An Overview of the Washington Cannabis Industry (1 of 8)

Written By Eli Neal

By: ELI C. NEAL, CPA, ABV, CFF

Welcome to 4 Corners’ Cannabis Valuations in Washington State introductory blog series! Throughout this eight-post series, we’ll be sharing information about the local cannabis industry and walking through the key concepts and challenges of a cannabis business valuation. 

The legal cannabis industry is one of the fastest growing industries in the United States and the State of Washington, where recreational use has been legal since 2012. As of April 2021, 16 states and Washington, D.C. have legalized adult recreational use of cannabis. Medical use is legal in 36 states. 

Earlier this year, the Washington State University IMPACT Center published a report titled 2020 Contributions of the Washington Cannabis Sector. Major findings include the following: 

  • Washington’s cannabis sector contributed $1.85 billion to gross state product in 2020 

  • The industry supported almost 18,700 jobs 

  • Retail sales grew 21% between 2019 and 2020 

  • Within the state’s General & Selective Sales Taxes revenues, Marijuana Excise Taxes are the fastest-growing 

  • Direct retail cannabis sales contributed $468.81 million to state tax revenues in 2020, which was greater than the excise revenues from liquor and alcohol sales ($415.28 million) and cigarette, tobacco, and vapor product sales ($383.55 million), respectively 

The study notes that because the alcohol and tobacco industries are more mature, their growth has plateaued. Cannabis, on the other hand, "represents an ‘infant industry’ that is still in a growth phase, which will continue until a relative equilibrium point is achieved.” (Page 9) Growth in California, Colorado, and Oregon appears to be following a similar trajectory, without signs of slowing down at this time. 

Retail cannabis sales in King County were over $340,000 in 2020, followed by approximately $160,000 in Pierce County and $135,000 in Spokane County (Page 7). As King County includes some of the most populous cities in Washington state (Seattle and Bellevue), it is not surprising that sales were highest in that area. 

In December 2020, the Washington State Liquor and Cannabis Board released its Annual Report for Fiscal Year 2020 (ending June 30, 2020). During this time period, the Cannabis Licensing Unit (which processes license applications for cannabis-related businesses) received more than 1,000 change applications. These applications tended to mainly be for “alterations to the premises” and “change of ownership.” (Page 13) The Board reported the following active licenses by type (see “License Type Definitions” at the end of this post): 

Type of License  Number of Active Licensees 

Producer/Processors 944 

Retailers  484 

Processors  232 

Producers  147 

Cooperative  14 

Transportation  13 

Research  1 

The number of change applications and active licenses shows the continued activity and growth in Washington’s cannabis sector. As the industry grows, there is a greater need for business professionals such as accountants, attorneys, and valuation experts who are familiar with the legal cannabis world. 

We expect the fragmented Washington market of cultivators/growers and dispensaries will likely continue to consolidate as market winners and losers are identified. Inevitably, the cannabis industry will likely go through a period of mergers and acquisitions which will necessitate business valuations as the basis for equitable transactions. Business owners executing buy/sell clauses in their operating agreements will also depend on business valuations to complete a clean transition. 

Interestingly, the consolidation in Washington will happen differently than in other states. Washington is one of only a few states that prohibit vertical integration. One entity cannot hold all three license types, but it can hold a producer and processor license simultaneously. A producer or processor cannot also be a retailer. As a result, consolidation will take the form of retailers buying retailers and producers buying other producers.  

If you own or represent a cannabis business in Seattle, Bellevue, or elsewhere in the Pacific Northwest and need a business valuation or financial expert, call 4 Corners Financial Forensics at 425.800.4896 or schedule a video call here; we’ll listen to your situation and help you scope your project. We’d love to help you.  

License Type Definitions: 

Producer – A person or entity who grows the cannabis plant. Also called a cultivator or a grower. 

Processor – A business that creates new products from the cannabis plant, such as topicals and edibles. Also called manufacturers or extract technicians. 

Retailer – A business that sells medical marijuana products directly to registered and/or qualifying patients, or recreational products to adults 21 and over. Also called dispensaries. 

Cooperative – According to the Washington State Department of Health website, a medical marijuana cooperative allows “up to four medical marijuana patients or their designated provider to join together to grow marijuana for the patients’ personal use.” These cooperatives must be registered with the Washington State Liquor and Cannabis Board. 

Transportation – The Washington State Liquor and Cannabis Board defines a cannabis transporter license as allowing “the licensee to physically transport or deliver cannabis, cannabis concentrates, and cannabis-infused products between licensed cannabis businesses within Washington State.” 

Research – A cannabis research license allows the holder to “produce, process, and possess cannabis for...limited research purposes,” according to the Washington State Liquor and Cannabis Board. 

Eli Neal
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How to Perform a Business Valuation of a Cannabis Business (2 of 8)