Whether you are buying, selling, or refinancing, a disciplined dispensary valuation starts with four operational levers: traffic (visits), basket size (units per ticket), loyalty (repeat behavior and CLV), and margins (gross to EBITDA). This article translates those levers into lender-ready KPIs, a step-by-step model you can copy, and diligence language that survives investment committees. Use it to price offers, defend asks, and tighten your LOI, APA, and lease terms so DSCR and timelines hold through diligence.
Compliance note: Federal tax treatment under IRC §280E still applies to marijuana businesses as of 2025, which materially affects after-tax earnings and valuation. Plan for 280E unless/until a final federal rule says otherwise. IRS
Executive snapshot
- Value = Durable store-level cash flow × confidence. The fastest way to raise value is to convert walk-in traffic into larger, more frequent, higher-margin baskets with tight shrink and labor control.
- What buyers actually pay for: Documented throughput (visits × conversion), stable AOV and margin by category, repeat-purchase cohorts (loyalty), and clean compliance.
- Paper it right: Event-based milestones in your LOI/APA, occupancy cost language that protects DSCR, and a data room organized for a light QoE.
- Why this method works: It aligns unit economics to appraisal math, makes assumptions auditable, and anticipates questions lenders and credit committees ask.
The four pillars of dispensary valuation
Below are the drivers that move value in the real world and how to quantify each—clean enough to paste into your model or investor memo.
1) Traffic: visits, conversion, and catchment
What to measure
- Visits (door counts) by daypart and day of week; segment by new vs. returning.
- Conversion rate = transactions ÷ visits.
- Channel mix: in-store, curbside, delivery (if permitted).
- Catchment: population, drive-time, competition density, tourist uplift.
How it translates to valuation
- Visits × conversion × AOV = top-line. Sustained growth in qualified traffic (not promo spikes) supports higher forward revenue in QoE bridges and a tighter risk premium.
- Use a 13-week rolling window to evidence momentum through seasonality.
Evidence to include
- Raw counters (sensor/POS), marketing calendars, and competitor openings/closures; a one-page “trade-area” memo with zoning/CUP context and buffers.
2) Basket size & AOV: from ticket to contribution
Definitions that matter
- Basket size = items per transaction. Average Order Value (AOV) = net revenue per transaction. These are distinct. Authoritative retail KPI sources separate “basket size” (units) from “basket value” (dollars).
Practical levers
- Attach rates on high-margin add-ons (prerolls, edibles, accessories).
- Assortment rationalization by price band to align AOV to local elasticity.
- Menu layout, impulse zones, and budtender prompts (scripting + incentives).
Why valuation cares
- Sustained AOV expansion with steady conversion proves pricing power, reduces promo dependency, and supports stronger EBITDA quality.
3) Loyalty: repeat behavior, cohorts, CLV, and LTV/CAC
What to track
- Repeat-purchase rate by cohort (30/60/90 days).
- CLV (customer lifetime value) and LTV/CAC (value per customer ÷ cost to acquire). Standard definitions are well-established in retail analytics and management literature.
Why valuation cares
- Loyalty compresses payback cycles, stabilizes demand, and de-risks store cash flows, which lowers perceived risk for buyers and lenders.
Proof package
- Cohort curves, loyalty penetration (% transactions tied to an ID), offer cadence vs. margin, and churn/reactivation rates.
4) Margins: from gross to EBITDA to SDE
Essential bridges
- Gross margin by category, adjusted for discounts.
- Contribution margin after labor (front-of-house + management).
- Store-level EBITDA after occupancy (rent/NNN/utilities) and security.
- SDE (seller’s discretionary earnings) for smaller, owner-operated shops.
Compliance-driven adjustments
- Document 280E tax posture and cost of goods treatment; under current IRS guidance, 280E disallows ordinary deductions for businesses trafficking in Schedule I or II substances—affecting after-tax cash flow and, therefore, valuation.
From counter to valuation: the roll-up model (copy/paste framework)
Goal: turn store KPIs into a defendable enterprise value under multiple deal structures.
A. Revenue engine (monthly)
- Visits × Conversion = Transactions
- Transactions × AOV = Net Revenue
- Break down by category (flower, vapes, edibles, wellness, accessories) to show margin mix.
B. Gross profit
- Net Revenue × Category GM% (weighted) = Gross Profit
- Track promo leakage and shrink explicitly.
C. Contribution & EBITDA
- Gross Profit – Labor – Variable Ops (bags, merchant fees, cash logistics) = Contribution
- Contribution – Occupancy (base, NNN, utilities) – Security – Insurance = Store EBITDA
- Add back corporate allocables thoughtfully; credibility matters in QoE.
D. Normalization & SDE (if applicable)
- Normalize for owner comp, one-time items, non-recurring TI. Build an EBITDA/SDE bridge with notes and evidence (invoices, policies).
E. After-tax cash flow
- Model 280E impact (until rules change). Careful: some “adjusted EBITDA” presentations ignore 280E; buyers and lenders do not.
F. Valuation views
- Earnings multiple (EV/EBITDA or EV/SDE) triangulated with comparable transactions.
- Per-door or per-revenue sanity checks for quick market reads.
- Discounted cash flow (rare in small deals; useful for multi-store).
G. Credit metrics
- DSCR at stabilized occupancy and normalized margin.
- Sensitivities: price compression (–x% GM), labor step-up, and excise tax changes (e.g., California excise tax 19% effective July 1, 2025). CDTFA
What premium shops have in common (and how to demonstrate it)
- Consistent traffic quality
- Evidence: 90-day rolling conversion ≥ prior period; traffic sources with measured ROI.
- Healthy AOV without over-discounting
- Evidence: promo calendar vs. margin mix; attachment rates on add-ons.
- Cohort-based loyalty programs
- Category margin management
- Evidence: mix shift toward higher-margin categories without volume loss.
- Tight labor model
- Evidence: sales per labor hour, queue time, and conversion during peaks.
- Clean compliance & operations
- Evidence: inventory variance logs, audit results, security SOPs, and (if applicable) C1D1 certification for in-store manufacturing uses.
- Landlord & lease posture that supports value
- Evidence: assignability, options, fair rent escalators, and SNDA/estoppel readiness.
Price, terms, and structure: getting multiple expansion without over-promising
Multiples follow perceived durability. The same store can clear very different prices depending on how you document durability and how you structure terms.
- Earnouts linked to revenue or EBITDA can bridge valuation gaps without over-discounting today.
- Working capital mechanics (inventory thresholds, shrink caps) protect both sides.
- Sale-leaseback proceeds can right-size balance sheets—but only if rent preserves coverage at downside margins.
LOI language that travels well
- Event-based milestones: “Closing occurs within X business days after [state ownership change approval] and [landlord consent].”
- Inventory & cash count: detail method, variances, and disputed items.
- Talent: specify retention bonuses and training days for key staff to protect loyalty curves.
- Regulatory: list CUP/zoning representations and any open conditions.
Diligence checklists that make buyers move faster
Financial & KPIs
- Trailing 24 months revenue by category; EBITDA/SDE bridge with notes.
- Visits, conversion, AOV, basket size, loyalty penetration, CLV, LTV/CAC; weekly cohorts.
Operations
- Inventory controls, shrink logs, cash management SOPs, variance thresholds, and cycle counts.
- Security SOPs, camera coverage, access control, vaulting.
Compliance
- License letters, inspections, corrective actions.
- Tax posture memo (280E), filed returns, and any payment plans; remember 280E disallows ordinary deductions for Schedule I/II substances under current IRS guidance. IRS
Real estate
- Lease abstract (base/NNN, options, assignability), SNDA/estoppel templates, utility capacity.
- TI as-builts and warranties.
Legal
- Draft APA terms, reps & warranties, escrow/funds-flow, and wire controls.
Occupancy cost, DSCR, and the “rent-proof” test
Rent-proof means the store’s cash flow comfortably services rent and debt after promotions, labor, and expected price compression.
- Occupancy cost ratio (rent + NNN + utilities ÷ net revenue) should remain acceptable even when promotions normalize.
- Model DSCR at (i) base case and (ii) downside margin; show how loyalty and labor controls keep coverage above lender floors.
- In high-tax jurisdictions (e.g., California’s excise tax adjustment to 19% effective July 1, 2025), pressure-test after-tax cash flow and rethink aggressive escalators.
Negotiating power: use your data to pull the right lever
If traffic is strong but baskets are small
- Emphasize upside in attachment rates and AOV; propose an earnout indexed to basket size growth.
If loyalty is deep but traffic is flat
- Price off CLV and contribution stability; defend value with cohort curves and LTV/CAC.
If margins are healthy but rent is high
- Offer rent-reduction or credit at renewal/assignment to preserve DSCR; separate real estate from operating asset price where a sale-leaseback is viable.
If compliance history is spotless
- Ask for a premium or reduced holdbacks; pristine audits, clean inventory variances, and documented SOPs reduce perceived risk.
Sample KPI glossary (paste into your data room)
- Basket Size (units/txn): average number of items per transaction; distinct from AOV.
- AOV: net revenue per transaction (after discounts, before tax).
- Repeat Rate: percent of customers with ≥2 purchases in period.
- CLV: present value of expected gross margin per customer net of retention costs.
- LTV/CAC: CLV divided by acquisition cost; >1 means value exceeds acquisition spend (higher is better).
- Contribution Margin: gross profit minus variable labor/ops.
- EBITDA/SDE: earnings measures used for valuation, normalized via QoE.
- DSCR: EBITDA (or NOI) ÷ debt service; lender coverage metric.
- CUP & Zoning: local land-use permissions and conditions affecting store viability.
- TI: tenant improvements; capex with depreciation or allowance implications.
Common valuation mistakes (and how to avoid them)
- Confusing basket size with AOV. Treat units and dollars separately; manage both.
- Ignoring 280E in after-tax modeling. Most sophisticated buyers haircut “adjusted EBITDA” that excludes 280E impacts.
- Over-indexing to short-term promos. Show sustainable AOV and margin with limited promo dependence.
- Under-documenting loyalty. If you say “loyal base,” prove it with cohorts and CLV/LTV-CAC.
- Sloppy lease abstracts. Assignability and options can change value materially; summarize clearly.
- No downside case. Price compression, excise adjustments, and labor creep happen—prepare sensitivities.
Package your store like a lender would underwrite it. Put the four levers—traffic, basket size, loyalty, and margins—front and center, and back them with clean data, a transparent EBITDA/SDE bridge, and event-based LOI/APA terms. That’s how you maximize price, compress diligence, and protect DSCR. When you’re ready to enter the market, align timing with local zoning/CUP calendars and prospective buyers who already have capital and compliance muscle.
Disclaimer
This article is for educational purposes only and does not constitute legal, engineering, financial, or tax advice. Always consult qualified professionals and your local Authority Having Jurisdiction before making decisions.
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