A Roadmap to Success: M&A and Capital Strategies for Cannabis Businesses

The cannabis industry continues evolving at a breakneck pace, presenting challenges and opportunities for businesses seeking growth, investment and strategic exits. Let’s discuss the critical factors shaping the cannabis capital markets – and strategies companies can leverage to thrive. 

The cannabis industry is experiencing a significant transformation in its capital markets. Despite challenges in recent years, 2024 saw a marked uptick in capital availability. Equity and debt capital flow into cannabis businesses has nearly doubled, with an average deal size of $20.4 million—a 50% increase from 2023.

While this growth signals a positive shift, nuanced dynamics are at play. Debt capital continues to dominate, with refinancing accounting for 90% of the activity. This trend reflects the industry’s need to manage a looming “debt cliff” as companies restructure to extend maturity dates into 2026. Meanwhile, equity investment, a long-term growth driver, has also rebounded – signaling renewed confidence among investors.

The cannabis mergers and acquisitions (M&A) landscape is shifting towards strategic consolidation. Gone are the days of indiscriminate acquisitions. Buyers are now highly selective, focusing on accretive deals that enhance profitability and align with their strategic objectives. Public companies increasingly target private, single-state operators (SSOs) with established business models, proven profitability and strong brand presence.

For sellers, preparation is vital. Comprehensive evaluations and data on comparable deals provide a competitive edge in negotiations. Successful transactions often involve complex deal structures, including cash, stock, seller’s notes and earn-outs. A strategic, data-driven approach helps sellers maximize returns while navigating these complexities.  Sell-side Quality of Earnings reports have gained popularity in recent years. These analyses provide valuable insights into the business prior to going to market and can add value to sellers by way of increased deal value, increased credibility for the seller, and efficiency in the closing process. Aligning with the right advisors can be a critical step in effective M&A strategy.

Regulatory reform remains a key variable influencing the cannabis industry’s trajectory. The rescheduling of cannabis, the elimination of Section 280E tax burdens, and the passage of the SAFE Banking Act are game-changers. These reforms would lower the weighted average cost of capital by 25–30%, making debt and equity more accessible and affordable.

While full federal legalization remains a distant goal due to the complexities of regulatory alignment across agencies, rescheduling and banking reforms are critical first steps. Such changes would catalyze higher valuations, increased capital flows and robust M&A activity, positioning the industry for sustained growth.

States with well-established cannabis markets offer valuable lessons for operators nationwide. Markets like California and Colorado have demonstrated the importance of adaptability in the face of price compression and market saturation. Strategies such as reducing production costs, maintaining solid margins and focusing on branded product offerings have proven effective.

For struggling operators, reinvention is essential. Licensing intellectual property (IP), developing white-label products and exploring roll-up strategies within states are potential avenues to achieve profitability and attract investment. As the industry undergoes a “natural cleansing process,” only the strongest, most adaptable businesses will thrive.

The cannabis industry is at an inflection point. Capital markets are rebounding, and strategic M&A opportunities are on the rise. However, success hinges on preparation, adaptability and understanding of market dynamics. By leveraging expert insights and embracing innovation, cannabis businesses can position themselves to unlock significant opportunities in the years ahead. The future of cannabis is promising, but success will belong to those who act decisively and strategically.

Authors: Steven Monacelli, CPA, Partner and Team Lead, Cannabis Services | [email protected] and John Schrumpf, CPA | [email protected]