10 Factors That Affect The Value Of A Cannabis Entity

There are approximately thirteen states that have legalized recreational use of cannabis. There are an additional twenty-two states which have legalized cannabis for medical use. Since cannabis is still illegal federally, the challenges of valuing these entities is challenging. Here are ten factors that affect the value of a cannabis entity. 

1. Section 280E of the Internal Revenue Code-Section 280E was introduced in the U.S. tax code in 1982 when a business engaged in illegal drug trafficking attempted to deduct ordinary business expenses on a tax return. Under Section 280E any business engaged in illegal substances can only deduct the cost of goods sold and not ordinary business expenses. This means that expenses such as rent, utilities, wages that are not related to cost of goods sold. This results in a significant impact on profit margin.
2. Branding-Companies that have a strong position in the market on their brand will have higher valuations.
3. Consistent earnings-Companies that have strong and consistent earnings and revenues will be less risky and result in higher valuation. Strong forecasts of consistent revenues and earnings for start up entities will result in higher values.
4. Innovation-Companies that can adjust to customer demands and continue to adapt to customer demand and preferences will generate consistent customer satisfaction and will result in higher values.
5. Compliance-The cannabis industry is highly regulated. The companies that adhere to these regulations and compliance will result in higher values.
6. Geographic presence-Like many other businesses being in areas where demand is high and it is socially acceptable will be valuable for the business.
7. Collaboration-There are vendors, suppliers and consultants who are specialized in the cannabis industry. Working with these specialists allows the cannabis business to be more efficient and results in higher profits and value to the company.
8. Production and supply management-For companies that manufacture cannabis products, efficient production strategy and supply chain management are important for cost efficiencies and higher profits and value.
9. Public Perception-Investor sentiment including favorable industry outlook, media coverage and public support go a long way to adding value to a cannabis business.
10. Team-having a strong management team with experience and a strong track goes a long way to the value of the business.

Though the cannabis industry is ever growing, many of the factors that increase value are concepts that have been around a long time. The tax consequences of Section 280E make many of these concepts even more crucial to establishing a strong valuable business.