Marijuana Business Magazine November-December 2019

I know you have been discussing the importance of earnouts recently. Can you sum up why these are particularly relevant in the cannabis industry? Hemp and marijuana are high-growth sectors, and they will be for some time to come. A hemp or marijuana company may show great promise yet be losing money—or at least not be showing a meaningful profit. Owners of such companies are reluctant to value the company for investment or acquisition based on historical EBITDA, or trailing 12-month (TTM) EBITDA, or even current EBITDA. They want them valued on future EBITDA, as yet unrealized, whereas an acquirer or investor wants the value pegged more closely to current performance. That tension—high-value expectation of the owners with lower ones from the investor/acquirer—can be managed with an earnout, which is a risk-allocation vehicle. A certain percentage of the deal value can be paid at deal’s close with tranches paid over future time for incremental EBITDA as it is achieved. This is typical for high-growth companies. Are you seeing cannabis business owners with unrealistic valuation expectations? Yes, occasionally. One of the first questions we ask when we engage a prospect is: “Have you thought of what range of value you’d like to get?” If it’s unrealistically in the stratosphere, we will defer working with them. The reason is that, after the hype burns off, hemp and marijuana companies are subject to the same vagaries of any other businesses. The same performance principles apply no matter what you’re selling. Generate a solid top line, control your operating expenses, watch your gross profit margin and drive toward EBITDA. That’s what generates value, and that’s the same advice we would give to a company inside or outside the cannabis industry. This interview has been edited for length and clarity. John D. Wagner is a regular contributor to Investor Intelligence, Marijuana Business Daily ’s premium subscription service targeting investors. Learn more at mjbizdaily.com/investing.