Cannabis companies still standing after reset ‘well positioned to thrive’

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Over the past five years, the cannabis industry has experienced intense growing pains.

Capital overspending, regulatory friction and tax headwinds have taken their toll.

After all the industry’s recent challenges, some level of natural selection was bound to occur.

As a result, the companies still standing today are often being run by the most disciplined, resilient management teams, which means these businesses are well positioned to thrive.

The correction the industry has experienced has reset expectations and valuations to rational levels.

Unlike in 2019 or 2021, where investors were largely focused on companies showing strong growth and ability to acquire market share, today’s investors are focused on profitability and balance-sheet strength, prioritizing protection of capital.

This is an environment where experienced investors can identify high-quality businesses with real assets, strong leadership and sustainable operations – and partner with them on attractive terms.

Over the coming years, these conditions should result in strong risk-adjusted returns for the best operators in the industry.

Why today’s environment is compelling

The past five years have been a proving ground.

Operators have navigated volatile pricing, limited access to capital and the punitive effects of Section 280E of the Internal Revenue Code.

Merger and acquisition volumes have slowed, and more than $3 billion in industry debt is coming due by 2026. Many undercapitalized companies have exited the market or entered receivership.

But this dynamic has also produced a stronger cohort of companies – those that have weathered the storm by managing costs, maintaining compliance and building strong regional brands.

With valuations meaningfully lower than they were several years ago and sellers more receptive to creative structures, it seems that now could be a uniquely attractive moment to deploy capital into companies positioned for long-term success.

What to look for in 2025

Identifying the most promising opportunities across the evolving marijuana landscape has certainly been a moving target.

In 2025, businesses with one or more of the following criteria have garnered interest from equity investors:

• Strong branded product companies with customer loyalty and pricing power.
• Assets emerging from receivership that can be acquired without legacy liabilities and repositioned quickly.
• Companies with real assets and collateral, including owned real estate and licensed infrastructure.
• Retail operators in smaller, niche, underserved markets – particularly those near borders with prohibition states, where consumer demand is strong and competition is low.
• Companies that have created significant moats over the past several years – specifically companies that have increased market share through accretive M&A while much of the industry has struggled to stay afloat.
• Companies with creative structures that address the structural limitations of the U.S. cannabis industry (more on this below).

Those types of opportunities make compelling entry points for growth-oriented capital – especially when such opportunities are structured with appropriate downside protection.

Structuring for downside protection

Given the absence of exit liquidity in the cannabis industry across both performing and non-performing assets, deal structure is critical.

It’s best to rely on security structures that provide capital protection while aligning the investor with long-term upside:

• Convertible notes with downside protection and equity participation. Convertible notes offer investors capital-preservation features today while maintaining participation in future upside.
• Preferred equity with strong liquidation preferences. Generally speaking, with 1.5X-2.0X liquidation multiples and cumulative dividends, these securities ensure investors are prioritized in the capital stack and compensated for the time value of capital.
• Cash-flow participation structures that return capital through operational cash flows ahead of an exit, providing interim liquidity and reducing dependency on uncertain future liquidity events for realizing returns.

That last structure allows investors to manage duration risk and internal rate of return (IRR).

Even in the absence of public market access or strategic M&A, capital can be distributed back to investors from well-run, cash-generative companies.

Creative structures for a complex industry

In the past 12-24 months, sophisticated operators have put together multiple creative structures that are very compelling, including:

• Employee stock ownership plan (ESOP) conversions: For operators with consistent cash flow and strong fundamentals, converting into an employee stock ownership plan provides liquidity to founders and investors while aligning incentives with employees. ESOPs also create tax advantages, making them an elegant exit path in a market where M&A might be delayed. These tax advantages can be significant as the U.S. marijuana industry remains subject to Section 280 and, in many instances, can take a break-even company to significant profitability.
• Net operating loss mergers: Pairing profitable cannabis operators with defunct entities that hold large net operating losses or tax credits allows investors to reduce future taxable income. While complex, such transactions can meaningfully enhance after-tax earnings when structured correctly, particularly in anticipation of 280E reform.

These approaches aren’t just creative.

They offer a pragmatic response to the structural limitations of the industry, and they unlock new ways to generate returns.

The road ahead for the cannabis space

For the first time in years, federal momentum around marijuana reform is accelerating.

President Donald Trump has voiced support for both rescheduling marijuana and advancing the SAFE Banking Act.

In recent tweets, he noted: “The time has come for a more rational approach to cannabis,” and “We should not punish small businesses that follow state law.”

What’s notable is how much of Trump’s policy platform aligns with marijuana reform:

• Disempowering the cartel-driven illicit market.
• Combattng the fentanyl crisis with safer alternatives.
• Establishing clear, common-sense laws that respect state autonomy.
• Promoting American manufacturing and agriculture.

This alignment gives us optimism that marijuana reform could transcend partisan gridlock and usher in meaningful change – from capital market access to tax normalization.

Rescheduling or the passage of SAFE Banking could be the catalyst that reopens institutional capital and public market activity.

The next 12 to 24 months offer a critical window to invest in the future of cannabis.

The industry is no longer in a speculative phase.

Today’s opportunities are grounded in fundamentals: leaner operators, real revenues and, hopefully, a clearer policy horizon.

Today’s investors have the opportunity to support the next generation of industry leaders – those who have survived the storm and are now poised to grow with structural support behind them.

Pete Karabas is a founding partner at Key Investment Partners, a Denver firm that provides institutional-quality investment management for the cannabis industry. He can be reached at pete@keyinvestmentpartners.com.