From Kevin Haller, who is helping cannabusinesses build their empires.
By Liz Gold
As an accountant looking to work with cannabis clients, one thing is certain – make absolutely sure you understand what you are getting into.
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According to Kevin Haller, CPA and chair of Petrinovich Pugh & Company’s Cannabis Practice Group, accountants who want to get into the cannabis industry should consider these three key things:
- establish an onboarding process (which should include background checks),
- convey your expertise and support for the industry through your website and
- get involved in the cannabis community.
PP&Co formally launched the firm’s cannabis practice this year, but the firm has been working with cannabis clients since 2014. Until now, the firm’s marketing to the cannabis industry has been somewhat stealthy, mostly by word of mouth. This year under Haller’s direction, the firm began a more targeted, public campaign to attract cannabis clients, including a comprehensive marketing plan and development of educational materials to share with cannabis clients and prospects. Firm cannabis industry group members have joined cannabis industry organizations and exhibited at industry trade shows. Most recently, Haller became a member of the National Cannabis Industry Association Cultivation Committee, helping them decipher compliance issues.
He takes a holistic approach to working with cannabis clients, establishing a framework for internal controls and monitoring to address compliance. “I believe compliance may be the trigger that starts the consolidation of cultivators/manufacturers/distributors/retailers in the industry,” he said. “We want our clients to have the framework to survive the inevitable consolidation and to entice investors.”
Haller brings a lot of passion and knowledge to his work with cannabis clients. Because a recent multiple sclerosis diagnosis propelled him to start taking CBD to address his chronic lower back pain, he can illustrate both his personal experience and knowledge of the plant life cycle and the nuances of the recreational and medical sides of the industry – which is rare among CPAs.
Though PP&CO is mainly based in California – with offices in San Jose and Santa Cruz – Haller lives in Lake Oswego, Oregon, where he relocated with his wife and daughters three years ago. He primarily works remotely, traveling back to San Jose as needed. As it turns out, this decision has helped fuel PP&Co’s move into the Pacific Northwest – at the direction of the firm’s partners, he is currently looking for office space in Portland.
The client sweet spot for Haller is those cannabis businesses that are already operating and interested in growth and expansion. They are in it for the long haul and want to build an empire. Of the 16 license holders in San Jose, PP&Co is working with four. The firm’s clients run the gamut from cultivators to distributors, from manufacturing to those companies that are vertically integrated. He sees a lot of clients whose financial data requires extensive cleanup and, like many CPAs in this industry, said that it’s much easier if they start out on the right foot.
His specialty is helping companies get their internal controls and infrastructure in order. He often advises his clients to seek board oversight and governance and to develop a strong internal controls framework. And while he admits that the initial financial outlay can be substantial, he helps business owners prioritize their to-do lists to maximize the investment.
The hurdles for the industry are many, according to Haller. Here are five of the biggest challenges he sees cannabusinesses having to confront.
Black market and 280E: 280E does not incentivize cannabusinesses to become legal and in fact has caused a rise in the cost of manufacturing cannabis, resulting in the inability of the legal market to compete with the black market on price. Also, the black market cannot be quantified, which is a problem with valuating a cannabis company. “We need to get rid of the black market and incentivize legitimate businesses,” he said. “Until the production and sale of cannabis is federally legal, the black market will continue to thrive in states where it is not.”
Still illegal at the federal level: While the West Coast has quietly supplied much of the country with cannabis on the black market for decades, now states where it is legal are overproducing, but the product cannot leave the state. This further supports black market sales and distribution and oversaturation in the legal market. It also poses risks to those serving the industry – CPAs included.
Banking: With no real solution for banking, compliance will be the focus of audits. Because banks can provide no paper trail, it is hard to track the money. This also has caused the industry to be creative. Although there are no formal/legal banking solutions, it is very likely that money from legal cannabis enterprises is making its way into the banking system.
Local jurisdiction taxes and 280e hurt: Everyone wants to capitalize on the industry, but no one considers the price expectation, which has been established by the black market. Most customers appreciate the convenience of the stores and the testing – they feel secure making purchases and they know the product is safe. However, cost is still a huge factor for most cannabis users. Most consumers can find products on the black market and will continue to do so if they can get more product and at a lower cost than they can legally. Unless the legal operators can compete with black-market pricing, the black market will continue to flourish, and the legal market to suffer.
Software solutions: Software solutions for the industry’s specific needs are improving, but many cannot provide cannabis businesses the ability to properly capture cultivation/manufacturing costs, or other key data necessary to make informed management decisions.
Haller said that rather than focusing on bypassing 280E, cannabusiness owners should be addressing how to maximize their top line. In other words, concentrate on compliance and, in the case of cultivators, focus on growing the best product. To assist with this, he introduced a grow plan analysis. The idea is to capture information from the grow, including what was harvested and the selling price, to develop yields for specific strands.
“Focus on a killer product and one that will give you the highest yield in your space,” he said, adding that knowing the density yield and getting the most product from your harvest is the best way to improve your top line. “You want to focus your efforts; don’t be everything to everyone. If you can generate 800 more pounds a year from changing what you grow, that’s more revenue at the same cost.”
Haller said that PP&Co is interested in becoming a partner in their clients’ success – including their cannabis clients. The idea is not just to record the numbers, but to help guide cannabusinesses to identify and achieve their overarching goals. “We tell our clients, we don’t want to be a spoke in your wheel, we want to be your wheel.”