How Valuation Influences Mergers and Acquisitions

I spoke with the head of a very large multi-state operator this week about what they're seeing in the market. Wanted to share some insights around valuations that I believe every operator needs to hear when thinking about a sale or future exit. The M&A environment right now? • Very risk-off. • Buyers are no longer rolling the dice on upside. • They’re focused on fundamentals—especially cash flow after taxes. But here’s the disconnect I keep seeing in various markets: 💡 Everyone’s talking EBITDA multiples... And they shouldn't be! Because: EBITDA before tax is irrelevant in cannabis—especially under 280E. Let’s break this down: Large acquirers (like MSOs) are taxed on gross profit, not EBITDA. So when a business says, “We’re running at 30% EBITDA margin”—that doesn’t mean much in reality. The real question: What’s left AFTER tax? Unless there’s a well-structured workaround in place (which is rare), most operators are going to get hit hard on what's left. And many of these founders? 👉 They’re only now filing their first returns. 👉 They haven’t yet experienced the reality of 280E. 👉 They’re using pre-tax numbers to justify post-tax valuations. That's where deals fall apart. • Buyers are underwriting based on after-tax cash flow. • Sellers are anchored to pre-tax expectations. And unless someone bridges that gap with truth and clarity, the deal dies. So if you're a founder thinking about selling—or a buyer analyzing deals—this is your reminder: 📉 Always look at cannabis deals through a post-280E lens. 📈 It's the only way to accurately assess value in this market. I’m deep in these conversations right now. If you're navigating the M&A landscape in NJ or OH or IL—or anywhere for that matter—let’s talk. 😊

In M&A, buyers are underwriting 𝙧𝙞𝙨𝙠 — and the more confidence they have in the fundamentals, the more they’re willing to pay. This means the 𝘲𝘶𝘢𝘭𝘪𝘵𝘺 of the earnings and the 𝘴𝘵𝘢𝘣𝘪𝘭𝘪𝘵𝘺 of the business are key. Here’s a snapshot of what can drive premium valuations: ➡️ 𝗛𝗶𝗴𝗵 𝗿𝗲𝗰𝘂𝗿𝗿𝗶𝗻𝗴 𝗿𝗲𝘃𝗲𝗻𝘂𝗲 = predictable cash flow ➡️ 𝗟𝗼𝘄 𝗰𝘂𝘀𝘁𝗼𝗺𝗲𝗿 𝗰𝗼𝗻𝗰𝗲𝗻𝗿𝗲𝗮𝗿𝗶𝗼𝗻 = diversified risk ➡️ 𝗔 𝘀𝘁𝗿𝗼𝗻𝗴 𝘀𝗲𝗰𝗼𝗻𝗱 𝗹𝗮𝘆𝗲𝗿 𝗼𝗳 𝗹𝗲𝗮𝗱𝗲𝗿𝘀𝗵𝗶𝗽 = operational continuity ➡️ 𝗦𝘁𝗲𝗮𝗱𝘆, 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗹𝗲 𝗴𝗿𝗼𝘄𝘁𝗵 = consistency over time ➡️ 𝗦𝗰𝗮𝗹𝗮𝗯𝗹𝗲 𝘀𝘆𝘀𝘁𝗲𝗺𝘀 𝗮𝗻𝗱 𝗱𝗼𝗰𝘂𝗺𝗲𝗻𝘁𝗲𝗱 𝗽𝗿𝗼𝗰𝗲𝘀𝘀𝗲𝘀 = growth readiness ➡️ 𝗖𝗹𝗲𝗮𝗻, 𝗮𝗰𝗰𝘂𝗿𝗮𝘁𝗲 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹𝘀 (𝗶𝗱𝗲𝗮𝗹𝗹𝘆 𝗮𝘂𝗱𝗶𝘁𝗲𝗱) = trust ➡️ 𝗔 𝘁𝗵𝗼𝗿𝗼𝘂𝗴𝗵 𝗤𝘂𝗮𝗹𝗶𝘁𝘆 𝗼𝗳 𝗘𝗮𝗿𝗻𝗶𝗻𝗴𝘀 𝗿𝗲𝗽𝗼𝗿𝘁 = credible numbers These elements don’t just reduce perceived risk, they change how buyers 𝘧𝘳𝘢𝘮𝘦 the opportunity. Sellers focused solely on top-line growth, or even EBITDA, often leave money on the table. Two businesses can post similar financials, but command very different valuations. Why? Because buyers don’t just price performance. They price 𝘤𝘰𝘯𝘧𝘪𝘥𝘦𝘯𝘤𝘦 in the numbers, in the team, in the systems, and in the path forward. It’s why the so-called “country club” valuation rarely holds up. Just because two companies operate in the same industry with comparable revenue or EBITDA doesn’t mean they’re viewed the same by buyers. The difference is in the details, and the sellers who understand that are the ones who maximize value. #mergersandacquisitions #Investmentbanking #exitplanning

How do you value an M&A target in the face of economic uncertainty? It's probably no surprise to anyone that compared to the past 3-4 years, valuing businesses over the past quarter has been more challenging because of macroeconomic uncertainty. Getting to one right answer is never easy... but there are strategies that acquirers can use to make an educated decision and to put some guardrails around the risk due to a lack of predictability. When working with clients, here are the top six things we’ve focused on to factor uncertainty into business valuations. 1️⃣ 𝗗𝗶𝘀𝗰𝗼𝘂𝗻𝘁𝗲𝗱 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗗𝗖𝗙) 𝘄𝗶𝘁𝗵 𝗦𝗲𝗻𝘀𝗶𝘁𝗶𝘃𝗶𝘁𝘆 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀: DCF is a common valuation method that estimates the present value of a company's future cash flows. We add sensitivity analyses by adjusting key assumptions (e.g., growth rates, discount rates) to understand the impact on valuation under different scenarios. 2️⃣ 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀: Develop multiple scenarios based on different market conditions and economic outlooks. This involves creating optimistic, pessimistic, and base-case scenarios to assess how variations in external factors might affect the business's value. We also build in probability-weighted valuations that consider the likelihood of different outcomes 3️⃣ 𝗖𝗼𝗺𝗽𝗮𝗿𝗮𝗯𝗹𝗲 𝗧𝗿𝗮𝗻𝘀𝗮𝗰𝘁𝗶𝗼𝗻𝘀 𝗼𝗿 𝗖𝗼𝗺𝗽𝗮𝗻𝘆 𝗔𝗻𝗮𝗹𝘆𝘀𝗶𝘀 𝘄𝗶𝘁𝗵 𝗔𝗱𝗷𝘂𝘀𝘁𝗺𝗲𝗻𝘁𝘀: Use comparable company analysis, but are cautious about blindly applying industry multiples. We adjust the multiples based on the specific risk profile and performance of the target company relative to its peers. This can provide a more tailored valuation that accounts for the uncertainty. 4️⃣ 𝗘𝘅𝗽𝗲𝗿𝘁 𝗢𝗽𝗶𝗻𝗶𝗼𝗻𝘀: We increasingly rely on advice from industry experts who may have insights into the specific challenges posed by the uncertain market conditions for the industry. Their perspectives can complement quantitative analyses. 5️⃣ 𝗙𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆 𝗶𝗻 𝗗𝗲𝗮𝗹 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲𝘀: Consider flexible deal structures (e.g. earnouts) that are contingent on future performance or specific milestones. This can help mitigate risks for both the buyer and the seller in uncertain environments. 6️⃣ 𝗖𝗼𝗺𝗺𝘂𝗻𝗶𝗰𝗮𝘁𝗶𝗼𝗻: Communication and sponsor buy-offs are crucial. We clearly articulate the assumptions made in the valuation and the rationale behind them and ensure that the business sponsor for the deal is supportive of the assumptions made. -- Comment below with questions or reactions. Reach out for help with M&A. #mergersandacquisitions