“Every one of my cannabis clients needs multiple services and I think that’s what got people excited.”
By Liz Gold
When Mike Goral joined Squar Milner in January, he was brought on to start the firm’s cannabis practice. Headquartered in Newport Beach, Calif., Squar Milner has approximately $100 million in revenue and is ranked as one of the top 50 accounting firms in the U.S. with 10 locations throughout California and the Cayman Islands.
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Led by Goral, a state and local tax specialist for more than 20 years, the firm’s cannabis practice has 35 team members working with cannabis startups.
The services are similar to any other industry, Goral said. “We handle the whole gamut that any company would have; we just focus our attention on cannabis.” These services include bookkeeping, QuickBooks and other systems setup, income tax compliance, sales and excise tax returns and consulting.
“My international partner is busy as can be with Canadian investors looking to invest in U.S. cannabis companies,” he said, adding that mergers and acquisitions also come into play. “How you structure these deals can have a big effect on how the entity gets taxed. We offer all these services for other companies but (our group) focuses on cannabis.”
As a SALT practitioner, Goral was used to helping businesses in multiple states and deciphering taxes according to jurisdiction – but as cannabis was becoming more available recreationally and medically, and as more states started to get involved, he started seeing a big need for services. Cannabis business owners started talking to him about what they were facing – namely there was limited professional help to turn to regarding taxes, compliance, cash management and just everyday business questions. These businesses wanted to be legitimate, but didn’t have the support they needed.
“I thought someone needed to study this and figure it out and help these people,” Goral said. “It was an area that was underserved, and I jumped in head first and it’s been great.”
That’s not to say there weren’t some challenges, at first.
“There were certain members of the firm who were skeptical about getting into this space, it was easier to let someone else do it,” Goral said of his firm. “But they saw the need and demand out there. Every one of my cannabis clients needs multiple services and I think that’s what got people excited. It’s not just doing tax returns; it’s consulting and all the other work.”
Goral has worked with everything from seed to dispensary cannabis matters as well as business issues such as funding from private equity, venture capital and investment banking; loan structuring, mergers and acquisitions, cloud-based apps and other software relevant to the cannabis industry.
That said, he has some restrictions – all his clients must be licensed, meaning if you are looking for someone to help you obtain an operator license, Goral is not your guy. You need to see an attorney for this and Goral works with several throughout the country. His clients also need to be legitimate and compliant, following all the regulations properly. He works with $1 million clients all the way up to a billionaire. And though most of his client base is in California, he works with foreign Canadian investors looking to buy companies here in the U.S. as well as clients in Oregon, Washington state, Colorado, the East Coast and even in the Caribbean.
“Funding is always an issue for all these companies because they can never have too much money,” he said. “All of them are seeking a few million here and there to do expansion, but mainly what they are looking for is for somebody to do their books and taxes.”
Goral said he finds some cannabusiness owners keep it in the family, which means you have Mom working on recipes for edibles in the kitchen, one cousin driving the truck on the farm and yet another relative keeping the books.
“We are making sure they have real books and records so that things can be reviewed to give investors assurance the numbers are legit,” he said. “They (investors) want to know what’s going on with the money they just paid, so we come in, get the books done and put in policies and procedures around the cash.”
Goral pointed to his firm’s experience with casino clients, which has helped with the cash heaviness of the cannabis industry.
“We talk about who is going to count the money, who is going to double count the money, who is going to have the combination to the safe and bring the money to the truck, so you don’t have product and money going out the back door,” he said.
In terms of the California market, which Goral described as on par with the Canadian market, the opportunities are many and are becoming more sophisticated.
“What has really changed, is when Washington, Oregon and even Colorado had recreational cannabis, no one really cared,” he said. “The population of those three states combined is not as significant as a Top 10 population state. Because of that, you now have business professionals in this business, whereas before it was Mom and Pop grew four acres in their backyard. At most, they didn’t generate that much revenue and if they broke even they were doing good. Now you have private equity, venture capital and East Coast money putting millions of dollars into these new cannabis companies in California because the market is so large here.”
Still, despite the large market, funding, banking and tax compliance continue to be the biggest issues Goral’s clients face. And while banking is still pretty “spotty” as he described it in the state, those in cannabis still find a way in. For example, it’s possible for a business banking customer that has been around for 15-20 years in another industry to get a bank account for their new cannabis company because that financial institution doesn’t want to lose their primary business account.
“From a banking perspective, they are willing to a certain extent, to accommodate the smaller cannabis business because they want to keep the legitimate business if you will,” he said, adding that in other areas that are more rural, there are not a lot of other businesses to keep the bank afloat.
Goral said he’s continued to be impressed with the innovation that is going on in the industry in ways of growing, consuming and operating. He also said he’s been surprised – if not disappointed – at the turnaround time many of the cannabis business owners want to hold onto their companies.
“Their end goal is to sell out in three years,” he said. “No one has a 10-year goal, everyone is looking for quick money and that is one of the disappointing things. And the valuations people think they are at are beyond reasonable. Some companies are being valued at 40 times their current value, other companies are being valued at 150 times earnings. That starts to get pretty outrageous.”
Goral is excited about being in the industry but for those CPAs who are thinking about jumping in, be forewarned, you’ll need more than just a weekend to brush up.
“You have to study up on this, it’s very complex and here in California, the regulations aren’t even finalized, we’re going through our second set of temporary regulations,” he said. “You have to study and be dedicated to it. It’s a great area to be in and the cannabis community is very collaborative, but if you are not willing to put the time in, you have no business in it because it is changing too quickly.”