Cannabis: Embracing Risk as a Market Advantage

Portrait of Sabas Carrillo

Today's top trend: Mega-mergers, says Sabas Carrillo.

By Liz Gold

What do you do when you get a call from a friend at an audit firm who says there’s a company that needs accounting help, wants to go public and raise capital – except no other firm will help it?

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If you are Sabas Carrillo, chief executive of Adnant Consulting, you take it on.

Nearly 10 years ago, when he was just starting his company in Los Angeles, Carrillo fielded that call and the client ended up being Weedmaps, the well-known tech company that allows users to review and discuss cannabis strains and local dispensaries for adult-use or medical marijuana.

Even though Weedmaps is a tech company and didn’t even touch the plant, Carrillo says, no other firm would work with it. It was for that reason the engagement was all the more enticing.

“The accounting industry is very conservative still, and back then, I started to understand risk and embracing risk as a market advantage,” Carrillo says. “I’m competing against other accounting and consulting firms out there and if we embrace risk in terms of the industries and companies that we serve, we’re always going to have a competitive advantage over some of the larger firms that don’t even want to touch this space.”

Cannabis wasn’t the only controversial industry for Carrillo and his team – they worked with clients in online gambling, online gaming and mining as well as fracking. But just for a little bit.

“Once the research and reports started to come out about how bad it (fracking) was, I started to back out because I didn’t feel like there was a right side of history to that,” he says. “Whereas in cannabis, I felt like there is definitely a right side of history to this.”

At the time Adnant Consulting was working with Weedmaps, banking wasn’t available to the industry. This meant all the dispensaries that advertised on Weedmaps had to drive to the Weedmaps office and pay their bill in cash every month. This ended up being fortuitous for Carrillo.

“While we were in the process of getting ready to help Weedmaps go public, I was meeting all these dispensary owners and they were like, ‘help us out, help us get ourselves organized and professionalized,’" he says. “Fast forward 10 years of that, and now you have a firm that has a long history and a long-standing relationship with the industry.”

Carrillo cut his teeth in small and medium-sized publicly traded companies, mostly always joining companies that were startups. Right out of college, his first job was at a startup company that went public and got acquired.

“I had gotten issued around $80,000 worth of options, so when the company sold, I got a check for $80,000 for my shares,” he says. “I was just right out of college. I was like, ‘I don’t know what this is, but this is how people can make money and I am going to figure out how to make a career out of it.’ From that point on, I always looked for companies that were close to the startup phase, or very recent startups or out of startups, but had some kind of plan to go public.”

Carrillo says he wanted to stay in the accounting and finance side of things, with a foot in operations and an eye on technology. So that skewed the companies that drew his interest. As he continued working with startups and taking them public, he was able to develop a long list of investor and startup friends who would band together and jump on board new opportunities as they would emerge.

“There was always this part-time side gig kind of thing, building companies, taking them public, or identifying companies that have recently gone public and finding a vulnerability for a piece of their sales process that they didn’t quite figure it out,” he explained. “We would go figure it out and then try to sell them that company or threaten to take that company public as a way of making money. I just thought there is a business here. I kept doing it again and again and again. I thought if I had a team that is really good at this, we could do this on an ongoing basis and that was really the basis for starting Adnant.”

Today, Carrillo works with some of the largest companies in the industry including MedMen, Green Thumb Industries, Cookies, Cresco Labs and Verano Holdings.

Adnant's client sweet spot is those companies about a year away or less from going public.

“Typically, they are generating revenue already,” Carrillo says. “They have some type of large footprint in terms of retail, manufacturing, processing, cultivation, and they have some sort of niche.”

They also typically have some sort of advantage. For example, perhaps they are well capitalized, have won a bunch of licenses in a variety of different states, or have been operators for five to 10 years and have a large retail footprint.

“There are a lot of groups in California, in particular, that control between five and eight retail locations that are now having the conversations,” he says. “We are seeing all these non-industry people coming in, scooping up assets, taking them public. They want to participate in that process, too.”

But while taking a company public is their bread and butter, companies don’t necessarily have to be going public in order for Carrillo’s team to work with them. The firm also provides consulting around mergers and acquisitions, interim CFO services (to a chosen few and typically for equity), as well as 280E tax services.

Carrillo says while 280E is still a big topic, there are other things that are taking center stage – such as operating as a multisite operator (MSO). There are many questions surrounding this issue, such as how a company structures itself to be able to operate in different municipalities, counties, and states, and how to segregate parts of the business that touch the plant and those parts of the business that don’t touch the plant.

“I feel that banking and structure for tax mitigation in a way is more important than 280E even though 280E is still a huge deal and a problem,” Carrillo says. “I feel like it’s been largely solved to the extent it can be solved. Which means, you should have your retail footprint mapped, you should have your non-retail parts of your business segregated and outlined so you can really carve out those expenses that are tied to selling, which is through your retail and non-deductible per 280E. You should have that nailed down now. It’s so well known and well documented. You just have to go through the work and create the policy and it’s pretty much it.”

As for trends, Carrillo says he tells people 2018 was the story of big retail and the first wave of consolidation and 2019 is the initial wave of megamergers.

“We expect to continue to see these megamergers among the larger MSOs and the pace and speed at which it happens is pretty much going to astound everybody,” he says. “I think we are going to see the emergence of brands as powerhouses. I expect either some acquisitions to go public or major raises around brands. I also expect to see brands making a concerted effort to have a national footprint very quickly.”