Friends, in response to my Cannabis Musings from last week (link), I got a question from a reader about the EBITDA multiples being paid by Jushi to buy Nature’s Remedy of Massachusetts (link) - 4.5x-5.0x projected 2021 EBITDA for Nature’s Remedy, and 2.9x-3.2x projected 2022 EBITDA. This kibitzer noted that these multiples seemed low compared to multiples paid by buyers in other industries. Turns out, he’s a bisl right! I figured I’d delve briefly into some reasons why Cannabis buyout multiples generally seem to be lower.
Companies are valued in order to decide the price to pay for that asset (a finance term for “thing”). Measuring the value as a multiple of the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is one of those ways that’s generally accepted in finance. However, in order to value a company based on a multiple of EBITDA, the company needs to, well, have EBITDA, and it wasn’t until the past year or two that operators in the Cannabis industry started to generate positive EBITDA. (link). So, before an early-stage (a finance term for “new-ish”) company is generating EBITDA, it’s acceptable to value that company on a multiple of revenue. What if a company doesn’t have revenue yet, but just an idea, or a newly-won Cannabis license? Then you value it on a multiple of projected revenue (which, if that sounds like guessing, you’re not too far off – projections are simply a highly-educated guess based on accepted and reasonable assumptions).
Valuation is understandably one of the most critical parts of the deal negotiation – the seller wants a higher value for the asset and the buyer wants it lower. So how do you agree upon the multiple? It’s a bit of following the trend, which moves based upon a plethora of factors such as the macro economy, capital markets, industry growth, demand, regulation, and consumer sentiment.
Going back to the Jushi/Nature’s Remedy deal, those reported EBITDA multiples (which are also based on projected EBITDA) are lower than you’d see in the acquisition of private companies in many other industries (but not all). Although there isn’t a lot of public information on Cannabis buyout multiples, from what I’ve seen, mid-single digit EBITDA multiples have been typical as of late. Why would this be the case, given that Cannabis is such a hot, high-growth industry? It’s hard to know for sure, but if I had to speculate (which I will), I think it’s driven by a host of factors such as a serious dearth of cheap debt; lack of participation by traditional buyout funds and well-capitalized CPG companies; regulatory uncertainty; the challenge of fair-value adjustments for biological assets; and a general lack of positive net profits due to the high cost of everything in doing business in Cannabis.
To be absolutely clear, I’m not suggesting there was any particular issue or concern in the Jushi/Nature’s Remedy deal; rather, I think the lower valuations are most likely endemic to the entire industry. There is just as much art as there is science in trying to interpret the tea leaves of industry buyout trends. That’s why, as usual, not only is none of this legal advice, it’s also not investing advice (and certainly not accounting advice).