The 280E Discount: Why U.S. Cannabis Valuations Lag — and What Changes Next

In the latest Viridian Chart of the Week, we learn just how punitive IRS Rule 280E has been for U.S. cannabis operators, and how much upside could be unlocked if the rule is eliminated.

Using enterprise value to next-twelve-month EBITDA multiples, Viridian Capital Advisors compares large Canadian licensed producers (LPs) with Tier 1 U.S. multi-state operators (MSOs). The results are striking. While Canadian LPs currently trade at approximately 12.1x EBITDA, U.S. MSOs sit closer to 6.6x, despite operating in larger, faster-growing, and structurally more profitable markets.

According to Viridian, the gap, now roughly 5.5 multiple points, is largely explained by 280E. Because U.S. cannabis companies are prohibited from deducting normal operating expenses for federal tax purposes, significantly less EBITDA converts into free cash flow. Canadian operators, by contrast, face no such constraint, allowing a greater share of earnings to flow through to equity holders.

In other words, the valuation discount applied to U.S. MSOs is not a reflection of inferior businesses, but of an inferior tax regime.

Why the Gap Could Close — and Then Reverse

Viridian argues that the elimination of 280E, expected to follow cannabis rescheduling, could drive a major valuation reset. With normalized tax treatment, U.S. MSOs would immediately see higher free cash flow, stronger balance sheets, and improved capital efficiency.

Importantly, Viridian believes U.S. multiples should not merely converge with Canadian LPs; they should exceed them. U.S. operators benefit from:

• Much larger addressable markets
• Higher margins and better unit economics
• Vertical integration and brand leverage
• Additional regulatory tailwinds, including SAFER banking and broader reform

As a result, Viridian estimates U.S. cannabis EBITDA multiples could more than double to ~15x, up from today’s ~6.6x.

M&A and Capital Markets Reawakening

Higher valuations would have immediate second-order effects. For years, U.S. MSOs have avoided equity-funded acquisitions because issuing shares at depressed prices would dilute existing shareholders. A valuation reset changes that math overnight.

At the same time, stronger cash flows from lower tax burdens would expand debt capacity, making acquisitions both easier to finance and more accretive. Viridian expects this combination to drive a meaningful increase in M&A activity across the U.S. cannabis sector.

Equity capital markets should also revive. Regulatory uncertainty has effectively frozen cannabis equity issuance, limiting operators’ ability to refinance debt or fund growth. With 280E removed, U.S. companies are likely to:

• Refinance expensive legacy debt with equity
• Strengthen balance sheets
• Increase capital spending and expansion activity

A New Chapter — Not a Return to 2021

While Viridian does not expect a return to the speculative highs of 2021, the firm does anticipate a significant step-change in valuations and activity compared to the past two years. The removal of 280E would represent the most meaningful financial reform in the industry’s history — and one that finally allows U.S. cannabis operators to be valued on fundamentals rather than tax penalties.

Photo by Logan Voss on Unsplash