Believe it or not, small businesses make up most of the revenue generated in the American cannabis industry.
But that’s not likely to be the case forever, according to Viridian Capital. The capital advisory firm recently released a chart highlighting the “fragmented” cannabis industry.
Six of the largest multi-state operators accounted for 20% of 2021’s revenue. Small businesses made up approximately 64% of the United States’ total cannabis industry revenue.
At first glance, one might deduce that this means small businesses are winning.
But capital advisors like Viridian say this means consolidation is inevitable. Craft beer companies make up just 27% of beer revenues in the country - representing just over 9,000 companies.
“As cannabis approaches legalization, the necessary scale of businesses will increase,” Viridian’s notes on the chart say.
“The industry is capital-intensive, and tremendous sums will need to be spent to establish national brands, distribution systems, and centralized production facilities.”
Small businesses fight to stay on top
There is unlikely to be a more passionate group of small business operators than the cannabis industry.
Cannabis cares deeply about keeping this industry small. It makes sense, given our history and standoffs with the law & authority 🙂
But, the licensed cannabis industry involves more than just passion. Regulatory and tax burdens make doing cannabis business nearly impossible.
And with few choices for sourcing capital, consolidation might be the only option for some small cannabis businesses.
“The average valuation multiple for the largest MSOs is more than twice that of the tier 3 competitors, implying an enormous cost of capital advantage that makes it nearly impossible for the smaller companies to maintain growth,” Viridian Capital says.
It’s expected that a large number of small cannabis businesses will be acquired before federal legalization to get their ducks in a row.