The market for Michigan dispensaries has been incredibly cyclical. In 2018 and early 2019, dispensaries would essentially sell themselves. As a Michigan cannabis real estate broker, I have worked on deals on the seller side where I was shocked to discover that anyone would agree to pay that amount. Many 8 Mile dispensaries were seeing eight figure offers. Many of these same dispensaries are now receiving offers at a fraction of what they were receiving in 2018. So, what drives the valuation of these dispensaries?

This article will go over many of the factors aside from general location that affect the overall sale price, as well as some data-based tips to best position your dispensary on the cannabis real estate market, whether it is an MMFLA provisioning center, legal MRTMA retailer, or both.

Timing

One of the most overlooked factors affecting the final sale price of dispensary listings in the Michigan cannabis real estate industry is timing. While the dispensary market in 2018 and early 2019 was hot and will heat back up in the future, market data from late 2019 and 2020 shows that sale practically ground to a halt.

Many of the big companies that were driving up the purchase price of state dispensary listings stopped buying, and this caused the prices to fall off a cliff. Fortunately, the market has picked back up, as many of the larger Michigan vertical companies are buying once again, and out-of-state MSOs are beginning to discover the largely untapped Michigan market.

But timing your sale can also be important with respect to your specific municipality and location. Using the Detroit 8 Mile dispensary listings as an example, once the cities of Ferndale, Hazel Park and Centerline came fully online, the appeal of 8 Mile dispensaries and other cannabis businesses for sale in Detroit dropped. Many of the customers coming from the northern suburbs found it easier to go to Ferndale or Hazel Park after they'd approved green zone operations, rather than drive the extra couple of miles to Detroit; which was further magnified by Detroit’s botched first recreational roll out.

Of course, this very well may happen again. The appeal of Ferndale dispensaries is likely to drop with Madison Heights coming online and with Royal Oak and Berkeley not far behind, assuming litigation doesn’t tie up those cities for too long. The same can be said for many areas throughout Michigan. As another example, River Rouge area dispensaries are likely to have their sales cannibalized once Lincoln Park and Ecorse dispensaries open up to recreational marijuana.

What this means is that you must know the market to decide when the best time is to sell. If you are in a city and doing great numbers but know many neighboring cities that you draw customers from are on the verge of granting new licenses or passing an MMFLA or MRTMA ordinance, then you may want to think about selling before that happens.

If you wait too long, and those new dispensaries start cannibalizing your business, then you may end up getting a purchase price substantially less than what you would have gotten if you’d listed your dispensary for sale before the city accepted those licenses or ordinances.

As with most things in life, timing is key; this is the same for the cannabis real estate industry, yet it is one of the most overlooked factors in determining the price you will get for your dispensary.

Revenue and EBIDTA

In the public markets, cannabis companies tend to be valued based on revenue or occasionally EBIDTA (i.e. Earnings Before Interest, Depreciation, Taxation and Amortization), but not profits. As a matter of fact, we find many public cannabis business do not actually make a profit, with a handful of exceptions. What this means is that these companies, and many larger private companies, value dispensaries strictly on revenue or sometimes EBIDTA multiples. Some of the more sophisticated business players will also look at EBIDTA margin, but not all do. Thus, when deciding to sell your dispensary, you want find out how to be showing as high sales number as possible.

There are many ways to drive additional revenue as a cannabis business as well as increase total EBIDTA, including those that do not eat into your margins. At Michigan Cannabis Properties, we work with data driven consultants that can come in and drive additional revenue to your dispensary in anticipation of eventually selling your dispensary.

In certain circumstances, they may even do it free of charge to you since we can sometimes negotiate arrangements where we pay them directly through MCP as they help drive a higher sales price, which in turn means my company gets a bigger commission.

Without disclosing all of the tricks of the trade, the data reflects that one key item is to bring in strong brands that have been proven to drive business sales, such as MKX or Platinum Vapes, as well as specialty products that excite consumers. Since the consultants we work with tend to do a lot of business with the bigger Michigan cannabis brands, oftentimes we find that they can help negotiate lower wholesale prices for these products, which can improve both revenue and margin.

Another way to do this is by marketing, though I’m sure this isn’t new news to most dispensary owners. However, finding the best bang for your buck when it comes to marketing your business does require a mixture of the right knowledge and legal experience.

Billboards and Weedmaps can be good tools, but there are others at your disposal as well. I’ve been approached by radio stations that have recently begun to open up to advertising cannabis business and brands, with a few odd restrictions (such as not mentioning the word “THC”), but there are other avenues for marketing other than billboards and Weedmaps.

Here, a quick word to the wise: you need to be VERY careful with text message marketing of both medical and recreational marijuana. Several Michigan dispensaries have been sued for sending out text messages under the TCPA. Don’t be one of them.

Operating v. Non-Operating

Operating dispensaries tend to garner a higher sales price in the Michigan cannabis real estate industry, but I’ve seen at least one situation where a plan to open up actually hurt the overall sales price instead of boosting it. The thing is, when a dispensary is pre-operational, valuation becomes much more subjective.

A great location can attract a lot of interest, with groups doing their best to estimate their sales at that location and basing their offer on those estimations. Groups will make offers based off the potential of the listings' location, as there is no revenue or EBIDTA data that can be used when there is no revenue.

However, if you have a solid location, open up, and are underperforming and not doing solid numbers, then you may see the value of your dispensary drop. This was the case on business sale I worked on, where a group had a very strong location in a fairly well populated metropolitan area.

Having looked at demographics and traffic pattern data, I estimated the location would sell for about $3M to $3.5M on the Michigan cannabis real estate market. However, when it was open, the revenue numbers were rather dismal as the partners seemed to have opened it just for the sake of opening, without making much of an attempt to market or proactively drive sales.

Once put on the open market, the offers came in around $2.5M to $3M, despite the fact the company had spent a couple hundred grand extra on inventory and other items. In this situation, the company actually spent more money to make less money on the sale.

The lesson here, for dispensary owners and cannabis real estate brokers alike, is that if you plan to open your dispensary in order to make it more attractive to sell, don’t do it half-assed. If you do, you may have been much better off just selling before opening, as you may have gotten a higher sale price with less investment and less hassle.

“Terms”—i.e., Seller Financing

Land contracts and mortgages back to the seller are shockingly common in the Michigan cannabis industry. Many groups new to the cannabis real estate industry in Michigan are surprised to learn that the data reflects more seller financed deals than traditional purchases. Usually, seller financing is a verified win-win for both buyers and seller.

For dispensary buyers, seller financing can save a lot of up-front money, which can instead be used to build out the inventory and stock shelves. Not only that, but the interest rates offered by sellers tend to be a lot less than the interest rates offered by private lenders in the industry, which currently hover around 12%.

For sellers, land contracts and other seller financing structures usually means a higher overall purchase price, as well as interest rates that provide a relatively attractive return compared to other ways to park your money. With savings accounts yielding less than 1%, getting a higher purchase price along with a 6% interest rate of return can be very attractive.

As an example, we were working on a deal where the cash out price was $850,000, and the seller financed price was $1M, with about 30% down, a three year “carry” at 7% interest rate, and final balloon payment at the end of the three-year term. When you work out the numbers, the seller would have received closer to $1.15M, or an extra $300,000, with seller financing. Put another way, that’s about 35% more money in the seller’s pocket compared to a straight cash out offer. The buyer, on the other hand, saved half a million in upfront costs, which they could use to fully stock the inventory and for working capital.

While seller financing is not for everyone—and sellers need to make sure they have well drafted legal documents protecting their interests—it can be a good strategy to get a higher sales price. Not only that, but you can draft the purchase and sale documents such that you are not only OK if the buyer stops making payments, but you actually may hope they do as you can take back your property, keep the money they’ve already paid, and sell it again! Not a bad deal if you ask me.

Medical v. Recreational

Another consideration when valuing a dispensary is whether the dispensary is medical—i.e. operating under the MMFLA; recreational or adult use—i.e. operating under the MRTMA; or both. While this can be important, it doesn’t really have as much relevance as some may think as the numbers really determine the value on the cannabis real estate market.

Having said that, when representing buyers, this is generally one of the first questions they ask. On the buy side, one thing we look for is a medical dispensary doing good numbers under medical in an area we know is about to opt-in to adult use. This represents the best value on the buy side as we can buy based off lower medical numbers, knowing we will have a big boost once the municipality establishes recreational green zoning.

Conversely, if you are looking to sell, you probably want to wait until after your municipality has verified its decision to opt-in to adult-use as that will boost your revenue and EBIDTA, which in turn will lead to a higher purchase price.

Of course, not everything is as clear cut as the above example given the wide variance of municipal restrictions on the cannabis real estate industry. Take the city of Detroit, which unsuccessfully tried to opt-in a few months ago with an adult-use ordinance with certain provisions that certainly seemed to be unconstitutional, along with a poison pill that threw out the entire ordinance if any provision was found unlawful.

We know Detroit is looking to go adult-use, but the city can’t seem to get out of its own way. Detroit may not see its first recreational dispensary until 2022 or possibly later. Does a dispensary owner wait a year or more with the hope they can see a large sales boost once the city goes adult-use? Unfortunately, there are no clear answers here, as the city may not even grant adult-use licenses to all the existing dispensaries and the timeline for the city licensing recreational dispensaries is unclear.

Conclusion

If you were to look just at data for comparable sales of dispensaries, it may be hard to make heads or tails out of the sales prices. Dispensaries in a seemingly better general location may have sold for less than dispensaries in worse locations, and vice versa.

However, there is a method to the madness, as certain Michigan dispensaries knew how to best position themselves for eventual sale, or best structure the sale, while many others do not. If you are looking to sell your dispensary, give the experts at Michigan Cannabis Properties a call to set up a free consultation. We can help you receive top dollar for your Michigan dispensary property.

How to Sell Your Dispensary for Top Dollar