Marijuana Valuation

mikesswimn's picture
Rank: Neanderthal | 2,296

Morning Monkeys!

As I'm sure we've all seen, marijuana is now legal for recreational use in both Colorado and Washington state. Now, the pressing question of "how can I make money on this?" arises. Obviously, we could go out to Denver and open up a shop, but when you're already working 60-80 hours a week, that seems like an awful lot of trouble when you could simply acquire an existing shop. Which brings up the question of valuation.

Not surprisingly, the calculation of common statement lines is a bit trickier, making the process of valuation a bit more cumbersome. For instance, recently a US tax court said that dispensaries cannot deduct business expenses on their tax returns. This came as a result of an owner building a vapor room and posting it to schedule C, filing the charge on their tax return, and gettting chided by the authorities as such deductions are invalid under section 280E. Also disallowed are deductions for wages, advertising, and supplies among others.

The curious wrinkle here is that the same judge who said that business expenses cannot be deducted noted that marijuana purchases, in fact all COGS, does not qualify as a deduction under 280E and can be used to reduced revenue for the purposes of tax reporting.

So, here we are, weird statements with differing tax treatments, no public comparables, and an awfully grey market with very little data to work from. How do you value a company like this? What do you monkeys think?

tl;dr - Pot shops in CO & WA look tricky to value for tax reasons. Thoughts?

Comments (37)

Nov 7, 2012

Isn't pot still federally illegal to possess? Before you begin starting up a weed farm, I'd consider the legislative consequences first.

Nov 7, 2012
FutureBanker09:

Isn't pot still federally illegal to possess? Before you begin starting up a weed farm, I'd consider the legislative consequences first.

Yeah, definitely still illegal. Good point though, risk of getting shut down would also be worthwhile to include in a given valuation.

I should note, I'm not actually interested in setting up a giant weed farm, just posing the question of how you would go about a valuation. Seems like an interesting problem.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Nov 7, 2012

I think you need to find better hobbies

    • 5
Nov 7, 2012

youd enjoy the weed more if you smoked it instead of studying it

    • 1
Nov 7, 2012

I feel like the last two commenters should have just decided not to comment

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

    • 1
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Nov 7, 2012

So their income statement is like the one below?

Revenue
(-) COGS

(-) Interest Expense

Taxable Income
(-) Taxes

(-) Business Expenses

Net Income

After a summer of working with very small businesses, owners typically saw the value of their business approximately equal to LTM revenue. However, these small businesses don't have the same growth opportunities that these dispensaries have.

Realistically, I would want to see the margins at a few different dispensaries. Also, I'd probably want to include an earnout to cover the risk that the Federal government comes down hard on these states.

Just my $.02

    • 1
Nov 7, 2012
GED or Bust:

So their income statement is like the one below?

Revenue
(-) COGS

(-) Interest Expense

Taxable Income
(-) Taxes

(-) Business Expenses

Net Income

I'd imagine so, but another curious sticking point is "interest expense". Banks are getting angry letters from US Attorneys about making loans to these types of shops. I have to imagine that a lot of the funding is either from individual wealth or personal loans, which I imagine would complicate things further.

Looks like book value is what a potential investor would be chasing in general, PP&E in particular.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Nov 7, 2012

there would be some endline discount rate similar to a DLOM (discount due to lack of marketability) to factor into the valuation

Nov 7, 2012

To be honest, like a lot of small businesses they would likely book their books a bit anyways, and report a little less revenue than what they really receive. it would be like the dry cleaners business, mostly cash, hard to track easy to launder. So valuation likely have be done from cash flow stand point instead of income statement due to that.

Nov 7, 2012

Great point about cash flows.

Nov 7, 2012
ladubs111:

It would be like the dry cleaners business, mostly cash, hard to track easy to launder.

I see what you did there

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Nov 7, 2012

More importantly, I'm looking forward to structuring marijuana sales tax revenue bonds... thoughts on tombstone design?! ha...

Nov 7, 2012

My fam has places in Nederland, Breckenridge, and Boulder and I can tell you that that market is already so saturated it's almost pointless. As of 2 years ago, there are dispensaries on every block, most of which don't make it longer than a few months when they realize these mountain hill people have suppliers that grow forests full of weed for practically free; the few players that exist in every neighborhood or town pretty much have a monopoly on prices.

The real money will lie in consolidation and innovation. Like a Walmart type venue; a place you can go to buy your pot, fully equipped with a food court, game room, movie theaters and water slides.

Also key to note is that shop owners have zero fear of federal intervention. As an investor, it would certainly be an added risk, as I've heard of places in California being temporarily shut down by feds. Never in Colorado, though. And that was years ago. The new legislation would allow all folks 21 and over (I believe) to purchase; not just medical patients. That's a pretty significant addition to the market. I'd personally never do it but there are plenty of smart folks out there who have and will.

Nov 7, 2012
CaR:

My fam has places in Nederland, Breckenridge, and Boulder and I can tell you that that market is already so saturated it's almost pointless. As of 2 years ago, there are dispensaries on every block, most of which don't make it longer than a few months when they realize these mountain hill people have suppliers that grow forests full of weed for practically free; the few players that exist in every neighborhood or town pretty much have a monopoly on prices.

The real money will lie in consolidation and innovation. Like a Walmart type venue; a place you can go to buy your pot, fully equipped with a food court, game room, movie theaters and water slides.

Also key to note is that shop owners have zero fear of federal intervention. As an investor, it would certainly be an added risk, as I've heard of places in California being temporarily shut down by feds. Never in Colorado, though. And that was years ago. The new legislation would allow all folks 21 and over (I believe) to purchase; not just medical patients. That's a pretty significant addition to the market. I'd personally never do it but there are plenty of smart folks out there who have and will.

I'm from Denver and I can confirm that everything you mentioned is true. Legalized pot (albeit for medical purposes) has been around in CO since I believe the 2008 election (could be wrong) so any type of first-mover advantage is long gone. I think the places that will thrive will be hooka lounge type establishments where people can buy weed and smoke it there. Who knows though should be interesting.

As for the legality issue, from what I understand the feds haven't/will not intervene because of their reluctance to overrule state law. From what I remember from business law, the federal government is reluctant to do this in general so I don't think it will be an issue.

Nov 7, 2012
proptrader14:
CaR:

My fam has places in Nederland, Breckenridge, and Boulder and I can tell you that that market is already so saturated it's almost pointless. As of 2 years ago, there are dispensaries on every block, most of which don't make it longer than a few months when they realize these mountain hill people have suppliers that grow forests full of weed for practically free; the few players that exist in every neighborhood or town pretty much have a monopoly on prices.

I'm from Denver and I can confirm that everything you mentioned is true. Legalized pot (albeit for medical purposes) has been around in CO since I believe the 2008 election (could be wrong) so any type of first-mover advantage is long gone. I think the places that will thrive will be hooka lounge type establishments where people can buy weed and smoke it there. Who knows though should be interesting.

As for the legality issue, from what I understand the feds haven't/will not intervene because of their reluctance to overrule state law. From what I remember from business law, the federal government is reluctant to do this in general so I don't think it will be an issue.

You're definitely right about the fed's hesitation to supercede state law. They talked about that a lot on a 60 Minutes special I saw a bit back, good work

Nov 7, 2012

Don't you think the federal government will do something about this? Doesn't the Amendment only change personal possession and production (growing laws)? Or did I read something wrong...

Nov 7, 2012

Huge synergy if you open up a taco stand next door offering Buy an 8th get a taco promotions

    • 1
Nov 7, 2012

This.

jamesdakrn:

Huge synergy if you open up a taco stand next door offering Buy an 8th get a taco promotions

Nov 7, 2012
jamesdakrn:

Huge synergy if you open up a taco stand next door offering Buy an 8th get a taco promotions

I think 7-11 would have higher synergistic value due to the slurpee.

Nov 7, 2012
jamesdakrn:

Huge synergy if you open up a taco stand next door offering Buy an 8th get a taco promotions

Hilarious

Nov 7, 2012

lol Peyton Manning purchased 21 papa johns pizza restaurants in denver on 10/26, coincidence?

http://espn.go.com/nfl/story/_/id/8553736/peyton-m...

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Nov 7, 2012
AndyLouis:

lol Peyton Manning purchased 21 papa johns pizza restaurants in denver on 10/26, coincidence?

The man can do no wrong in Denver

Nov 7, 2012

Anyway Spring break 2013: Boulder.

Nov 7, 2012

Does anyone else find it ironic that the first state to legalize the herb is a swing state?

Nov 7, 2012

No, because CO is one of the biggest stoner states. Also CO (and most of the Rockies West) has a huge libertarian streak-which is why they are a swing state. They are against gun control, against gov't intervention in their lives so they are averse to parts of Republicans and democrats alike.

Nov 7, 2012
jamesdakrn:

No, because CO is one of the biggest stoner states. Also CO (and most of the Rockies West) has a huge libertarian streak-which is why they are a swing state. They are against gun control, against gov't intervention in their lives so they are averse to parts of Republicans and democrats alike.

Interesting. They should change the political map to Reds, Blues, and Greens - repubs, dems, and stoners.

Nov 7, 2012

Dispensaries often deal in cash. You will be hard pressed to find a multiple to use. The businesses vary in size also, some of the small mom/pop's working out of their homes, while others are large corporate office buildings. It is too early in the game to determine how stable and how long some of them will run. Here in California, dispensaries pop up all the time and many fail.

My brother runs a dispensary. The number one rule is to avoid reporting high dollar figures to the IRS. The federal government uses your tax returns to source out the highest earners. And yes, the big dispensaries still get raided by the federal government, prosecuted, and eventually let go by a state judge. All this happens even in a state with medical marijuana. But the owners are left crippled as all their plants, inventory, and equipment is damaged, seized, and burnt(marijuana).

Just because it is legal in a state, doesn't mean the fed won't go after you. With that said, it'll be very difficult to get enough data on these companies to develop a set of parameters to value them at.

It is not about the title that you have, it is about how much money that you have.

Nov 7, 2012

Yeah, this seems like a really risky industry to get into financially.... though you know there are gonna be some people that are gonna get rich as hell soon enough.

I wish the DEA would leave these states with medical/legalized/decriminalized marijuana alone... the people have spoken, leave them be.

What do you guys think about Philip Morris or other big tobacco companies who already have the machinery and just have to switch around the actual material getting into this? I remember reading a few years back that it's actually cheaper to make and process marijuana than it is tobacco... I could be wrong, but it seems like that leaves a biggg chance for profits. 20 cigarettes = ~$7 here... 20 joints = ~12-15 grams = ~$150-$190 street value for the higher end strains ~$35-$50 for "regs". I doubt they'll be selling packs of joints, but it's pretty neat to think about ha.

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Nov 7, 2012
wolverine19x89:

Yeah, this seems like a really risky industry to get into financially.... though you know there are gonna be some people that are gonna get rich as hell soon enough.

I wish the DEA would leave these states with medical/legalized/decriminalized marijuana alone... the people have spoken, leave them be.

What do you guys think about Philip Morris or other big tobacco companies who already have the machinery and just have to switch around the actual material getting into this? I remember reading a few years back that it's actually cheaper to make and process marijuana than it is tobacco... I could be wrong, but it seems like that leaves a biggg chance for profits. 20 cigarettes = ~$7 here... 20 joints = ~12-15 grams = ~$150-$190 street value for the higher end strains ~$35-$50 for "regs". I doubt they'll be selling packs of joints, but it's pretty neat to think about ha.

haha interesting I hadn't thought about mass production. It would be crazy to see the day where I could buy a pack of joints at a gas station, or buy a package of blunts instead of just the shitty cigars to use as wrappers. I would think it would take a few more states before major tobacco would get involved but it will be interesting to see their response.

Nov 7, 2012

Oh, I'm sure other states are going to catch on... imagine going to your local supermarket and on the other side of that whole aisle devoted to beer/liquor is just... every type of weed you could think of

... not that I do that sorta thing. would just be something to see ha.

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Nov 7, 2012

I've done some research, and haven't found a single instance of a dispensary in Colorado being raided by Feds--never heard of one either. Earlier this year 9,000 plants were seized by the Feds, but they were owned by cartel in the south of the state by Pueblo.

Personally, I find it ridiculous that states amend their constitutions to this end. Sure, it's a step in the "right direction", but write a statute or something. Amending a constitution for the sake of decriminalizing weed is fucking ridiculous, and has subtle implications regarding the public's view of the sanctity of our governing documents.

That being said: I don't think the idea of commercializing marijuana is farfetched at all. Maybe it's because I went to Amsterdam for a weekend last summer, or maybe it's because I spend as much time fishing and skiing as possible in Colorado; the ganj is ubiquitous, more people use (albeit infrequently) than one might think and everyone knows it. I suspect my generation will do something about the obnoxious number of folks overcrowding our prisons for fighting the "drug war," and find a reasonable way to tax and limit the use and sale of weed. I envision a system similar to alcohol's; need a permit to sell, get's taxed heavily, limited number of licenses per county (require city council approval), age requirement, and no getting Amendment 64'd while driving. Everyone in the western states is getting 64'd already; why not bring in some added revenue and circumvent the cartels and high school dropouts? As ultra progressive as it is, that's a multi billion dollar economy that would be infinitely easier to value and invest in. $.02

Nov 8, 2012
jamesdakrn:

Huge synergy if you open up a taco stand next door offering Buy an 8th get a taco promotions

As long as they've got some version of the doritos locos taco. My friends go ham for that when they're rolling.

"There is only one corner of the universe you can be certain of improving, and that's your own self." --Aldous Huxley

Nov 16, 2012

Honestly the fatal flaw in the dispensory or pot shop model is the supply chain issue. Since you need to go to the black market to purchase inventory there is always a potential show stopper for the business (outside of the aforementioned federal law).
You could have a model with self supplied inventory (grow your own) but then you are really running 2 businesses. A lot of work for an industry where the only people who make consistent money are the growers, as it is my understanding the margin on selling at the shop level is fairly narrow due to the well controlled supply chain and high level of competition.

Doog37

Nov 21, 2012
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Nov 26, 2012