How to sell your marijuana business: Q&A with GRN Funds CEO Justin Costello

Valuating a cannabis business requires coming up with creative comparisons to established industries, such as tulips and wine.

That’s the space Justin Costello operates in. The CEO of Seattle-based GRN Funds, he brings years of experience making deals in the investment banking sector and said he has completed 80-plus cannabis deals.

He currently is brokering a $60 million-$70 million sale in which he’s packaging 12 marijuana companies in Washington state.

Costello recently spoke with Marijuana Business Daily about how he valuates cannabis businesses, which companies are easier to sell and deal structures to avoid.

With the price tag of $60 million-$70 million for the 12 Washington stores, can you walk me through how you compared those cannabis businesses to comparable mainstream businesses?

I looked at other industries, and I also looked at other sales that I’ve done and determined what those went for.

I use a combination between the industrial tulip industry and some fundamentals in the wine industry. I’ve developed what I think is as close to an industrial metric as possible in combining a few of those industries.

A pharmacy or drugstore is another metric you can use. And you have the hops industry as well.

Hops is kind of a cousin of the cannabis plant. It has institutional or commercial grade applications that deal with growing as well as processing and packaging.

I found that the tulip industry uses varying growing mediums. They use aeroponics, they use hydroponics, they use soil-less mediums like a pro-mix – so there’s a variety of that – and then they also constitute artificial light through double-ended bulbs like a Gavita light in a controlled manner with PPM, CO2 and other aspects of controlled cultivation. So it’s very close in regards to how the cultivation side of indoor marijuana would work.

So, kind of a hybrid model. But I used traditional metrics.

I just took their revenues per parity and put it into the book value. Is it book times 4, or book times 5? I used a traditional sales metric for that. And we valuated everything and conferred everything with the state and checked all of the details and cross-referenced the details for that with their bank accounts.

So the revenues were real. It wasn’t a unicorn, pie-in-the-sky, penny stock deal. These companies have $25 million to $30 million in revenues a year.

I looked at EBITDA (Earnings Before Interest, Taxes, Deduction and Amortization), but I don’t ever use that in an interview case because there are variances on that.

This Washington deal has a bunch of assets on it in the form of licenses as well as real estate. So we had to get third-party assessments for all of that as well. This is a large deal, including a lot of different things, so that was taken into consideration.

What revenue multiples are you using?

I used the times 3.6, typically. This was a little different because of the real estate. I’m not going to give you the exact revenue multiple I gave because that would indignify my negotiations with a potential buyer.

There’s 12 licenses that are included with this, including two Seattle licenses, which are very valuable, and two different pieces of real estate involved as well.

In your experience, are some businesses in certain niches – such as ancillary companies or infused-product companies, for example – easier to sell than others?

I think it’s dependent on the buyer. If the buyer wants to be on the end of the supply chain and deal with all the regulation – and be at the forefront of making money – then, yeah, the ancillary companies.

I see a lot of vape companies coming out, I see a lot of software coming out. And we’ll see how it sticks to the industry.

Traditionally it takes longer than a couple of years for those ancillary companies to start making money and become solidified.

If you look at American history, you have the silver industry, the gold industry, the timber industry, the people selling the widgets – it takes them a while to make money, but those are the ones who end up becoming companies.

The ol’ sell-the-picks-to-the-miners rather than mine-the-gold-yourself.

Exactly. I think retail’s a different story because it’s a really simple financial model. (For instance) Walgreen’s is coming in, it bought out a major regional player in Seattle and they used similar multiples and looked at the same types of things.

So it’s a pretty traditional acquisition compared to a drugstore or a pharmacy, minus some of the other aspects of the sale – which is the controllability, the traceability and, ultimately, the license. The licenses have value.

Aside from the penny stock or reverse mergers, are there any specific deal structures that you might avoid?

No. They’re all different. You’re going to get a lot of people that want to do a sizable down payment, then a payoff. The problem is you’re involved with a controlled license. So there’s only so much you can do in this industry.

Washington state will allow you to buy into a license. That’s just business. But pushing out a transaction two, three years, they might not approve that.

You got to go to your regulator and say, “Do you believe this transaction will work with codes and laws?” That’s a simple question you can ask, and as regulators, that’s their job to let you know where you’re at with that.

This interview has been edited for length and clarity.

Bart Schaneman can be reached at barts@mjbizdaily.com


Washington State Broker Aims to Sell Bundle of 12 Marijuana Retailers for Up to $70M

A dozen marijuana retail businesses in Washington state are employing an unusual strategy on the mergers and acquisitions front: package their assets together for a combination sale.

In a move that’s being described as “unprecedented,” Seattle-based investment bank GRN Funds is asking $60 million-$70 million for the 12 retail cannabis firms.

The ambitious plan has spurred questions about whether such a strategy can work, particularly after two Washington state cannabis entrepreneurs recently failed to sell their businesses together in a similar – albeit much smaller – fashion.

The plan also faces some hurdles tied to Washington state’s cannabis regulations, a lack of available cash from potential buyers and less-than-optimal deal structures.

GRN Funds CEO Justin Costello – who’s brokering the sale and claims he has spearheaded 80-plus cannabis deals – said the businesses are located throughout Washington state but most are in the Seattle area.

He wouldn’t reveal the retailers’ names because of a nondisclosure agreement.

There’s no secret as to why the retailers are on the market, however.

“They’re just looking to exit out of the industry and enjoy their lives,” Costello said. “That’s the American dream, right? Build something big and sell it or do an acquisition deal and make tens of millions of dollars.”

GRN Funds launched the deal at the beginning of August with a timeline of 60 days from the outset to source the right type of bidders.

To arrive at the $60 million-$70 million valuation, Costello brought in a third party to audit the businesses’ books, then applied industry metrics to reach that dollar amount.

So far, Costello said he’s received multiple offers, though they’re below asking price.

There are a lot of “tire kickers” in the cannabis industry, Costello has learned.

Uncharted waters

Paul Seaborn – assistant professor of the Business of Marijuana class at the University of Denver – said the sale is “unusual and unprecedented” for the cannabis industry. It’s rare, if not unheard of, to see a sale set up as GRN Funds’ is, he said.

Among the questions Seaborn has about the sale: Are the stores in competition with each other? Are there synergies between them? Is the sum actually greater than the parts?

With the cannabis industry as nascent and fluid as it is, the packaging could simply be seen as a strategy to attract the attention of potential buyers.

However, Costello said it wasn’t his goal to gain attention by bringing together 12 firms.

“Something of this size, we knew it would have headlines,” he added, “but we also knew the deal would support itself.”

‘Unicorns and magic’

The two prominent Washington cannabis business owners who attempted to sell out earlier this year can back up Costello’s claim about tire kickers.

Uncle Ike’s and Main Street Marijuana – both based in Seattle – paired up in January to sell their retail outlets for $50 million but didn’t find suitable buyers.

“Nobody has any real money,” was the takeaway for Ian Eisenberg, owner of Uncle Ike’s.

Ramsey Hamide, owner of Main Street Marijuana, said he and Eisenberg were contacted by roughly 20 different companies in the United States and Canada, but no offers interested them.

“If they were cash, they were too low,” Eisenberg added. “And if the price was right, it was always equity in some kind of startup stock, reverse merger, unicorn, magical thing – which I’m not interested in.”

Other roadblocks

Two key Washington state requirements also come into play:

  • Under the residency requirement, prospective marijuana business owners must prove they’ve lived in the state six months before they apply for a license.
  • The state allows each license holder to own only up to five retail shops.

Costello anticipates having to structure any sale around a group of consolidated buyers. For example, one group would buy five of the businesses, another group would purchase five and a third group would acquire two.

“I think as buyers dig into it – especially out-of-state buyers – it’s a pretty complex thing to complete a transaction,” Main Street Marijuana’s Hamide said.

“We wanted a clean, all-cash sale, and that would require somebody with a lot of money that’s a resident of Washington that really had an interest in cannabis. But we weren’t able to find that person.”

Were Main Street Marijuana and Uncle Ike’s simply priced too high? Hamide doesn’t think so.

“We already thought we were selling at a very, very low valuation by the standards of any other industry,” he said.

Another potential hindrance for a combined sale like the one GRN Funds is brokering could be the Trump administration and its anti-cannabis attorney general, Jeff Sessions.

“There’s not a lot of real capital that wants to invest in pot right now,” Eisenberg said. “Especially with the change in administrations. If I was some super-rich, private equity guy, I don’t know if I would want to run the risk of going to jail over making a few extra bucks.”

Different tack

So what is GRN Funds doing differently in its sale?

Costello said he hasn’t been approached with penny stock deals or reverse-merger proposals because the 12 companies went through 2½ months of due diligence – including underwriting and third-party audits – before launching the sale, first reported by RespectMyRegion.com.

So far he’s had about 150 “serious people” inquire, he said. Costello’s had interest from around the United States as well as Canada and Asia, including inquiries from Singapore and Hong Kong.

He seems most encouraged by working with Washington state-based private hedge funds and equity companies.

“Those are the real people that are your targets,” Costello said.

Before the launch, his firm targeted what he considered applicable buyers.

“We were very surgical about who we approached and how we approached them first before launching them into the open market,” Costello added.

A sale this size could have a major impact on the industry, he said.

“People will see that we’re a big industry and we’re here to stay,” Costello added. “We’re real and it’s possible that businesses in this industry will get in the tens of millions of dollars.”

Bart Schaneman can be reached at barts@mjbizdaily.com