State of the Market - Retail Sept 2017

WEDNESDAY, September 27, 2017

Hello and welcome to theBlunt

State of the Market. What’s up with Washington Cannabusiness and Licenses?  Retail Edition, part 2.

As the leaders in Washington CannaBusinesses and Licenses, we are noticing some trends that you should be aware of.  If you missed our segment on producers and processors, check out the previous edition in our series.

So, what’s going on with retail license prices? 

Well, a lot of things as the market tightens. 

First, we would like to point out that as of the time of this writing (September 8, 2017), there are 500 retail licenses issued, out of the 556 that will be allowed in Washington State.  That means 90% of the people are in place, and the other licenses are in the works.  Of these 500 licenses, there are 441 that are active but only 385 have reported income.  That means, less than 70% of the total licenses actually have their doors open and operating in Washington today.

Now, let’s look at a main issue that is impacting sales.  Previously, retail owners could hold up to 3 licenses.  This has now increased to up to 5 licenses.

At first, we thought that there would be a frenzy to scoop up more spots.  But what has this recent change really done to retail license values? 

Well, surprisingly not as much as the sellers were hoping for. 

Never fear, retail buyers are still shopping for stores… just not in the madness we saw at the start.

Here is our understanding of why.

I think we can all agree that the “large” retailers are already playing the game by using others as a place holder for multiple licenses.  Since the retailers could only hold 3 licenses themselves, as a work around they brought in their friends or family or whoever would act as the “owner” and still be a part of their group.  A lot of this is all unofficial, of course.  It is rare that a written agreement comes with this set-up, since the state doesn’t allow it in the first place for retailers to ban together like that.  However, as the market matures, that is changing.  What the state does allow are service agreements or employment agencies or other avenues that you need an experienced attorney to help you draft so your business stays in business. 

With this “work around” already in place, we didn’t see a huge rush to “grab” more retail licenses like many people expected.  There are certainly acquisitions taking place… but there have been since the beginning and those will continue. 

However, what this change did spur are more inquiries from the “mom and pop” type store owner.  Maybe that owner has their 3 stores, but they have stayed fairly local to their home town and haven’t necessarily expanded.  This new rule has sparked some interest from the bigger players too, but not as much as we had anticipated.

Regardless of who is shopping today, do you know what all these buyers have in common?  They have a better understanding of the true costs involved with operating a retail location.  That was missing at the start of this game.  You have to remember that roughly half of the retail dollars go to taxes.  That is a big chunk to take off the top, for any business.

With more educated buyers entering the market for cannabis retail stores, the license and business prices are impacted. 

Personally, I think it’s a good thing.  We have gone from the “green rush” of totally inflated and uninformed prices to something that is more sustainable over time.  That can only benefit the stability of our market in the future.

With all this in mind, where is the market at?  Well, sellers still want their pie in the sky prices.  They are misled about today’s values because they saw a license for 2015 sell for multi-millions of dollars with just a piece of paper.  Buyers just won’t go there today, unless it makes financial sense.  So, there is a lot of talking and it takes a while both parties to come to the table.  The buyers who are coming forward are now analyzing cash flows with sales, overhead, operating expenses, and taxes.  If your business books don’t look good on paper, it hurts your overall value.  That is business 101, so this shouldn’t be a surprise.

For a well-placed and well managed retail store, those are still profitable.  However, buyers are considering other impacts as well.  Between the Washington State regulations, our current federal administration, and the fact that there are other opportunities around not only the United States but also the world, buyers are more cautious than previously.

So, what is a retail license worth today?  Well, the only consistent answer we can give is “it depends”. 

It depends on the location, the cost for the space, the actual sales, the overhead and employees, the status of the license and whether there are violations, and a whole lot more. 

Since there are only 10% of the licenses remaining to be issued, we are seeing some other trends too.  With a license that is truly just a piece of paper and needs to relocate, we see those starting around $300k.  Your spaces left are so limited, that a lot of them barely make sense to try and open a store in, in the first place.

Then, there are a few licenses with locations on the market, but in a spot where the doors can’t open.  Those licenses that are in limbo are also around the $300-$500k range for a general price point, but that comes with a lot of “what if’s”.  What if the license is moving to a new spot.  What if the local jurisdiction is in the process of rezoning or lifting a ban.  What if the buyer needs to sue to city to get their license active.  What if, what if, what if.

The true value of the license and business is dependent on a variety of items.  Everything from the jurisdiction, visibility of the store, quality of the construction and build out, and so much more. 

However, the one thing we can say is that if you want to scoot back and take a 30,000 foot view on pricing… it usually lands at half of the gross sales for a good year.  There are factors that will make it worth more such as whether you own the real estate, have competitors closing down that may spur more sales, or other things that impact your cash flow.  On the flip side, there are also factors that may make it worth less such as other stores opening in the area, changes in the jurisdiction, or if the store needs to relocate, just to name a few.

These numbers are from today for retail businesses, but markets cycle and do change over time.  Prices go up and prices come down, that is just the way it is.

If you need help buying or selling your Washington state cannabis opportunity, we know the market and can help you put your next deal together.  Or, if you already found your buyer and need help with the contracts, we have connections to good attorneys who can assist.  Give us a call at (206) 466-4020 or to discuss your situation and figure out what your best options really are.

Jennifer Hudson