Everything You Need to Know About Buying Cannabis Businesses and Licenses on the Secondary Market

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The U.S. housing market is currently red hot, with the majority of homes on the market selling in less than one week around the country. But the housing market isn't the only market experiencing a boom right now. The demand for cannabis licenses, especially on the secondary market, is also skyrocketing, with multi-state operators seeking to expand their operations fueling demand. Public cannabis companies raised 1.6 billion of capital in January 2021 alone, making these operations extremely attractive to investors, especially as they anticipate federal marijuana reform.

Additionally, rather than going through a time-consuming application and approval process by local and state municipalities; MSOs (multi-state operators) have found success in acquiring Turn-key business opportunities through specialty cannabis business brokers. Due to the knowledge, and expertise of the brokers, these cannabis opportunities have opened the doors to acquisitions in retail, delivery, cultivation, manufacturing and distribution businesses and licenses.

What Is the Secondary Market?

As the cannabis industry grows and evolves and companies expand, a lot of smaller, original growers and retailers are starting to put their licenses up for sale via the secondary market — just as you would list a home for sale. This growing trend gives cannabis entrepreneurs a fresh way to secure a valuable business permit rather than going through their state's application process, which is known to be expensive and time-consuming, with no real guarantee that you will secure a license. In fact, data shows that the average group spends $300,000 to $1.5 million pursuing a license and still ends up not getting it. 

What's Causing the Cannabusiness Boom?

The secondary market has been growing steadily for the past few years. The growth is mainly attributed to the fact that most marijuana markets in the United States have caps on the number of business licenses issued, making it much easier for newcomers to get in by buying an existing business instead of attempting to win a competitive and crowded process for the highly coveted licenses.

Other factors that industry leaders attribute to the surge in interest include:

• COVID-related restaurant and bar closures drove many entrepreneurs to enter the cannabis field as their other ventures were shuttered. This also extends to other industries hammered by COVID, such as gym owners and hospitality workers who are flocking to a new career in cannabis because they feel it's a "recession-proof" industry.
• With a Democratic president and more and more states legalizing recreational marijuana, hopes for federal marijuana legalization are at an all-time high. Included in the proposed federal marijuana reform is legislation that would allow cannabusiness owners to deduct their business expenses from their taxes — a huge benefit and cost-reducing measure.
• Multi-state operators (MSOs) are on an acquisition spree as they look to solidify their presence in the industry and create a national presence. This is leading to an all-time high demand in the secondary market.
• The U.S. economy is bouncing back from the pandemic. As the economy reopens and the money returns, a lot of investors will be ready to jump at the chance to invest. As capital continues to flow into the market, the value of the assets will only increase.

Business owners are also highly motivated to sell because of harsh business conditions that are eliminating profits in some markets and the steady price decline for longstanding cannabis companies as they face mounting competition, among other factors.

Prices on the secondary market are high, but a secondary market purchase provides you with a guarantee that you will receive your license. This allows investors to raise capital for the endeavor with investors who can feel secure knowing they are investing in a sure thing with an issued license.

Cannabusiness Market Activity 

Data shows that in 2020 the number of cannabusinesses and assets for sale spiked from the year before in several states with established markets, including Colorado, California, Nevada and Arizona. The listings in California experienced a near 100 percent increase. The factors that cause increases in the number of assets for sale include the state market's transition from medical-only to recreational or other regulatory changes. As more states continue to legalize recreational marijuana, these trends will continue and create more demand.

In 2020 the world was heavily impacted by Covid-19 which led to many catastrophic economic impacts economists, world leaders and mainstream industries were not properly prepared for. Despite the negative impacts of Covid-19 the cannabis industry continued to move forward and strongly set a footprint for economic growth in the upcoming years. What was once a new and delicate industry is now an industry considered to be pandemic and recession-proof.

Though it's safe to say that demand for existing marijuana operations has never been hotter, there are some things everyone should know about and take into consideration before agreeing to a secondary market cannabis license acquisition, including the following.

Make Sure You're Getting a Fair Price

In hot markets like the one we're currently in, the seller is out to take advantage of the market and make the most return on their investment possible. This is why it's critical to do your own market research, see what comparable businesses are going for, and work with a real estate agent who can advise you on whether the deal is worth it or not. There are a number of factors that influence a cannabis licenses' price tag, from zoning and buffers to competition. The less competition there is in a specific market, the more valuable a cannabis license is in that area. Additionally, some cities limit the location of cannabusinesses to specific zones, driving up competition even further. Chicago Mayor Lori Lightfoot, for example, is looking to ban the sale of cannabis in a lot of the downtown area. 

There are many factors that influence price, including the number of licenses available in the state. For instance, prices in California and Oklahoma, where there is no state license cap, are much lower than in a state like Arizona, where there are strict limits on the number of available cannabis business permits.

Know What You're Getting Yourself Into

The year 2021 has picked up right where 2020 left off. Mergers and Acquisitions in the cannabis industry continue to have a strong impact in the cannabis space. As predicted, buying and selling of cannabis businesses has continued to boom in quarter one of 2021. As federal legalization continues to move forward, MSO’s from different industries outside of cannabis have begun to push for new ventures within the cannabis industry. Cannabis has continued to attract investors as it has proven to be recession and pandemic proof. 

Industry leader, Green Life Business Group sold 8 cannabis businesses in Quarter 1 of 2021. Such success has led to the representation of a massive state of the art cultivation facility in San Bernardino County that has a price of 109M which INCLUDES the real estate. This 45,000 Sq. Ft. facility could potentially be expanded into a 110,000 Sq. Ft. with future build outs that have already been approved and permitted. Not only does this facility have current revenues of $29M and EBITDA of $20M, it has also been licensed for Distribution and Type 7 Manufacturing. Green Life Business has represented many cannabis businesses but has never seen anything like this. The bar has been set.

A lot of investors go where the money is. Many people may choose to throw their money at cannabusinesses for the mere fact that the market is heating up. But, before investing in a cannabusiness, you must make sure you are 100 percent ready to enter the cannabis market in the first place. It's a complicated, fragmented industry — not to mention one that's federally illegal. So, it can time a lot of time, effort and failures until you master the market and succeed with your operation. From an IRS rule that bans tax write-offs to a total lack of interstate commerce, the cannabis industry comes with challenges that are not present in any other multibillion-dollar industry.

Pack Your Patience

The process of buying a cannabis license can be taxing and time-consuming enough. A lot of states require background checks along with the cannabis license application, a measure that has been known to come with long wait times.

The Blueprint of Your Investment

Once you've overcome these hurdles, you have to decide whether you want to buy a turnkey operation or start your own from scratch. Keep in mind that starting from scratch comes with a lot of challenges, including entitlements, regulatory agencies and construction timelines — to name a few — all of which take about twice as long as conventional transactions. When you purchase an existing operation, you are giving yourself the benefit of time — significant savings that can accrue to your bottom line.

Build Your Team

It's important to surround yourself with the right people who can help guide you through the acquisition process. These people include attorneys, real estate agents and financial professionals who are familiar with state and local marijuana licensing regulations. Your team will be there to help you through the complex process, but it's also important to do your own due diligence. Take the time to carefully review state and local rules that govern the cannabis sector in your area. The worst thing you can do as an investor is take the word of the seller — the person the most motivated to make their deal appear sweet and amazing. You should never take a seller's word that their location has the secret potion to quadruple the dispensary's revenue. If you take their word for it, you will end up paying twice the market rate for the license just to find out quadrupling the revenue will be impossible because the market is already saturated with dispensaries. 

For help finding a cannabis businesses for sale or cannabis license for sale, count on 420property.com-- the world's largest cannabis and hemp real estate and business marketplace.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.