Cannabis Industry Investment Is Risky, Expensive, CPA tells GABB members
The cannabis industry might be one of the largest industries in the next decade, but right now, it’s risky, expensive and faces uncertain legal and tax hurdles, says an accountant who specializes in the cannabis industry.
Matthew Foster CPA, a partner with Frazier & Deeter, LLC and the firm’s National Practice Leader for the Cannabis Industry, spoke about accounting and the cannabis industry earlier this year at the Georgia Association of Business Brokers.
“This is not an industry for the faint of heart,” warned Foster. “If you have a very low risk tolerance, I would just advise you to stop right now and wait until the feds open it up in about five or six years, possibly longer.”
The biggest risk? The whole industry is illegal in the eyes of the federal government.
“From a federal perspective, every one of these companies that are in cannabis are lawless citizens of the U.S.,” said Foster. “They’re all breaking the law.” Federal officials could “come in at any moment and break them up if they wanted to.”
If the company is in one of the many states that has legalized cannabis, most assume that federal officials won’t intervene, “unless they do something really out of line,” Foster said.
Georgia’s Cannabis industry
Georgia’s cannabis industry is poised for growth because the state recently passed a law legalizing the production and manufacturing of low THC CBD oil, defined as anything with a THC content of 5% or less. That’s just strong enough for medicinal use, and not strong enough for intoxication. The new law allows up to six licenses for growing medical marijuana, plus licenses to the University of Georgia and Fort Valley State University for research.
Of the six private licenses, two will be for large productions, up to 100,000 square feet, and four for up to 50,000 square feet. There’s a $25,000 non-refundable application fee for a large license, along with an initial $200,000 licensing fee and $100,000 annual renewal fee. The smaller licenses carry a $5,000 non-refundable application fee, along with an initial $100,000 licensing fee and $50,000 annual renewal fee.
“So you need a lot of capital just to hold the license in Georgia,” Foster said. “That’s before you even start with the production and the costing and everything else.”
Recently Flourish, an Atlanta-based supply chain management startup that helps cannabis companies monitor logistics, raised $2.1 million in a seed round led by 7thirty Opportunity Fund, the Atlanta Business Chronicle reported.
Georgia has made cannabis companies ineligible for any state tax incentives. “You are going to pay tax on every single dollar that you make here in Georgia,” Foster said.
Bummer, right?
Which means that companies in the cannabis industry right now must be highly capitalized. “You have to have a lot of money at your disposal to weather the storm until the feds open it up,” said Foster.
Frazier & Deeter works with clients to set up inventory methodologies that will move as many expenses as they can under current tax law from their overhead into the cost of inventory.
Banking Obstacles
Another obstacle for the industry is banking. Under current laws, federally insured banks are not allowed to do business with cannabis companies.
“These companies can bank with state-sponsored banks, with credit unions, if those banks decide they want to work with this industry. But they can’t bank with FDIC-insured banking institutions, your Wells Fargo, your Bank of America, your Chase, because they are federally regulated,” Foster said.
Cannabis industry investors are lobbying legislators to pass a law that would make cannabis similar to hemp, which would open up a more traditional taxation and banking.
Foster predicted that Congress will act on banking before legalization because right now, the federal government is losing lots of potential tax revenue from the industry.
Cannabis VS Industrial Hemp
Cannabis and industrial hemp represent different segments of the market. For example, industrial hemp is becoming a very attractive option for people to invest in thanks to last November’s farm bill. The farm bill, in essence, descheduled industrial hemp, defined as a product with a less than 0.3% THC content per gram. Hemp fiber and oilseed can be used in variety of industrial and consumer products. What the bill did was deschedule hemp, meaning it’s still illegal at the federal level, unless you are producing and working in a state that has legalized industrial hemp.
Cannabis is still illegal from a federal standpoint, despite being legal for medicinal uses in 33 states and the District of Columbia, and in 11 states and D.C. for recreational uses. Because cannabis is included in Schedule I of the Controlled Substances Act, it falls under section 280E of the IRS code. “That means cannabis businesses cannot deduct any necessary or ordinary business expenses for federal income tax purposes, nor can they claim any Federal credits,” Foster said.
“You can deduct your cost of goods sold, but everything else in your return is non-deductible,” Foster said. “You can’t have R&D credits, you can’t have business credits, and you can’t have jobs credits. Take your revenues, deduct your cost of goods sold, get your gross profit, and that’s your taxable income: your gross profit.”
But companies with shrewd accountants can take advantage of certain sections of the IRS code that allow companies to capitalize their overhead, which would allow them to deduct some of the expenses for rents, utilities, property taxes, salaries, depreciation, etc.
Managing Cannabis Finances
Foster recommends that their traditional cannabis clients do full financial statement audits which allows for an opinion on what’s capitalized into the cost of inventory and what’s being deducted as cost of goods sold. If the IRS does come in and audit, “we have a lot of support for the position that we have taken.”
Cannabis companies should NOT use the name of the plant in their company name, Foster recommended, to try to minimize the red flags that the IRS will see on these companies.
“First and foremost, the words cannabis, hemp, and marijuana should not appear on your tax return, anywhere,” said Foster.
Also, these companies should not get creative in taking deductions, Foster said. If you go that way, “start putting money aside because you’re going to get audited.”
He also recommends that anybody in this space should operate as a C Corp, mainly because it’s the lowest tax rate that you can find on federal level right now. Also a C Corp allows a company to “put up a corporate wall around your investors.”
If the IRS starts attacking the company, the investors are only out what they put into the company. It won’t be able to go after their personal assets. He also recommends portioning off different sections of the business into separate entities for real estate, equipment or intellectual property.
Potential Profits Huge
Returns on investment are a mystifying 10 to 30 multiples on revenue streams in the industry. “I haven’t quite figured out what’s going on in this space,” Foster said. “This must be Toad’s Wild Ride for investors.” But last year, a lot of people made a lot of money.
“So, it depends on when you get in, what you get in to, and how long you’re willing to ride this roller coaster,” Foster said.
Big U.S. companies are awaiting new banking regulations that will ease investment into this industry. Foster said “They’re either waiting to go public, or they’re waiting for big pharma, big tobacco, or big alcohol to come in and buy them up.”
Read MoreBusiness Buying Scams to Avoid
1. They want you to hold money in your escrow account (usually a large dollar amount so the deal is attractive). The risk is that the deal or client requires you to transfer some or all of the money out of your account before you bank has time to verify the funds are legit and can cover the transfer. This actually happened to a Georgia attorney awhile back and it was in the AJC. Talk about bad publicity for the attorney who got suckered; he was very embarrassed.
2. The transaction involves an overseas or out-of-state company wanting to do a deal with either an individual or a business in located Georgia, and they need a Georgia attorney or other professional to represent them.
The Do’s and Don’ts of Selling Your Business
Selling your business can takes as much planning and careful consideration as starting it does. The Atlanta Small Business Network recently interviewed former GABB president Michael Ramatowski, Managing Partner at RamBizGroup Business Solutions, in the ASBN studios.
Considering the most common reason for selling a business is due to retirement, Michael says it’s important that a business owner get the most out of selling their business. He said that’s why members of the Georgia Association of Business Brokers make sure that business owners are getting the most out of their business and not leaving any equity on the table.
Michael also shared with ASBN exactly how much work goes into selling a business. Business brokers generally follow certain steps to determine the value of a business. He says for GABB specifically they will begin their process with a no-cost meeting with the business owner before they begin to work towards determining the price at which the business would sell for. From there they will be able to determine how they are going to fund it and whether or not the business is ready to be taken to market.
Read More
Georgia: Top State For Business
Georgia has been ranked the top state in the nation for business for the past five years by at least two business ranking companies, according to Emily Poole, metro Atlanta project manager for the Georgia Department of Economic Development.
Poole spoke to the Georgia Association of Business Brokers on June 25 at their weekly meeting. Site Selection, an internationally circulated business publication covering corporate real estate and economic development, ranked Georgia tops in the nation for business from 2013 through 2018. Area Development, a leading executive magazine covering corporate site selection and relocation, ranked Georgia tops in the nation from 2014-2018, Poole said.
In her presentation “Georgia: A Profile in Economic Development,” Ms. Poole described how her department works to develop business in Georgia, how they track trends and how varying factors converge to make local projects happen. The GABB is the state’s largest association of professionals dedicated to buying and selling businesses and franchises.
Among the items that make the Peach State favorable for business:
- Unchanged 6% corporate income tax rate for over 50 years; lowered to 5.75% effective January 1, 2019.
- Consistent AAA credit rating from all three credit agencies for the past 20 years
- First Southeastern state to adopt single-factor apportionment
- Certain tax credits applicable to payroll withholding
- Top 10 for lowest effective tax rate
Georgia many economic incentive programs include job tax credits, a port tax credit bonus, a quality jobs tax credit and mega project tax credits. The state also has discretionary grants for land acquisition, site preparation, building construction and equipment costs. Community incentives include the potential for property tax abatement, buying land at a reduced cost, waivers of permitting fees, site preparation and cash grants.
Georgia-Profile-In-Economic-Development-Global-Commerce-PowerPoint-EPoole-PUBLIC
The Georgia Association of Business Brokers meets at conference room hosted by the Georgia Association of Realtors at 6065 Barfield Road, Sandy Springs, GA, 30328. The monthly GABB meeting is free and open to the public and is preceded at 9:45 a.m. by a free light breakfast and networking session. Thanks to Christopher J. Cowart, CFP®, CTFA, CRPC®, Vice President, Private Wealth Management for SunTrust Bank for sponsoring the meeting. The meeting will last from about 10:30 to somewhere between 11:30 and noon. Please fill out the form below if you are not a GABB member but wish to attend our meeting.
Emily Poole serves as the Region 3 (Metro Atlanta) Project Manager for the Georgia Department of Economic Development. Prior to joining the Department, Emily worked for the City of Fayetteville as their Director of Economic Development, as well as the Fayette County Development Authority as Vice President of Economic Development.
Awarded Fayette County Young Professional of the Year for 2011, Emily has an impressive record of community service and partnership. The 2012-2013 President of Young Professionals of Fayette County, Emily has served on the board of the Fayette Chamber of Commerce and Main Street Fayetteville. Currently, she serves on the Board of Directors for Bloom, AV Pride, and Fayette Senior Services. Additionally, she is a 2013 graduate of the Atlanta Regional Commission’s Regional Leadership Institute, and a 2014 graduate of Leadership Fayette.
A native of Fayette County, she graduated from McIntosh High School in Peachtree City. She received a Bachelor’s degree in Psychology & Human Services and an MBA in International Business from Clayton State University where she was recognized with the “MBA Service & Leadership” Award for the Class of 2016.
The GABB is the state’s largest and oldest association of professionals who specialize in brokering the purchase and sale of businesses and franchises. Broker members help owners determine the asking price of their business, create marketing plans and strategies for selling their business, identify and qualify buyers, and have the knowledge, experience and skills needed to help maintain the confidential nature of the process. Affiliate members include bankers, lawyers, appraisers, insurers and other professionals who work closely with brokers to help owners and buyers get to the closing table.
For more information about GABB, please contact GABB President Dean Burnette at 912-247-3209 or dean@b3brokers.com, or GABB Executive Director Diane Loupe at diane@gabb.org or 404-374-3990.
Read More
Word Up: Best and Worst Words to Use in a Business For Sale Ad
By Peter Siegel, MBA is the Founder And Administrator of BizBen.com
When it comes to selling your business, the right words matter. Using the wrong words can prevent or delay a sale, says Peter Siegel, Founder of BizBen.
When you’re selling a small business online, the first 30 to 45 days are critical. So Siegel says you want to fine tune your text before posting your business for sale online!
He offers a glossary of “Best Words & Phrases” and recommends using them in your copy, but only if they are true. And he also recommends avoiding the “Worst Text & Phrases.”
Best Text & Word Phrases To Use In Your Business For Sale Ads
Good Books And Records
Real Estate Included
SBA Loan PreQualified
Verifiable Financials
Owner Is Retiring
Great Location
Owner Carry Back Note
Health Forces Owner To Sell
Owner Will Carry
Owner Financing
Growing Sales
Growing Revenues
Consistent Earnings
Stable Revenues
High Adjusted Net Income
Provable Cash Flow
Staff In Place
Absentee Run
Semi-Absentee Run
For Sale By Owner
Relocatable
Home Based
Training And Support Provided
Long Established
Employees In Place
Management In Place
Easy Operation
Easy To Learn
Training Will Be Provided By Owner
Room For Growth
Steady Clients/Clientele
Computerized Operations
POS System In Place
Updated Client Database
Good Track Record
Owner Will Train
Owner Will Carry A Note – Help Finance The Deal
Long Lease In Place
Great Lease Terms
Will Cooperate With Brokers And Agents
Worst Text & Word Phrases in Biz for Sale Listings
Potential!
Owner Must Sell
My Loss Is Your Gain
No Training Provided By Owner
Don’t Let This Opportunity Slip Away
Will Sell Quickly
Moving Must Sell Quickly
Location, Location, Location
Must Check This Out
Act Fast Before It’s Gone
Priced To Sell
Will Not Last
Money Maker
In A A+ Location
Must Move Quickly
Don’t Lose Out
Dumb Advertising Strategies & Text Choices:
– Using All Capital Letters On Words
– Listing No Financial Information (Or Very Little)
– Giving No Selling Price or Price Range
– Not Giving A General Location
– Giving Very Little Information In Posting
– Using Multiple Exclamations – like !!!!!!!! to make a point, etc.
About The Author: Peter Siegel, MBA is the Founder And Administrator of BizBen.com (established over 20 years!) and is a Business Purchase Financing expert (SBA and Non-SBA financing) – see BizBuyFinancing.com. He consults daily with California business buyers, owner/sellers, business brokers, and agents regarding buying and selling California small businesses. Call him today regarding advise on finding, buying, selling, financing a business purchase/getting pre-qualified (ask about the BizBen ProBuy and ProSell Programs for business buyers and owner/sellers, and brokers). He’ll also give you referrals to the best resources on buying and selling businesses, brokers, etc and a FREE copy of his eBooks “How To Find And Buy A California Business Successfully” or “Valuing And Selling A California Business Successfully” with any personal consultation/service. Peter Can be reached direct at 866-270-6278 (if you get voicemail please leave some good times to reach you and a detailed message – thanks).
Read More