors should understand the particular challenges the industry still faces. For instance:
- Cannabis is still classified by the U.S. government as a Schedule (Class) I drug
- This classification substantially limits the types of costs such entities can deduct for tax purposes
- Production and distribution methods are improving, potentially to the comparative disadvantage of existing operations
In valuing a cannabis company for purchase or when considering any similar investment, one must understand how these and other issues affect an entity’s future prospects. There are important considerations when applying an income or market approach to valuation. A helpful summary for anyone involved in the industry is available in the Cannabis Valuation Guide.