The cannabis industry has seen consistent growth over the years and has not shown any signs of faltering. The emerging industry surrounding cannabis represents a once-in-a-lifetime opportunity to get in on the ground floor of a future major market. The ground floor though often implies starting from the bottom, but many investors can struggle to assess the value of non-operational cannabis businesses. Based on how far along they are in the process of getting operational, these fledgling businesses can not only carry a lot of value but also increasingly reliable potential returns in the future.
Measuring the value of a non-operational cannabis business
Every business is unique and the normal factors in business valuation will come into play to determine the value of any cannabis business. With non-operational cannabis businesses, however, substantial value as an investment comes from each milestone they reach along the way towards becoming operational. Since this process is often lengthy, competitive, and complex, every step towards eventual operation gives a massive boost in value to a business.
This provides a relatively unique framework for investors to target certain milestones of value for entry or exit based on their needs, goal time frame, and skillset. This has often allowed investors to specialize in specific parts of the business development for an even higher and more reliable ROI. For investors that choose to see a business through the entire process, the boost in potential value throughout the process can both help with the financial challenges that often go with building a business, and ensure that equity continues to rise before operation.
What makes a non-operational business valuable?
Each step of the process carries a surprisingly reliable value increase, as most investors are willing to pay premiums for businesses closer to operation. There will, however, be some variations between each type of business within the cannabis industry. While the path to operation often begins similarly for production, processing, retail, and distribution companies, each of these is a unique type of business that will have its own challenges and milestones throughout the process as well as those listed below.
Green zone property
A green zone property is essentially an area where real estate has been approved by local authorities to allow cannabis businesses. This doesn't mean that any green zone property will necessarily be suited for your cannabis business, but any lot that is suited for your business must be on green zone land.
Property that's been green zoned will commonly see a boost in value of around 25%.
Real estate specialists who have the skills necessary to successfully speculate on what property will soon be a green zone can commonly achieve excellent ROI from this milestone alone. The increase in value can be even higher for prime storefront space.
Land entitlement issued
Being approved for a CUP means that a business has been approved by local authorities specifically for cannabis on that land. This is a major milestone that moves a business much closer to operation and thus creates a massive increase in its valuation.
Local approval processes are commonly ill-constructed and difficult to navigate, so those with experience in navigating them will often find this the target milestone for their investment. It's pretty common to see a CUP increase the value of a business by 125%-200%.
State license issued
State licenses will usually be a little more straightforward to obtain than local approvals but in most states, the approvals system is quite dense and bureaucratic. Incorrect filings and missed deadlines could delay or even derail projects, so successfully navigating the system to licensing can offer a huge boost to a business' value.
A state license will usually increase a business' value by $100,000 to $300,000.
It's important to note that this isn't just a summation of the fraction of that amount you would pay in fees to achieve the license, but an added value that another investor will happily pay to circumvent having to go through the approval process. Investors that know the state approval process well can achieve high returns in short periods from this milestone alone.
Facility development and improvements
This greatly depends on the needs of each particular type of business. For many investors, the prospect of paying a premium price for a ready-to-operate cannabis business is much more attractive than waiting through each milestone to compound an investment over time. In this sense, developing the facilities and land for a cannabis business to be ready for operation is like introducing your investment to the retail market. The value this milestone adds will depend on various local factors, but it has the potential to generate massive returns for businesses that develop to this step.
This can be an ideal step for land developers and those with high capital and the resources that a build-out demands. Many will then sell the business or rent it out as a turn-key operation, ready to go. While land and facility development is a costly and complicated endeavor, the returns it can offer in the cannabis industry are incredibly high.
Value before operation versus value during operation
Before a cannabis business is operational, each milestone along the way can compound an initial investment. Once a cannabis business is up and running, it still carries through that value in the eyes of potential investors, but like other businesses, growth becomes reliant on earnings potential.
If the project was a sound investment in a good location with a good business plan, the sky is the limit on the long-term ROI that a cannabis business could produce as its value and profitability grow over time. An investor who's followed the process leading up to operation since the beginning would have potentially doubled their initial investment several times over by this point, but the long-term operation of a profitable cannabis business can provide even higher long-term ROI.
Capitalizing on the opportunity of cannabis investments
Every milestone along the way in the development of a cannabis business offers a potentially massive opportunity for a smart investor. While the cannabis industry doesn't seem to be slowing down its growth, the opportunity to make early investments into an emerging industry won't last forever. Getting involved in the right cannabis investments right now is critical to positioning your money to have the highest ROI you can achieve in the future.
The cannabis industry is complicated and there are a lot of moving parts. Not all cannabis investments are equal, and you need the right experts on your side to make educated and sustainable investments. BeGreenLegal is a full-service agency, dedicated to getting businesses operational and profitable. We help demystify the cannabis industry so that we can get investors into the right investments for their needs and goals. If you have questions about how to better capitalize on opportunities in the cannabis industry, reach out to us for an investment analysis today.
