Cannabis might invoke associations with hippies, but it's become a very sophisticated area of law that's fraught with issues that complicate not only the business models and their financing, but also M&A. It understandable why it has appeal to buyers and potential investors: revenues in this sector have doubled over the past three years and are on track to reach $25 billion by 2025.

Scot Crow, a governing board member at Dickinson Wright and head of the law firm's private equity practice, says the industry currently comprises a handful of big players, a lot of little players. However, uniquely, they're all competing against one really big player, and that's the illicit market.

"If you canvas the cannabis industry today, even with the growth of legal multi-state operators' growth throughout the United States, the largest competitor in each and every state still remains and continues to be the illicit market," Crow says. "That's the challenge is to get patients to convert from buying from their illegal growers, their illegal retailers that they've done historically, to now convert to coming to a retail location to purchase their cannabis."

All the conflicting laws between federal and state regarding distribution, cultivation and financing creates risk for investors.

"It's definitely keeping your typical private equity players at bay," Crow says. "If it's a true private equity — a typical fund, a New York, Boston-style fund — they have prohibitions against investing even in these styles of businesses. Some can invest in horizontal equipment players — lighting, fixtures, things like that — but direct investments into what are called plant-touching businesses are relatively prohibited. So, until federal law changes, access to those markets is going to be continually barred unless something were to change with those funds. You are seeing specialized funds pop up in the sector but those funds are $25 (million), $50 (million), $100 million. You're not seeing a $500 (million) or $1 billion fund that is in the sector that's buying up plant-touching assets. Federal legalization has a chilling effect for a lot of people. It continues to be an illegal substance. It's not being policed or enforced, and for the most part I think the government's position has been and will continue to be that if you're compliant with state laws you probably have little risk of any sort of enforcement activity."

While it's an industry where it's tough to project the operating environment, the valuation methodology is becoming more normalized. An EBITDA-based valuation is what banks and investors are starting to look at. Unfortunately, those multiples have come down to about a third of what they were 18 months ago. While there's still a lot of M&A activity, some of it is M&A activity by necessity — not to maximize value but for those that are looking for capital that don't have the ability to run their operations or find themselves in a situation where they need to partner to protect against things like price compression if they're solely a cultivation operation. Companies that aren't vertically integrated are starting to move to join those vertically integrated operations and grow conglomerates on a on a state-by-state basis.

"M&A is occurring," he says. "It's not the fun type of M&A where everyone's maximizing value. It's more merger by need as opposed to merger by desire."

Crow, who was one of the earliest lawyers to focus on helping clients get up and running in legal marijuana-related businesses and now has nearly 10 years of experience in the industry, spoke with DealTalk host Michael Marzec about the latest trends in the red-hot cannabis industry.