Cannabis industry is going through a major transformation. Once fueled by aggressive growth strategies and high revenue expectations, the cannabis market has undergone a significant change. Investors are shifting away from using gross revenue to determine the value of an industry and instead focusing on EBITDA and EBIT.
This shift marks a maturation phase for the industry – one that prioritizes sustainable profitability over sales volume.
What is the new focus?
Cannabis companies grew at all cost for many years. They reported impressive numbers of revenue while burning through money. Market expansion, licensing acquisitions and aggressive M&A activity dominated headlines. As capital is drying up and the financial pressure has increased, businesses can’t ignore their bottom line.
Buyers of industry and investors now evaluate businesses on the basis of their cash-flow generation, rather than solely based upon impressive sales figures. Investors now demand profitability, not just market dominance. The trend isn’t limited to mature markets, such as California or Colorado.
Top-line growth is on the decline
Despite the fact that some companies still ride on top line-driven valuations this is a period of time quickly coming to an end. Companies that only rely on growing revenue and lack financial discipline face pressure from the tightening capital markets.
The final stretch is a crucial time for cannabis businesses. It is difficult for those who have relied solely on sales volume, without optimizing their operational efficiency, to find strategic or investment buyers. In the meantime, firms that are well managed and have a strong EBITDA performace will be the long-term winners in this space.
EBITDA: The key measure for the future
EBITDA and EBIT have been adopted as the industry’s new standard to measure financial health. Strong net margins demonstrate the ability of companies to optimize their supply chains and manage costs in an environment that is heavily regulated. The margins of companies with strong net margins will continue to suffer as the federal government continues its uncertain legalization process and prices pressures increase.
It is the new standard for cannabis. In the future, it will be impossible to value a store based on “how much money I’ve invested”, “my sales have been this high”, or “the potential of my business is massive”.
The conclusion of the article is:
In the cannabis industry, profitability is now more important than revenue. Investors and buyers are focusing more on EBITDA than top line revenue.
Companies who fail to adjust to the new reality will have a difficult time surviving, while companies with a focus on operational efficiency and fiscal discipline will see their industry grow. Operators should do all they can to remain above the water, before it’s too much and their business goes out of business or into receivership.
Green Life Business Group completed more than 300 cannabis transactions. There are currently over 200+ exclusive cannabis licenses on the market, including profitable cannabis businesses. Market Overview: What’s on Sale Today?