Originally published on Forbes.com.
One way you can tell a thing is really becoming a thing is when you have national accounting firms jumping on it. So it looks like cannabis is now a thing. I had a nice discussion with Rick Frimmer, a managing director at EisnerAmper (According to this list EisnerAmper ranks 18 in the United States.) Rick is now the Cannabis and Hemp Practice Leader at EisnerAmper.
Rick is a graduate of Wharton and Harvard Law School and is both a lawyer and a CPA. He practiced law for forty years with a focus on restructuring. He joined EisnerAmper about three years ago. He pitched the idea of forming a group to focus on the cannabis industry and the firm was enthusiastic.
I can’t get the image out of my mind of me pitching something like this to my first managing partner, Herb Cohan, back in 1981. I could have hung out in the laundromat on Highland Street looking for clients.
And Then There Is Hemp
Besides creeping state legalization, the cannabis industry got a big boost from the recent farm bill which allows for the growing of industrial hemp. Being a tax geek and all I have focused my attention on Code Section 280E, which makes for big tax complications, for state legal pot sellers.
Because marijuana is still a Class 1 controlled substance, Section 280E, a relic of the “Just say ‘No'” days denies deductions for the expenses of operating the business (although not for costs of goods sold). Rick said that his group is very familiar with 280E, but there are a host of other regulatory issues to be concerned with. For example, the federal illegality can create banking difficulties. Doing a lot of business in cash makes auditing a challenge.
Much More Than Tax
The group that Rick leads is mainly focused on transaction advisory services. They help examine acquisition targets testing their regulatory compliance and the quality of their earnings. Rick indicated that the players are serious business people. Right now a lot of the action is with Canadian companies as major US players are held back by continuing concerns about legality.
The EisnerAmper Cannabis and Hemp Practice has around twenty full-time professionals and can draw on the firms resources as required.
Companies are being bought at very high multiples of earnings but unlike the dot.com boom there are real earnings.
Not For The Faint Of Heart
The federal illegality still casts a cloud over providing services to the industry. State boards of accountancy and the AICPA are providing some guidance, but it is far from reassuring. The AICPA has highlighted some of the policies that state boards have adopted that represent best practices. Here is my favorite:
While the state board will not sanction licensees solely for providing services to state-legal businesses in the marijuana industry, the board’s position does not negate the possibility that disciplinary action may be taken by the board should a licensee be found guilty of a criminal act. The board will treat any successful prosecution related to federal or state marijuana laws just as it would the prosecution of any other criminal act.
The executive summary on that would seem to be “ We’re not going to bug you, but if the feds bust you, we will pile on “.
Precedents
I asked Rick, if he remembers anything comparable to the problems that his group is now facing. One example he mentioned was the gambling industry in Atlantic City in the eighties as complex regulatory problems needed to be addressed as a new industry took off.
He also indicated that there is a bit of a feel of the dot.com boom about the excitement that is being generated. The difference he sees is that the companies have real products and revenue models. I remember that before they called it the dot.com boom, it was called the New Economy, where things like profits and cash flow no longer mattered. Apparently, that is not what is going on in the cannabis boom. Just watch out that they don’t start growing tulips.
The end game of all this activity is likely to be full legalization and the industry being folded into big pharma and liquor and tobacco companies. The latter have the distribution channels and the ability to operate nationally dealing in products that are heavily regulated by the states. In the meantime, there will be a lot of transaction work. Interesting times.