5 biggest mistakes cannabis ceos make

… and how to use them to land a client.

by andrew hunzicker
cannabizcpa.pro

the single biggest mistake cannabis ceos make is not paying enough attention to compliance.

more: five secrets to launching your own cannabis accounting firm | five reasons accountants should serve cannabis clients | cpa andrew hunzicker creates course in cannabis accounting
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that’s not surprising, considering many cannabis companies – especially those that have evolved out of the black market – are going from a completely unregulated black market to one of the most regulated industries in the u.s.

additionally, many cannabis companies include every vertical: farming, chemical processing, food manufacture and retail. this adds complexity, as well as many layers of regulation: city, county, state licensing, federal, irs, fda, osha, epa and more.

license requirements and federal law require compliance with all laws or your license can be revoked, not to mention large penalties and interest. good practice is to have the position in org chart of chief compliance officer who takes complete ownership of this key function.

as warren buffett points out in his two rules of investing: rule #1 don’t lose money and rule #2, see rule #1. if your company is shut down, it’s a complete loss to owners, investors and employees.

so, mistake no. 1 cannabis ceos make is about compliance.

here are four more:

  1. building a world-class _______________ (fill in the blank: grow, dispensary, extract, edible, product), but not being focused on building a world-class company. world-class product is just the start, and if you don’t have world-class accounting, tax, finance, compliance, risk management, corporate/board/legal, your valuation goes way down for any investment, loan or exit, and your risk of failure goes way up.
  2. not understanding the need for robust accounting. to further complicate #2, big accounting – and even mid-level firms – have taken a stand (or their insurance requires them) not to serve cannabis while federally illegal. because cannabis is the fastest growing industry in the u.s., you have a huge vacuum /lack of quality accountants supervising day-to-day accounting at almost all cannabis companies. additionally, the complexity of accounting required by the irs and state isn’t easy (gaap/accrual accounting required to implement absorption/cost accounting to comply with 280e/471). even without cannabis issues, farm accounting, chemical manufacture, food manufacture and retail are four distinct industries, greatly differing from each other and each with their own specific and complex accounting issues. the final piece of this “perfect storm” is the fact that almost all cannabis companies are using bookkeepers who don’t have the accounting background or skills to perform this complex accounting. these bookkeepers, for the most part, are not trained in accrual, gaap or cost accounting (most don’t have accounting degrees or cpa designation) and simply don’t have the knowledge to account correctly for these entities. this means these entities are likely out of compliance; see #1 above. your tax cpa might do a quick review at year end, but usually is not reviewing your accrual accounting or bookkeeper each month.
  3. not paying enough attention to market conditions. for example, in late 2017 there was a supply glut of flower in oregon, prices dropped significantly and purchases by dispensaries went way down the last couple of months in the year, with many doing consignment only. because of this many farms were put on the market at pennies on the dollar or shut down. however, we know of several grow startups that had plans to invest large sums of money starting from scratch without investigating what might be available for sale. with predictions as high as four out of five new cannabis startups going under in california, smart ceos and investors might sit back and wait to pick up premier assets on the cheap.
  4. not planning for worst-case scenarios. it’s fairly easy to predict your yield or volume, and prices at the top end of quality might stay stable, but it’s much harder to predict whether you can actually sell large volumes of product at good pricing. the field is loaded with competitors and many have the same plan: increase the yields and move lots of product. simple math says some will be able to but many won’t. are you well capitalized to sustain long periods of low cash flow?

so how to use this knowledge to land a ceo client?

first, you need to find cannabis ceos and their email. luckily, this is very easy.

next you send them an email and you highlight some of these “pain points” in your email – how they are at risk of loss of license, and exposed to penalties and fines for not doing accounting right.

attach a link to your calendar (calendly), and request a call to discuss.

follow this with a proposal/offer, based on your value, and for the ceo who gets the importance of these issues, you might land your first cannabis client!