Booming new niche where opportunity meets complexity.
By Liz Gold
Cannabis startup costs are on the rise, as cultivators, vertically integrated retailers and laboratories are spending upwards of $1 million just to launch, making the sector as potentially treacherous as it is potentially lucrative for many tax and accounting firms on the leading edge of the booming new industry.
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The budding industry is confounded by differing regulatory models emerging nationally for both medical marijuana and adult use programs. But it’s clear – those cannabusinesses that are succeeding have help. More accountants are moving into the cannabis space, helping clients develop a sound financial infrastructure, a regular accounting and bookkeeping process and a solid understanding of IRS Tax Code 280E.
That said, there is so much up in the air.
According to Business Insider, nine states and Washington D.C. have legalized marijuana for recreational use. Medical marijuana is legal in another 29 states.
Individual states are still determining the types of consumption and products allowed; if there should be a license cap (or not); to include diversity or equity clauses in ordinances; and what medical conditions are covered. The overall consensus is – will states keep experimenting with their ordinances and regulatory bodies or will a blueprint develop?
Not surprisingly, given the competitive market, consolidation is on the rise, as is an increase in chain and national brands. For example, in Colorado, five companies run 70 locations or 14 percent of the market, according to Chris Walsh, founding editor and vice president of Marijuana Business Daily.
In Washington, 20 percent of retailers operate more than one store and dozens of infused brands, dispensaries, and recreational cannabis stores have expanded to multiple states.
Recreational sales are on the rise and as a result, legal states are facing a decrease in wholesale prices. Colorado has seen more than 50 percent decrease in their wholesale prices, while Oregon is ranging between 40-50 percent. Oregon also is dealing with an abundance of flower and heavy competition and that’s a result of having no caps on license applications. That is changing, however, as state regulators will discontinue processing new adult-use licenses effective June 15.
It’s become survival of the fittest.
Stay out of Trouble
”First, stay out of the IRS auditor office, says Robert Carp, of Carp Law Offices in Newton, Mass. Carp says if you are cannabis business, you will likely see the IRS in the first 48 months of your launch. His big tip? Documentation.
“Document every scrap of paper and at the end of the month print out every statement,” Carp says. “If you are paying by money orders or check, take a photo or copy it.” The first year is always the toughest, Carp says, adding that Tax Court Case Memo 2017-211 is required reading for cannabusinesses. He calls it is the best roadmap for anyone looking to avoid issues with the IRS.
Carp says cannabusinesses which get $10,000 or more in cash need to remember to fill out Form 8300. “A lot of people say I’ll catch up on it later,” he said, “They can take all the money that day plus penalties and interest. Don’t play. Fill it out.” If there are no business deductions on the first page of the tax return, the IRS will immediately flag you as a cannabis company. Cultivators don’t typically have any issues because everything they do is categorized as Cost of Goods Sold, which are allowed business expenses.
For dispensaries, it’s a different story. “You have to have companies,” Carp says. “A management company and a dispensary company.”
The Future is Green
“You can’t scale a company unless your foundation is rock solid,” says Charlie Bachtell, of Cresco Labs. “If you don’t have standard operating procedures and your culture tightened up, you won’t be able to scale, and those wobbly wheels will fall off.”
Pete Kadens, of Green Thumb Industries, says business owners need to have a clear intention and know why they are in the industry. “This requires a lot of capital and it can be hard to raise,” says Kadens, who had a background in highly regulated industries before entering into the cannabis business. “For every $30 million we lock in, only $10 million shows up in our bank account.”
Adds Bachtell, “We are in a lot of developing markets. We want to build a good business with the expectation the market will catch up. We want to maintain cash positive and cash neutral, we don’t want to be burning cash. [And] our cultural health is the number one KPI at the organizational level.”
Both are optimistic about the future of the industry and talked about how “cannabis now wins elections,” Kadens says. “If banks can lend you money in 2018 or 2019, functionally that makes us all legal.”
Branding is Everything
In a saturated market like Oregon, it’s necessary to differentiate not only your shop but your brand, according to Aviv Hadar, co-founder of Oregrown, in Bend, Ore. Hadar recommends including targeting people from all age ranges into your dispensary; event sponsorship; turning customers into repeat customers and acquiring customers that already have a go-to shop.
Oregrown positions itself a lifestyle brand – with outdoor sports like skiing, surfing, snowboarding in focus and cannabis use is secondary. “You don’t want to pinpoint who can come into your store,” Hadar says. “Try to be elegant and blend into your community.” You also won’t see any green crosses or marijuana leaves outside their dispensaries. Aside from hosting large community events – again, that are not focused on cannabis per se – Oregrown has strong relationships with elected officials and even has an individual focused on government relations.
Hadar says while social media is important, don’t rely on it to make sales since accounts have a way of disappearing due to platform restrictions. Instead, focus on the content that can be controlled – that lives on your website and blog. “Authenticity is the most important thing you can portray to your customers,” Hadar says. “You have to be authentic. We’re selling what Oregon is to people. Cannabis is secondary to that.