California Cannabis Is Broken: ‘There Are No Cash Buyers,’ Experts Warn

As one of the early adopters of cannabis legalization, California has been seen as an example of what can be accomplished for the rest of the nation. But regulatory missteps, steep taxes, and competition from an entrenched illicit market have taken a toll on legal weed in the Golden State. Licensed businesses are failing across the state, while MSOs are abandoning California for more lucrative markets.

With little relief in sight (save a temporary rollback of a cannabis excise tax increase), investor confidence in California’s regulated cannabis industry has been shaken. But can it be won back? That was the question posed to an expert panel at the recent IgniteIt Market Spotlight: California in Anaheim.

The panel discussion, dubbed “Quiet Momentum: Can Standouts Reignite Investor Confidence in California?” was moderated by Meilad Rafiei, CEO of cannabis business brokerage and consulting firm WeCann. The industry experts adding insight to the conversation were:

• Dennis O’Malley, Founder, Echtrai
• Seth Yakatan, Founder, Katan & Associates
• Rachel Wright, CEO, Verdant Strategies
• Steve Ernest, Director, Chicago Atlantic
• Joe Lustberg, CEO, Upwise Capital

Is Now the Right Time to Buy a California Cannabis Business?

Rafiei started the discussion by noting that the prices for cannabis businesses for sale in California are at their lowest level ever. With prices so low, he asked the panel if now is a good time to buy a California cannabis business. As the Trump Administration reviews a proposal to reschedule marijuana under federal law, is California poised to become the nation’s weed “breadbasket?”

O’Malley rejected the idea that potential federal action is a significant factor in the decision to buy or invest in a cannabis business. He also noted that California has already been supplying markets across the country for generations.

“California’s been the breadbasket for cannabis across the nation for a very long time, and anybody that goes into any state absolutely knows that. And federal legalization does not mean shit at all, which is so nuanced and everything else,” O’Malley asserted. “And we’re all fooling ourselves if we bet on any of that, and if anybody can actually take money from somebody by using federal legalization, that is the dumbest money in the room.”

O’Malley also stressed the need for collaboration within the California cannabis industry as an inevitable wave of consolidation takes hold. Arguing that many operators have been kept alive artificially by Covid-era subsidy payments, failure to pay vendors, and other factors, he encouraged struggling business owners to consider consolidation with an MSO.

Ernest of Chicago Atlantic agreed that consolidation is to be expected as cannabis markets continue to mature. He also said that those in a position to buy have become better at evaluating operations worthy of investment.

“I think the industry at large is becoming more focused,” said Ernest. “There is a lot of distress out there, and we’re taking a look around the asset floor and now and saying, like, hey, who are the zombies out here that actually just never needed to be here in the first place, right?”

When the microphone went to Yakatan, he pushed back on some of the panel’s assumptions. And he noted that most of the deals that are going through are debt-driven.

“I might disagree with the assertion that values can’t get any lower, and California’s gonna be a breadbasket for the rest of the United States,” Yakatan told the panel. “I might kind of counter that and say there’s no cash buyers. There’s no cash buyers.”

Increasing Investor Confidence Comes Down to Fundamentals

The panel discussion then turned to how operators can make their cannabis businesses more attractive to potential buyers and what factors potential investors should be aware of. Wright, a CPA, said she continues to see pervasive accounting issues among cannabis operators.

“I’m still seeing very bad books,” she said. “I’m still seeing amateurs in the finance department, I’m still seeing, you know, an admin person doing the accounting work, and they don’t know really what’s going on.”

The State of Investor Confidence

Rafiei then delved into the question at the heart of the discussion: What is the state of investor confidence in California’s cannabis industry? Ernest was less than enthusiastic, saying, “There’s very, very little investor confidence in this space right now.

Yakatan, however, was more blunt.

“Investor confidence is an oxymoron if you put those two words in the same sentence,” he said.

Where’s the Money Coming From?

Rafiei then enquired about the lenders to cannabis businesses, wondering whether loans were coming from private investors or whether institutional lending was available. Lustberg said bank funding is available, but only to a select class of operators.

“There are banks in California that are lending. We’re currently doing three bank deals, right? But it’s a mortgage. You know, it’s coming with a first lien position on the property,” Lustberg said, adding, “The business has to be profitable.”

Before wrapping up, the panel discussed other issues surrounding cannabis investment, including taxation and the possibility of federal rescheduling, topics that affect the cannabis industry in all markets. For further insight on these and other vital issues, join the Cannabis Capital & Policy Summit in Washington, D.C., on November 17.