Financing, taxes and cash management – three of the most important topics for cannabis entrepreneurs – took center stage during last week’s CannaBusiness Money Show events in Boston, Chicago and San Francisco.
The cannabis professionals who attended each event were as diverse as the host cities. In Boston, the 200-plus crowd was comprised predominantly of investors and potential financiers; in Chicago, most of the 120-plus attendees were looking to enter Illinois’ new medical marijuana industry; and in San Francisco, the 150 or so attendees were a blend of veteran dispensary owners, seasoned investors and new entrepreneurs.
Each group took away a long list of best practices on how to handle the financial side of the marijuana business.
The Industry’s Growth Continues to Impress
Chris Walsh, editor of Marijuana Business Daily, kicked off the conference with stats from the Marijuana Business Factbook, which shows that the U.S. cannabis market could hit $2.7 billion in 2014. Growth in the recreational market is helping boost this number upward, but so is impressive growth at medical dispensaries.
According to the research, Walsh said medical marijuana patients spend an average of $156 a month on cannabis.
The growth could force dispensaries and retail shops to become more specialized with their product offerings. Travis Howard, owner of Green Dream Health Services in Boulder, Colorado, said his business will target high-end connoisseurs when it opens for recreational marijuana later this year.
“Decide what type of business you’re going to be before you enter the cannabis market,” Howard said. “Don’t let the market decide.”
Businesses that do not grow within the first few months, however, face a shaky future. Walsh said businesses that do not succeed immediately usually disappear.
“Businesses that are not profitable after one year usually fail,” Walsh said. “Cannabusiness is a tough business.”
Dispensaries Are Getting Bank Accounts… The Right Way
The banking industry has publicly reinforced its ban on cannabis businesses, even after the Department of Justice released banking guidelines in January. Business owners at the conference said they have had success opening accounts with smaller, regional banks; and they’ve done so by being open and transparent with the institutions.
There is still a high level of secrecy within the banking conversation, and not one cannabis entrepreneur would give the name of participating banks. Andrew DeAngelo, general manager of Harborside Health Center in Oakland, said dispensary owners should target non-FDIC-insured banks; preferably local credit unions or non-profit banks.
He said cannabis owners should also inquire to see if the bank has a cannabis policy before beginning a relationship with a branch manager. And when that relationships is established, DeAngelo said entrepreneurs should be as transparent as possible.
Lance Ott, president of Guardian Data Systems, warned against lying or misrepresenting the nature of a business when creating these relationships. Financial institutions are smart, Ott said, and businesses that make frequent cash deposits are under scrutiny. Also, cash that smells like marijuana will raise more than a few eyebrows.
Some 280E Strategies Aren’t Working Anymore
It’s become commonplace for cannabis dispensaries to also offer non-cannabis services, such as massage, yoga and counselling, to allow the owner to write off a percentage of the business’ expenses on the annual tax filings. Attorney Robert Carp, a former IRS agent, advised business owners to give employees non-cannabis responsibilities in addition to their cannabis responsibilities, in order to increase the savings.
“If you’re shrewd, you can reduce the tax bite,” Carp said. “You need to think like an IRS agent.”
Jim Marty, a CPA with Bridge West Consultants, said these tactics only work if a business owner can show revenues from the ancillary business. IRS agents, he said, have wised up to many of the tax-saving tactics used by cannabis businesses.
“You need to be able to show real revenues from these businesses,” Marty said. “IRS agents aren’t stupid. You can’t just say it’s a yoga studio.”
Marty said he estimates that 10% of the marijuana businesses in Colorado are currently under audit.
Bad Cash Habits That are Hurting the Industry
Our panelists spoke with extreme optimism about the trajectory of the industry, and said that they are seeing good business practices flourish in many areas of the country. However, at all three conferences, panelists said that a number of recurring bad practices are landing business in hot water.
Tony Gallo, senior director of Sapphire Protection LLC, said cannabis businesses, like pawn shops and jewelry stores, need to adopt better cash-handling systems, such as using vaults or professional safes to store their money. Gallo said many businesses purchase inexpensive gun safes for cash handling. Crooks can break into these safes with relative ease, he said.
Carp said he sees businesses mismanaging their accounts. They link a business account with a personal account, use business accounts to pay for personal expenses and fail to document expenses.
“The IRS hates this,” Carp said.
DeAngelo warned against depositing more than $10,000 in cash at once into a bank account. Frequent deposits of large sums of cash, he said, are sure to draw negative attention from the banks.
There are Multiple Ways to Attract Private Investors
Private financing is still the most popular way for cannabusinesses to raise money. Most business owners begin by asking friends and family. There are other ways, however, to attract funds. Greta Carter of the Cannabis Training Institute said she financed one of her businesses by offering employees profit sharing in the business.
The market for angel investors is growing significantly. Troy Dayton of the ArcView Group and Brendan Kennedy of Privateer Holdings said that they receive a windfall of pitches every month from eager cannabis professionals.
Kennedy said angel investors will intensely scrutinize entrepreneurs as they look to weed out the cream from the stock. He wants to see an entrepreneurs business plans, employee handbooks, budgets and other business documents. He also wants to see that the entrepreneur has vision within the market.
“The faster I kill a pitch, the better,” Kennedy said. “My goal is to get to ‘No’ as quickly as possible.”
The Public Sector is Growing, but Obstacles Exist
There has been impressive growth in the market for publicly traded cannabis companies. According to Chris Taylor of Advanced Cannabis Solutions, the number of companies has grown from 10 in early 2013 to more than 120 today. But these companies struggle with volatile share prices, intense SEC scrutiny and the threat of graft by business owners.
Taylor, whose company had its trading halted by the SEC just days before the conference, discussed the issue openly with the crowd. Marijuana Business Daily will run a separate story on the matter next week. But Taylor said that the growth within the space muddied the waters.
“Every day another company selling vape or tinctures or an extraction method enters the market, and it is making it very confusing for investors,” he said. “It’s still a huge opportunity for those interested in raising money.”
The CannaBusiness Money Shows were a production of CannaBusiness Media, which also publishes Marijuana Business Daily. The company’s next event, the National CannaBusiness Conference & Expo, is being held in Las Vegas this November.