Dispensary Gold Rush

California is well on its way to becoming ground zero in the competitive battle for cannabis dispensaries. No less than 40 companies from Canada and other US states are aggressively making acquisitions to establish themselves in the Golden State. Last year at this time there were over 2000 dispensaries, today there are 500 and by this time next year we may be back over a thousand. However, the ownership profile will change dramatically as more and more well-funded companies, offering cash and stock, will look to acquire California domain expertise in retail.

Why the focus on California? Obviously its big. Add to that the prevailing wisdom of the large-scale players is – “if you’re in Cannabis, you must be in California”. Just as important as market size is the sheer complexity of the CA market. With ever shifting sands driven by herky-jerky state regulation, evolving taxation across our 58 counties and a befuddling testing environment, CA operators are nose to the grindstone making sure they get and stay compliant. While CA retail owners focus day-to-day, well-funded multi-state operators roll in with an army of lawyers locking down every available retail permit (yes, even Coalinga). Add to that the inorganic strategy of acquiring retailers outright and you have a verifiably frenzied Green Rush. Chaos creates opportunity and well organized companies with strong balance sheets are taking advantage.

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Vertical Integration: Blessing or Curse?

When California regulations came out late last year the opportunity presented itself for cannabis companies to acquire multiple licenses, thereby enabling a strategy of vertical integration. As cannabis entrepreneurs went through the licensing process they had to decide how many licenses to apply for and determine how their corporate strategy would evolve with these new opportunities. As they evaluated the prospects many were keen to pursue vertical integration as it provided increased revenue, improved profit margins and the ability to control one’s destiny.

On the face of it this seems logical. But here we are nine months later and what was thought to be a blessing is turning out to be a curse. Vertical integration is a complex and costly business strategy and entrepreneurs have consistently underestimated the requirements to succeed, particularly in an industry built on the shifting sands of regulation. At the center of this predicament lie two interrelated concepts: Domain Expertise and Scale.

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Driving Scale in Cannabis the Silicon Valley Way

In today’s CA cannabis market everyone is scaling up as fast as possible. Licenses are being acquired, grows are being built out, manufacturing and distribution are being ramped up. Virtually every cannabis company is raising capital to pursue the opportunity and become the market leader.

In fact, there are several races going on. There are the large, vertically integrated companies trying to get really big (e.g. Cannacraft, Indus, Grupo Flor, Canndescent, Flowcana). Then there are a number of vertical markets where companies are battling for market share in their specific category: Distribution, Edibles, Craft, Carts and everything else for that matter.

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The Anatomy of a Canadian Acquisition – What’s the deal?

There has been a flurry of M&A activity in California from North of the Border in the first six months of 2018. Companies such as CannaRoyalty (4 deals), Nutritional High (2) and High Hampton (2) lead a group of over 15 companies currently hunting in CA. There is a lot of curiosity about the construct of these deals and what they mean so let’s try to clear up some of the misinformation.

One narrative being promoted by some suggests that Canada has boatloads of cash and is using it to buy companies here in CA. But the actual facts suggest otherwise. Let’s first look at the transactions closed or pending with CannaRoyalty, who has announced four deals since Jan 1.

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KO Acquisitions

Cannabis Valuations: Canada & California  – A practical guide to establishing valuation

Over the last 12 months one of the most frequent questions we get at Bowman/Hanson is; why are the Canadian companies valued so high? The follow up question is “since there are very few industry “comps”, isn’t it reasonable to apply Canadian valuations to my US cannabis business?”

This document is designed to shed some light into the factors that go into establishing valuation for cannabis companies and provide some practical advice for dealing with the growing number of Canadian companies looking to acquire in California.

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