Part 3: Identify Profitability and Financial Trends
In the series “Marketing a Cannabis Company for Sale,” Dena Jalbert walks through the nuances and intricacies involved in preparing a business for sale in the cannabis industry. This article, “Step 3: Identify Profitability and Financial Trends,” is part three of a five-part series.
At this point in your journey of marketing your cannabis business for sale, you should have progressed through step one – mapping out your strategy – and step two – assembling a strong M&A team. The next step in the process is to identify profitability and financial trends.
Profitability
Profitability is the goal of any business, and is a critical component of making your business an attractive target for acquisition.
When you are positioning your cannabis business for sale, you will need to have a complete financial picture of your company, including past and current profitability, as well as projections of future profitability. Potential buyers want to know how your company is currently performing and look at its historical performance prior to an acquisition, assessing whether your profits are trending up or down. If your company is underperforming – not growing revenues and not controlling costs – you will find it challenging to attract a buyer willing to invest the time and attention needed to turn it around.
Many companies in the cannabis sector struggle to become profitable, hedging their success on future distribution and sale of their product as rules and regulations related to cannabis are solidified. The most profitable cannabis companies are those that are committed to staying in the black as they expand their product portfolio, have a focus on organic growth and/or a strategy for growth through strategic partnerships. A focus on successfully executing on your business plan to achieve profitability will position you to take advantage of the increase in consumer spending on cannabis products and will attract the most interest for your company as a target for acquisition.
Trends
Timing is critical in terms of your company’s profitability, but also important in this timing are trends that impact the financial health of the cannabis industry. As a business owner, you should have your finger on the pulse of what is happening in the industry in order to strategically adjust your business plan to take advantage of these trends and potentially adjust the timing of putting your business up for sale if needed.
Two of the most significant trends currently impacting the cannabis industry include the legislative climate and the development of new cannabis products.
Legislative Climate
One of the key drivers of growth in the cannabis industry is increased legalization. Exponential growth in the industry is already being seen in states where cannabis is currently legal and will only increase as markets open up in more states. According to New Frontier Data, in states where cannabis is legal, medical and adult use sales are forecast to grow from $12.9 billion in 2019 to $26.3 billion in 2025.
Lawmakers in states where cannabis is not legal are seeing the success of the industry in states with legalization and want to bring this revenue stream to their states. Recreational marijuana is now legal in 10 states and the District of Columbia, and medical marijuana is legal in 33 states and D.C. The New York and New Jersey state legislatures are considering legalization of adult recreational use of cannabis in their states this year, and momentum for legalization is building in Pennsylvania and Illinois.
The legislative climate should be a significant factor in deciding when the time is right to sell or buy. As more states legalize marijuana, the markets will continue to open up and provide an even more favorable climate for M&A.
New Cannabis Products
Another key driver of industry growth is cannabinoid, or CBD, which is making significant inroads in consumer products. CBD can be found in everything from food, to skin care, to pet and fitness products. Consumer interest in these products is increasing as many of these brands are touting the wide-ranging health and wellness benefits of CBD. CBD products are bringing mainstream market opportunities to the industry with the development of innovative consumer products, and is expected to be a key driver of industry market growth moving into 2019.
The growth in market opportunities generated by the continuing increase of cannabis legalization and the development of new cannabis consumer products has attracted interest from large corporations in a wide range of sectors including food, tobacco and alcohol. These corporations are strategically entering the market by acquiring small cannabis companies, providing an excellent window of opportunity to position your company for acquisition. This window of opportunity will begin to close as the industry matures. Fragmentation as the result of the entry of many new players, a dwindling availability of seed capital and an increasing squeeze in profitability will all inevitably occur when the market has met this maturity.
The bottom line is that timing in terms of where your company is in its drive toward profitability, as well as industry trends impacting the financial health of the industry, will be key determining factors in the success of the sale of your company. Get the full picture of both as you determine the right timing to position your business for acquisition.
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