How to evaluate a cannabis business for sale

Evaluation is not due diligence

Evaluation is the screen you run before making an offer. Its job is to decide whether a business deserves a letter of intent and at roughly what price. Due diligence is the verification you do after the offer is accepted, and it has its own checklist.

The screen below runs in order of how cheaply each test can kill a deal. Do not skip ahead to the financials. A beautiful set of numbers attached to a licence you cannot own is a waste of a week.

Step 1: Can this licence legally reach you?

Answer three questions from public sources before you sign an NDA.

1. Is the licence active and in good standing? Most regulators run a public licence lookup. Confirm the licence number, type, status, and expiry.
2. Does the state allow a change of ownership for this licence now? Some licences are locked. Maryland’s converted licences, for example, cannot have a controlling interest transferred before 1 July 2028 outside narrow exceptions. Social equity licences often carry holding periods. The rules are summarised in the state licence transfer rules overview.
3. Can you and your investors qualify? Criminal history, residency, and ownership caps differ by state. See ownership eligibility, background checks, and residency.

Then check the city. A local permit may need its own transfer approval, and some cities do not allow one.

Step 2: Is the market worth being in?

A good operator in a collapsing market is still a poor purchase. Use the regulator’s own data where it exists.

Michigan is an example of why. Cannabis Regulatory Agency data for August 2026 showed monthly adult-use sales of about $258.8 million, down from $282.8 million a year earlier, and average retail flower at $60.33 an ounce, close to the lowest on record. Volume is high. Price is not. A Michigan business has to be evaluated on whether it makes money at those prices, not on sales growth.

Questions to answer for any market:

• Are licences capped at state or city level, or can a competitor open across the street? In Oregon, new retail and producer applications are closed, but the state already has more licences than demand supports.
• What has happened to wholesale and retail prices over the past 24 months?
• Is a neighbouring state about to open adult-use sales and pull border traffic away?
• What are the state and local cannabis taxes, and are any increases scheduled? See cannabis excise and potency taxes by state.

The effect on price is covered in how oversupply and price compression affect value.

Step 3: What cash does the business actually keep?

This is where cannabis differs most from other acquisitions. Under IRC 280E, a business trafficking in a Schedule I or II substance cannot deduct ordinary operating expenses. It pays federal income tax on roughly its gross profit. Since 28 April 2026, marijuana sold under a state medical licence is in Schedule III and outside 280E going forward. Adult-use sales are still caught. A dual-licensed business has to split the two.

So recast the seller’s numbers into three lines, not one.

Illustrative recast for an adult-use store, using an assumed 21% federal corporate rate and ignoring state income tax:

Line	Seller’s view	Buyer’s recast
Sales	$4,000,000	$4,000,000
Cost of goods sold	$2,200,000	$2,200,000
Gross profit	$1,800,000	$1,800,000
Operating expenses	$1,250,000	$1,250,000
Add-backs claimed by seller	$150,000	$60,000 accepted
Market wage for a manager	Not deducted	$90,000
Adjusted EBITDA	$700,000	$520,000
Federal tax without 280E (21% of about $520,000)		$109,000
Federal tax with 280E (21% of $1,800,000 gross profit)		$378,000
Cash flow after federal tax, under 280E		$142,000

The seller is marketing $700,000. The buyer can expect to keep about $142,000 before debt service. That gap is the whole negotiation. The mechanics of the recast are in cannabis financial statements under 280E explained, and you can test your own figures in the 280E effective tax rate calculator.

Also ask whether the seller has actually been paying tax on a 280E basis. Some operators file aggressive returns or carry unpaid balances. In an equity purchase those liabilities become yours; see tax liabilities and holdbacks in a sale.

Step 4: Do the numbers tie to independent records?

Before an offer you will not get full access, but you can ask for enough to test the story:

• Monthly sales from the point-of-sale system against state sales and excise tax filings.
• Summary reports from the state tracking system. The method is in verifying revenue with track-and-trace data.
• Bank or cash-deposit records for a sample of months.

If sales on the profit and loss statement do not match tax filings, stop and ask why. There are innocent explanations, such as timing or medical exemptions. There are also explanations that end the deal.

Step 5: How secure is the premises?

The licence is tied to an address, so the lease is part of the licence. Check:

• Remaining term and renewal options. A five-year payback on a lease with two years left is not a payback.
• Whether the lease expressly permits cannabis use and allows assignment or a change of control. See landlord consent and cannabis lease clauses.
• Rent against sales. Cannabis landlords charge a premium; find out whether the rent resets on transfer.
• Whether the seller owns the building and on what terms it is included or leased back.
• Zoning status: permitted use, conditional use permit, or legal non-conforming. Non-conforming status can be lost on a change of ownership in some cities.

Step 6: How clean is the compliance record?

Ask for every notice of violation, fine, and inspection report for the past three years, and check the regulator’s published enforcement actions yourself. One old administrative fine is normal. A pattern of inventory discrepancies, sales to minors, or unreported ownership changes is not. Open investigations can delay or block approval of the transfer, and the record follows the licence. The pricing effect is covered in how compliance history affects value, and the warning signs in red flags when buying a cannabis business.

Step 7: Is the price supported?

There is no public record of private cannabis sale prices, so anchor to what can be observed.

Public multi-state operators are the ceiling. Viridian Capital reported that the 11 US MSOs with market values above $100 million traded at a median of about 5.1 times estimated 2026 EBITDA as of 18 November 2025. Those are large, diversified, liquid companies. A single private store or grow carries more risk and should not normally be priced above them on the same measure, unless a scarce licence justifies it.

Then run your own test. Using the recast above:

Test	Result
Asking price	$2,100,000 (3 times seller’s EBITDA)
Price as a multiple of buyer’s adjusted EBITDA	About 4 times
Price as a multiple of after-280E cash flow	About 14.8 times
Years to recover price from after-tax cash, no debt	About 15

A deal that looks cheap on the seller’s EBITDA is expensive on the cash you keep. Either the price comes down, the structure changes through a seller note or earn-out, or you have a specific reason to expect better cash flow, such as a medical sales share that now falls outside 280E. Multiples by licence type are in dispensary valuation multiples and cannabis valuation methods by licence type.

A one-page scorecard

Test	Pass	Caution	Fail
Transferability	Clear path, you qualify	Local approval uncertain	Locked, or an investor cannot qualify
Market	Capped, stable prices	Uncapped, prices flat	Prices below cost of production
After-tax cash	Covers debt and a return	Thin after 280E	Negative after tax
Records	Tie to tax and tracking data	Minor gaps explained	Sales do not reconcile
Premises	Long lease, consent in writing	Short term, renewal likely	No assignment right
Compliance	Clean or minor	Resolved violations	Open investigation
Price	Supported by after-tax cash	Needs structure to work	Supported only by seller’s EBITDA

Two cautions or fewer, and no fails, usually justifies a letter of intent. This page is general education, not legal, tax, or investment advice.