Considering Selling Your Cannabis Farm? Read This First.

With the price of cannabis in California’s regulated system dropping to lows we haven’t seen since 2017, farmers are regularly asking how and whether to sell their farms. For those leaning towards “getting out,” here are a few considerations.

  1. Markets Fluctuate.

Markets regularly fluctuate and very few industries (if any) are as volatile as California cannabis. Our farmers face numerous circumstances which may cause the price of cannabis to drastically rise and fall before it eventually settles in the coming years:

  • Lack of Retail Outlets. The lack of retail licenses is potentially just as big or bigger of an issue than the current oversupply issue.
  • Oversupply. The current oversupply in the market was caused by Gov. Newson’s administration, who refused to institute Proposition 64’s cap on licenses greater than a half acre when licensing began in 2018. That was a travesty but we cannot put the genie back in the bottle, so big licenses are presumably here to stay. Remember that the price was this low back in 2017 due to oversupply of unregulated cultivators, so a price drop due to oversupply is not without some precedent.
  • CEQA. CEQA is a huge issue and may put some farmers out of business, depending on the jurisdiction’s approach. Farmers in counties like Mendocino are at a far greater risk of not meeting the current provisional licensing deadlines.
  • Interstate Shipping. Potential federal legalization in 2022 or hopefully soon after may drastically alter the oversupply issue and allow access to new markets.
  • Consumer Education/Quality Distinctions in the Market. Once farmers and their trade representatives can catch their breath from one extinction event after another, I expect to see a significant rise in consumer education programs that teach consumers the difference between quality and quantity. The importance of consumer education, in my mind, cannot be overstated as a means to economic viability for legacy farmers.

In light of this volatility, selling one’s life work based on a single season downshift is a risky move. That is not to say it is a “bad” or “good” business decision, but rather that making a long-term business decision based on a short-term situation is risky because whatever caused the short-term situation is likely to change.

If the decision to sell is based on something other than today’s market price, that’s a different issue. But considering how many farmers are considering selling their farms specifically due to this year’s market price, my only point is to say that today’s market price may not be next year’s market price, as we will likely see drastic rises and falls in pricing over the coming years.

  1. The Societal Impact of a Massive Sell Off of Legacy Farms.

There is growing concern over the vast number of our state’s legacy farmers who are feeling forced to sell their farms and who can’t afford to wait out the market volatility. Keep in mind that venture capitalists commonly wait for a market downshift to capitalize on those who cannot withstand the downturn by buying up those assets (here, the cannabis farms). When the market goes back up, as markets in this position often do, the venture capitalists reap that reward instead of the farmers or their communities.

If that happens, the bulk of the legacy farms may be owned by companies whose owners live out of the area. Those businesses often become another line entry on a corporate profit-loss statement and profit-maximization policies will begin to suck the natural resources out of our communities for the benefit of the bottom line.

To be clear, the decision to sell out is the farmer’s decision and the farmer’s alone. But considering how much is on the line for all Northern California communities if we see a massive sell off of our legacy farms, I simply ask folks to consider the broader societal impact of selling their farms prior to getting out before the market has a chance to settle.

  1. Knowing Our Value.

Sometimes folks have no other choice but to sell, and I respect that decision if it has to be made. If a farmer has made the tough decision to sell the farm after considering the market variabilities and the societal impact, it is important that the farmer does not undervalue their assets. A desperation-based sale on one legacy farm could set bad precedent for the rest of the region since buyers will use comparable values (aka “comps”) to negotiate the purchase price drastically downward on other deals.

To understand how to value each asset differently, the first rule is that each asset has a different value. For instance, the real property and the company that owns the cultivation license have different valuations (i.e. different purchase prices). Other assets often included in farm sales often provide additional value, such as the farm’s brand (aka the intellectual property), tangible assets (such as the farm’s current cannabis inventory or a tractor), or other licenses (such as the self-distro transport only) license. From the farmer/seller’s perspective, it is a mistake to not assess each of these values separately wherever possible.

As a final note, the sale of each of these assets can and usually does have different income tax rates, depending largely on how long the farmer has owned the asset. It is critical to talk to a CPA prior to entering into negotiations with a potential buyer, since an oral agreement about valuations made by a sophisticated and shrewd buyer can get the farmer stuck in a bad deal with a wild tax rate before pen even gets put to paper.

CONCLUSION

In closing, I am sorry that our industry and our regions are dealing with one seismic catastrophe after another. It has been heartbreaking, but I do not believe this is the end. Please join your local trade association or policy organization and support their work to open markets, increase access, reduce barriers, educate consumers and create stability for legacy farmers and for our shared communities.

We are in this together.

~hb

#protectourfarmers

#togetherwerise

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