Cannabis Valuation Techniques: 2025 Update on Rescheduling, Banking Reform and Market Challenges

The cannabis industry is entering a transformative phase. With federal cannabis rescheduling gaining momentum and banking reform back in focus, operators and investors face both opportunity and complexity. These changes could reshape cannabis tax planning, financing options and business valuation. They also introduce new challenges that require expert guidance.

The Drug Enforcement Administration (DEA) is considering moving cannabis from Schedule I to Schedule III under the Controlled Substances Act. This would be a game-changer. The shift could eliminate the harsh Section 280E tax restrictions, allowing cannabis businesses to deduct ordinary expenses and significantly improve after-tax cash flows.

At the same time, the SAFER Banking Act continues to gain momentum and despite expiring last session, is widely expected to be reintroduced in Congress. If passed, it would open the door for financial institutions to serve cannabis businesses without fear of federal penalties. This means better access to credit, reduced reliance on cash and lower compliance risk, all factors that directly influence cannabis business valuation.

Despite positive momentum around cannabis rescheduling and banking reform, industry participants remain cautious due to repeated failures of similar legislation in prior sessions. However, optimism has grown with President Donald Trump’s explicit endorsement of the SAFER Banking Act and his commitment to work with Congress on common-sense cannabis banking solutions. His support, coupled with backing for federal rescheduling, signals a potential shift in the political landscape that could improve the bill’s chances of passage, though timing and legislative priorities remain uncertain.

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

These dynamics make historical performance less reliable, reinforcing the need for robust forecasting.

Compliance requirements vary widely across jurisdictions, and pending federal changes add uncertainty. For valuation professionals, this requires a thorough assessment of industry and company-specific risks and often the application of elevated discount rates compared to more established industries.

Despite industry-specific nuances, the three primary valuation approaches remain essential.

The income approach is predicated upon the value of the future cash flows that a business will generate over its remaining useful life. The capitalization of earnings method relies on historical cash flows to estimate future cash flows, while the discounted cash flow (DCF) method involves a projection of the cash flows that the business is expected to generate. Typically, the DCF method is used to value a cannabis business due to the high volatility of historical cash flows.

Creating an income statement forecast for a cannabis business involves considering several unique factors. For retail stores, it’s important to estimate the number of stores in the area and their expected sales. For cultivators, key elements include the square footage of growing space, yield per square foot, and the product mix. Additionally, since cannabis businesses cannot operate across state lines, the forecast must account for the specific pricing and margins in each state. The number of licenses in the area is also a crucial factor.

When conducting a DCF analysis for the cannabis industry, tax considerations are particularly important. Section 280E of the Internal Revenue Code prohibits businesses from deducting expenses related to federally illegal substances, such as cannabis. This section only permits the deduction of the cost of goods sold and disallows deductions for operating expenses when calculating federal taxes. Some states, such as California, have decoupled from Section 280E of the Internal Revenue Code. This allows cannabis businesses to deduct ordinary business expenses that are disallowed under federal law due to Section 280E. As discussed above, the potential rescheduling of cannabis could eliminate Section 280E, but it remains uncertain when this change might happen. Net operating losses (NOLs) should also be considered. An NOL occurs when a company’s allowable tax deductions exceed its taxable income within a tax period. This loss can be used to offset taxable income in other tax periods, providing tax relief by reducing future tax liabilities.

Under the market approach, the value of a business reflects the price at which comparable businesses are purchased.

The Guideline Public Company (GPC) method of valuation is based on the premise that pricing multiples of publicly traded companies can be used as a tool for valuing closely held companies. There are several publicly traded cannabis companies. When selecting a multiple, the valuation analyst should consider the size, profitability, leverage, liquidity and growth of the subject company compared to the GPCs. The valuation analyst should consider the state or states the GPCs operates in, as the market can differ substantially between states.

The Guideline Merged and Acquired Company (GMAC) method is a valuation approach used to estimate the value of a company 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.

This method would likely not be used in most circumstances, especially if the value of future income streams is expected to exceed the adjusted net book value at the valuation date. The cost approach would fail to capture the value of intangible assets, such as brand recognition, licenses and customer relationships. The cost approach might be used to value cultivation facilities due to the high level of fixed asset investments.