Cannabis Valuation Techniques: 2026 Update on Rescheduling, Banking Reform and Market Challenges

The cannabis industry is entering a transformative phase following President Donald Trump’s December 18, 2025, executive order directing the rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act. This move signals a major shift in federal policy, creating significant opportunities for operators and investors while introducing new complexities. Rescheduling has the potential to reshape cannabis tax planning, financing options and business valuations, particularly through the anticipated elimination of IRC 280E and improved access to capital. At the same time, these changes bring heightened regulatory considerations and strategic challenges that require careful planning and expert guidance.

On December 18, 2025, President Trump issued an executive order instructing the Attorney General to expedite moving cannabis from Schedule I to Schedule III under the Controlled Substances Act. Rescheduling will recognize cannabis as having accepted medical use and a lower potential for abuse than Schedule I substances. Once finalized through DEA rulemaking, this change will remove the application of 280E, allowing cannabis businesses to deduct ordinary expenses and improve after-tax cash flow.

However, rescheduling is not deregulation. It does not:

Despite these positive developments, cannabis valuations remain complex. Key challenges include:

These factors make historical performance less reliable and highlight the need for robust forecasting.

Compliance requirements differ significantly across jurisdictions, and pending federal changes add uncertainty. Valuation professionals must thoroughly assess industry and company-specific risks, often applying higher discount rates than in more established industries.

The DEA’s reclassification of cannabis as Schedule III is a significant development. Once effective, this change will eliminate Section 280E restrictions, allowing cannabis businesses to deduct ordinary expenses and improve after-tax cash flows. Increased liquidity may enable operators to reinvest in growth or pursue strategic acquisitions. Stronger cash flows can also support higher valuation multiples as companies demonstrate scalable operations and improved profitability.

Rescheduling also reduces perceived regulatory risk, which may lead to broader banking access and credit facilities. Lower borrowing costs reduce the cost of capital and can boost valuations. Enhanced financial flexibility and stronger cash flows make cannabis businesses more attractive acquisition targets, supporting increased M&A activity. Public markets have already responded, with cannabis stocks rising after the December 18 announcement, and then adjusting as investors considered timing and implementation risks. Legal challenges to the rescheduling process are expected, and the exact effective date remains uncertain.

Despite industry-specific nuances, the three primary valuation approaches remain essential. That includes the income approach, market approach and cost approach.

The income approach values a business based on its expected future cash flows. The capitalization of earnings method uses historical cash flows to estimate future performance, while the discounted cash flow (DCF) method projects future cash flows directly. Due to the high volatility of historical cash flows in the cannabis industry, the DCF method is typically preferred.

Forecasting income statements for cannabis businesses requires consideration of several unique factors. For retail stores, estimate the number of stores in the area and their expected sales. For cultivators, key elements include growing space, yield per square foot and product mix. Since cannabis businesses cannot operate across state lines, forecasts must reflect state-specific pricing and margins. The number of licenses in the area is also important. Higher growth expectations may be included in projections due to the positive effects of rescheduling.

Tax assumptions are critical when performing a DCF analysis for cannabis businesses. With anticipated rescheduling and the removal of 280E, projected cash flows should reflect a higher likelihood of periods without 280E restrictions and normalized tax treatment. Net operating losses (NOLs) should also be considered. An NOL occurs when a company’s allowable tax deductions exceed its taxable income in a tax period. This loss can offset taxable income in other periods, reducing future tax liabilities.

The market approach values a business based on the prices at which comparable businesses are purchased.

The Guideline Public Company (GPC) method uses pricing multiples from publicly traded companies to value closely held companies. Several publicly traded cannabis companies are available for comparison. When selecting a multiple, analysts should consider the size, profitability, leverage, liquidity, and growth of the subject company relative to the GPCs, as well as the states in which the GPCs operate, since markets can differ significantly across states.

The Guideline Merged and Acquired Company (GMAC) method is a valuation approach that estimates a company’s value by analyzing the prices at which similar companies have been merged or acquired. Similar to the GPC method, the valuation analyst should compare the target of the transaction to the subject company to select an appropriate multiple. There are several sources of transaction databases. Viridian Capital Advisors’ “Cannabis Deal Tracker” provides valuable data on deal activity, enabling the identification of relevant benchmarks and assessment of market conditions. Transaction multiples established before President Trump’s executive order should be carefully reviewed and may require adjustment or reduced weighting, given the significant valuation impact expected from the elimination of 280E and related regulatory changes.

The cost approach is generally not used unless the value of future income streams is expected to exceed the adjusted net book value at the valuation date. This method does not capture the value of intangible assets such as brand recognition, licenses, and customer relationships. However, it may be appropriate to value cultivation facilities given their significant fixed asset investments.

As the cannabis industry enters this new era shaped by the executive order to reschedule cannabis from Schedule I to Schedule III, operators and investors face both unprecedented opportunity and growing complexity. Although rescheduling marks a meaningful shift in federal policy, it is not synonymous with full legalization or deregulation, and businesses must remain vigilant as they navigate evolving federal and state frameworks. This transition underscores the need for thoughtful planning, expert valuation analysis and proactive risk management as the industry adapts to a rapidly changing landscape.