Navigating Mergers and Acquisitions in the Cannabis Industry

The cannabis industry is booming, and with that growth comes a surge in mergers and acquisitions (M&A). Revenues have been climbing steadily, doubling in the past three years, and the industry is projected to hit $25 billion annually by 2025. Naturally, M&A activity has followed suit, with deal sizes and valuations skyrocketing.

In 2021 alone, the number of cannabis M&A deals exploded, increasing from 39 in the first half of 2020 to a whopping 166 in the first half of 2021, surpassing 300 by year’s end. This uptick has been largely driven by big players—multistate operators (MSOs) that are eager to expand and have the capital to do so. 

And it doesn’t stop there. Special Purpose Acquisition Companies (SPACs) have also jumped into the mix, accelerating the trend by quickly amassing capital.

Deals like Tilray’s $2.4 billion acquisition of Aphria and Trulieve’s $2.3 billion purchase of Harvest Health and Recreation highlight just how fast this space is moving. Even in the first five months of 2022, there were already 82 M&A transactions. 

But while these deals paint a rosy picture of growth, the cannabis industry is still relatively new and faces unique challenges—mainly due to its legal status, which varies from state to state (and country to country).

So, what should businesses keep in mind as they consider navigating M&A in the cannabis sector? Let’s break it down.

The Industry is Thriving

The future of cannabis looks bright. According to Fortune Business Insights, the cannabis sector is set to grow at a whopping 32.04% annually over the next five years.

Once the world moves past the pandemic, the industry is expected to fully recover and soar to new heights. Though projections vary, they all point to one thing—upward momentum.

The MSO Advantage

One of the biggest advantages in the cannabis industry is the MSO (multistate operator) model. MSOs operate under a single brand across different states, which allows them to sidestep legal issues tied to marijuana's classification as a Schedule I substance under U.S. federal law.

This model is not only vital for cannabis companies but also provides security for investors and potential buyers.

Valuations: A Strong Selling Point

Compared to other industries, cannabis valuations are quite impressive. For companies with projected revenues exceeding $750 million, the average valuation multiple is around 10x, with smaller companies still holding strong between 5x and 7x.

These figures put cannabis in line with other hot industries like tech, real estate, and biotech. Simply put, the combination of high revenues and reasonable valuations is enticing for those looking to buy in.

Legislative Hurdles

Despite all the excitement, there are still significant legal barriers, mainly due to cannabis being classified as a Schedule I drug.

This designation makes it difficult for cannabis companies to access traditional financial infrastructure, like loans or credit. It also makes sales in certain regions more challenging.

However, the political winds may be changing. Two key pieces of legislation are making waves in Congress: the MORE Act and the SAFE Act.

The MORE Act, if passed, would deschedule cannabis entirely, effectively legalising it nationwide. While it has passed the House, it faces an uphill battle in the Senate.

The SAFE Banking Act, on the other hand, may have better chances. If passed, it would allow banks to offer their services to cannabis companies without fear of federal penalties.

This would unlock access to financial resources and even enable basic conveniences like credit card usage at dispensaries. Optimism is growing that this bill could pass, opening the door for smoother business operations across the industry.

The Political Rollercoaster

The cannabis industry is highly sensitive to political shifts. Local, state, and federal regulations vary widely, and changes in leadership can quickly shift the landscape.

Zoning issues, permits, and taxes are just a few of the hurdles that businesses must navigate, and one adverse ruling or new regulation could throw a wrench in your plans.

The Price Consumers Pay

Taxes on cannabis are high—higher than alcohol or tobacco in most places. For example, Washington State levies a 37% excise tax, while Oregon taxes at 17%. In Alaska, consumers pay $50 per ounce for mature flowers.

These high prices, combined with competition from the untaxed black market, could give consumers second thoughts about purchasing from a dispensary.