For the past three to four years, the cannabis industry has experienced an unprecedented and steadily declining access to capital, resulting in slower-than-expected growth in new markets and a significant number of companies closing. The prevailing theory, time-tested and applicable to most any other industry, is the only way to survive in a competitive, capital-starved market is to become a smaller part of a larger business through consolidation.
But even that has proved challenging given the lack of available capital. In May, Viridian Capital Advisors reported a sharp decrease in both the number and value of mergers and acquisitions (M&A): thirty-seven M&A transactions with a disclosed value of $256.77 million in 2024, versus sixty-six deals with a total value of $1.13 billion during the same period in 2023. According to Viridian, “M&A is off to the lowest start of the past six years.”
In late 2024 or early 2025, rescheduling is expected to be a major turning point for the industry. Moving the plant from Schedule I to Schedule III under the Controlled Substances Act would eliminate federal tax strictures imposed by Internal Revenue Code Section 280E, potentially freeing up several billion dollars in operating capital and spurring growth as well as M&A activity. Time will tell, but the elimination of 280E would have a dramatic impact on both the amount of new capital and investors’ willingness to embrace the industry. In a recent report from Canaccord Genuity Group, an investment analyst stated, “We note that in 2023, the federal government received [about] $2.0 billion worth of tax installments from legal [United States] operators—with many of the leading [multistate operators] estimating the removal of 280E would result in a $100-million-plus bump to [their] overall free-cash-flow profile.”
Seth Yakatan, founder of Katan Associates International and a longtime consultant who helps companies attract investors and capital, is an outlier. He’s not convinced rescheduling will be the panacea many anticipate, primarily because state and local regulations will continue to be problematic.
“I am hopeful that [rescheduling] occurs and you have a kind of euphoria and ticker tapes and all the things people are expecting,” he said. “But remember, cannabis is really, really, really hard, and it’s hyper-regionally focused. I think some municipalities and states are just set up to not benefit the companies. In smaller regional areas, it’s just very difficult for a retailer to exist. So I don’t think it’s going to be the groundswell of euphoria and the uptick that everyone thinks is coming. I think it’s going to be kind of a marginal incremental bump, and then we’ll be back to business as usual.”
Yakatan said over the past few years, conservative, methodical investing has become the prevailing practice for investment groups and companies flush with cash.
“You maybe have about six real strategic buyers, and they don’t seem to want to buy anything except their own stock,” he said. “And of the financial partners out there, the ones on the equity side who have any dry powder left aren’t writing giant private-equity consolidation checks. The ones who have money or debt capital providers, they’re happy making a yield to be securitized against an asset.”
Industry analysts at BDSA reported the top twenty brands controlled about 26 percent of the market in 2020, but their share increased to nearly 35 percent in 2023. Without 280E devouring large chunks of operating capital, companies could opt for one of two paths: ramp up operations in order to survive in increasingly competitive markets, or position themselves for acquisition by one of the twenty goliaths—or at least a bigger player capable of competing with the giants.
Yakatan believes much of the feeding frenzy going forward will focus on the weakest companies. “I would love to see an M&A frenzy occurring in cannabis, but what usually happens in other industries is what I think will happen here: M&A that’s driven by the consolidation of more and more distressed assets,” he said. “For someone that is sitting with a strong balance sheet or has a good equity stock that’s public—or who’s just sitting on cash—I think there are going to be some great buys out there.”
As for how investors view the industry in the here and now, Yakatan said investors will continue to scout strong brands that are generating revenue and have a unique position in the markets where they operate.
“I keep looking for these companies that are generating revenue and cash flow,” he said. “I think I’ve identified probably six or eight types of companies that are pretty consistently successful and I think will continue to be successful going forward. And I’m pretty much on a quest to develop relationships with the management teams of as many of those companies as I possibly can.”
