Every small business has needed capital at different stages of development. Whether you are starting a brand new cannabis business or growing your already existing cannabis business, you’ll need to explore all your options when it comes to funding. Currently, with all the rules and regulations of the cannabis industry, it can be difficult to find funding. But there are options.
An angel investor is a financially well-to-do individual or group of individuals (angel network), who provide capital for a start-up business, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the beginning stages of a company (where risks of the start-ups failing are relatively high) and when most investors are not prepared to back them.
Receiving funding from angel investors can be difficult, but with the right approach and matching interests, it can be done. You will not only gain a financial benefit but also their expertise in running your business and specifically the cannabis industry niche.
1. Know Who You Are Looking For…
The best way to find an angel investor is to know who to look for, by understanding the type of person an angel investor usually is. Here a few profile items of the “typical” investor:
Middle-aged (around 40-60 years old)
Previous business or entrepreneurial experience
Net worth over $1,000,000
Has previous investments, or participates in a group of investors
Interest or familiarity with the industry
2. …And Who They Work With
While there are angel investors who invest entirely on their own, many invest as part of an informal network or group where they can pool their resources and share the risks. These angel networks usually meet regularly to review business proposals, deciding together whether to invest or not, and conduct due diligence to validate the plans, statements and history of the companies and their founding team. Angel groups also occasionally co-invest with other angel groups, individual angels and very early-stage venture capitalists to make larger, accumulated investments.
3. Know Where to Find Them
In most cases, you need to be referred to a specific angel investor. So it’s important to network! That means you need to immerse yourself in the community, find out who’s who, and remember that many successful business owners might end up becoming angel investors as well.
Many angel investors like to play an active role in the business they invest in, so in general they prefer to invest in businesses that are close to home. Start in your own network of friends and family to see if there is a potential investor you already know. These people know you the best, so they are the closest to you in knowing whether or not you are backable, as first-hand references. Just be careful with investments from friends and family, it is very difficult to mix personal and professional relationships. If something goes wrong with the business, Aunt Karen’s 70th birthday gathering might become quite awkward.
As we said earlier, it’s important to network, network, network! Especially if you can’t find someone in your own personal group of friends and family. Attend trade fairs, meetups, conferences, and events. Get your face and your name out there, and meet as many people as possible. Remember, the angel investor might not know you, so it’s good to have many people become familiar with who you are, in case you need someone else to vouch for you.
There are also more formal ways to find an investor, such as formal family investment offices, with professional managers screening deals for the angel investor. Networks aggregating angel investors are an option as well. Like the family offices, multiple investors set aside funds for investments, and a professional team source deals for the group. The individual investor keeps their anonymity while having the comfort of a team of managers doing due diligence on their behalf.
Finally, there are connection services available on the internet. You may be able to connect with specifically cannabis business investors through a website that provides investor matching. If nothing else, you can at least get your business proposal to a wider audience.
4. Get Your Business Plan and Financials in Order
Getting your business plan and financials in order is vital to any financial investment opportunity. Ultimately, you want to produce a company valuation which determines your startup’s worth. You need to factor in your profitability, market share, ownership, future projections, and forecasts. Your business plans should show potential investors that you have feasible goals and plans for business growth.
It important that your financials are done well and you account for all of the highly regulated tax and government rules that are associated specifically with the cannabis industry. Be sure to hire a CFO or accounting firm that specifically works with cannabis companies. Having everything in order shows your investor that you have done your due diligence and that you understand the value of professional help.
Finally, make sure you are completely transparent. Investors don’t expect your business to perfect out-the-box, and an apparently lack of challenges or issues you may be dealing with may arouse suspicion. Be honest and engage in an open conversation about your plan to overcome those challenges. The investor will appreciate the honesty and will probably be able to offer valuable insight into overcoming those challenges.
5. Have an Exit Strategy
One of the most common questions early stage companies are asked is “what is your exit strategy?” This is a critical question as it will determine how an investor will make a return on their investment. An exit strategy demonstrates that you have a clear, long-term plan for transitioning out of the business. Investors are interested to know how you plan on leaving a business if the company is bought by a larger company, sold to a private investor, and so on. Exit strategies include Initial Public Offerings (IPOs), acquisitions, mergers, or buy-outs, but may also include strategic default or bankruptcy to exit a failing company. Keep in mind that these various strategies are also not mutually exclusive, and your business may experience one or more of these through its lifetime.
6. Tell Your Story
At the end of the day, investors are people. They aren’t just investing in products and services, they’re investing in people, too. Tell them your story. Tell them who you are, and how you got to be here today. Show your enthusiasm and passion for your business. This is what will help you connect with the right people, who share your vision and will want to grow with you as a business.
Need help preparing for investors? Call us today for your free consultation! Dial: +1.424.274.3188
And one thing that no one can argue with is that Cannabis tax laws are among the most complicated and intricate to comply with. With the unique phenomena where cannabis is illegal on the federal level, but legal at the state level, there is an interesting dynamic with national bodies such as the IRS, and local governments.
Part of that interesting dynamic includes the less-interesting reality that cannabis regulations and cannabis business tax requirements are downright onerous. IRC 280E and California’s recent cultivation tax hike are prime examples of the difficulties of the system.
As you are preparing for your annual tax returns, you, or your CFO, will probably be reassessing certain financial frameworks in place within your cannabis business. One of those questions that you might want to reconsider is whether you should be following an accounting method that’s cash-based, or accrual-based.
Let’s take a moment, first, to define the terms.
What Accounting Methods Are, and How They Impact Your Cannabis Business
Accounting methods are a chosen framework for your bookkeeping. These are predefined by tax laws, and each method has its pros and cons, as well as specifications that your business has to meet in order to be able to use a particular method. Those specifications are, generally, based on the level of your business—i.e. Your monthly income and business activities—as well as the classification that you chose when you first opened your cannabis business, like “corporation” or “LLC.”
Different cannabis accounting methods do not affect the amount your business made or spent, which you declare on tax returns. They don’t either affect how your business is subject to tax laws such as 280E.
So how does the accounting method you choose affect your cannabis business? It affects the timing of when certain transactions will be reported annually.
Now let’s get into the two basic accounting methods. Keep in mind that there are several other accounting methods out there, but they are, for the most part, modified versions of these two methods.
Cash-Based Accounting for a Cannabis Business
Cash-based accounting is the method of calculating monthly revenue and expenses based on the moment that you get cash or the moment it leaves your hands. This is the easiest form of accounting because you are simply recording expenses and revenue as they come.
Accrual-Based Accounting for a Cannabis Business
Accrual-based accounting for a cannabis business is the method of recording your net earnings as they match up with your cash-in and cash-out, as well as the timeline of when your expenses, for example, are actually for. This is particularly relevant in cases where you pay rent ahead of time, or pay a lump sum for, say, insurance, instead of stretching it out into monthly payments.
This is more complicated but does align your net monthly income more accurately.
How to Know if Your Business is Right for Cash Method Accounting
For a cannabis business that’s perhaps just starting out, or has yet to gain momentum, it makes sense that you’d want to keep it simple with your accounting methods. After all, as we pointed out earlier, there are enough complicated bookkeeping requirements in the cannabis industry, as it is.
Keep in mind, though, that there are a couple of requirements in order to be eligible for the cash-based accounting method:
Your business must be licensed with a three-year average in gross receipts of less than $26 million as of the 2019 tax year, and/or
You have a cannabis cultivation business, with daily operations that fall under the farming activities sector.
Note that cannabis producers and retailers, of course, can still choose this accounting method as long as they meet the first requirement.
Inventory Requirements While Using Cash-Based Accounting
Once you’ve discerned whether you meet the requirements of being able to opt-in for cash-based accounting, there is a couple of must-dos to implement in your accounting SOPs.
Keep careful stock of your cannabis inventory. Doing so classifies your inventory as “non-incidental materials and supplies.” For those that are new to accounting jargon, this is as opposed to “incidental materials and supplies,” which are not tracked in an inventory system. Depending on what your business’s SOP for inventory tracking is, you might do this by either recording how much of your inventory is sold or transferred, or by physically going through your stock regularly and recording what you currently have.
If you are a licensed cannabis cultivator, this may not apply to you. In that case, you might be eligible to use methods of tracking inventory for accounting purposes that are available to the agriculture sector, and farmers in particular.
Use the inventory procedure as specified in your applicable financial statement (AFS). If you don’t have an AFS, then follow the accounting and bookkeeping SOPs you do have.
The Timeline of Cash-Based Cannabis Accounting
If you are a cultivator of cannabis sativa or cannabis indica, the cash method can potentially hasten the process of when you can declare your operating expenses. It goes without saying, that there is quite the process that your business facilitates, lengthening the timeline of when you actually get the cash in your hands from those cannabis plants. It certainly is beneficial to not have to wait to declare your expenses until all of that inventory actually gets sold, particularly when you’re spanning from one tax year to the next. Not having to wait a whole extra tax year to declare your expenses is often ideal.
As a retailer or a processor, you can similarly benefit from cash-based accounting, though, of course, you won’t have the eligibility to the deductibles that a cultivator may have.
When it comes to accounts receivable, in accrual-based accounting, you have to declare that taxable income at the time of the transaction. With cash-based accounting, on the other hand, you don’t have to declare money owed to you, as long as it’s within a reasonable amount until you’ve actually got the cash in your hands. If you do have a particularly large sum of accounts receivable, you may still have to declare it.
Is Cash-Based Accounting Right For Your Cannabis Business?
This is a question that is extremely particular to each and every business and situation. That’s why we recommend going to a top financial advisor in the cannabis industry. In which case, Northstar can help you.
Contact us now for a consultation, to learn whether cash or accrual-based accounting is right for your cannabis business. Call: +1.424.274.3188
Then it’s no news to you that cash flow is one of the main, if not the main, issues for a cannabis business. That’s why owners of businesses like marijuana dispensaries, cannabis distributors, and cultivators are always on the lookout for new ways to solve the cash flow issue. What’s an innovative way to raise money for your cannabis businesses? Many are turning to the sale-leaseback.
But let’s take a step back and explore just why it is that cash flow is at the top of every cannabis business owner’s mind.
Lack of Federal Legalization and Limited Cash Influx Options
Because cannabis is still illegal at the federal level, there are many regulations and restrictions that create disproportionate challenges for compliant business. Yes, even for those operating even in state legalized communities. The 280e tax code being a prime example, as well as the restriction on federal banks from providing financing options, or any finance services at all, to cannabis businesses.
Many smaller banks are hesitant to take on cannabis entrepreneurs as clients because of both the legal intricacies and the cultural stigma around the industry. (Though many Americans are starting to view things differently thanks to state legalization.)
This leaves cannabis business owners with the need to be more resourceful than entrepreneurs who are involved in other, less-regulated industries.
Luckily, there are a few investors and investment firms out there who believe in the cannabis industry. They’re willing to take the risks involved with the promise of a national-boom that many believe is to come in the very near future. And, for the time being, those risks are unfortunately quite real.
Unpredictable Performance in the Stock Market
The sad fact is that not enough investment firms are jumping on the bandwagon. And why is that? Because the cannabis industry is still extremely volatile. After the record-breaking stock prices the cannabis industry saw at the start of last year, cannabis stocks plummeted from the second quarter onward, and they haven’t recovered since.
While businesses in other industries may consider providing more shares to investors, the consensus among financial experts—especially those specializing in the cannabis niche—is that doing so for a cannabis businesses would be a bad idea. Issuing more shares in a cannabis company, especially if the industry has been performing so poorly in the market, waters down the worth of each share, and therefore the networth of the cannabis company.
This leaves the cannabis community with the question of what happens next. Currently, there are two levels of action that are being set in motion: the on-the-ground solution that individual cannabis business owners are turning to, and there’s a more forward-thinking push for change at the legislative level.
The SAFE Banking Act
Introduced last year by Ed Permlutter, Democratic representative from Denver, Colorado, the Secure and Fair Enforcement (SAFE) Banking Act allows for the creation of financial institutions that provide financial services to cannabis businesses in legalized states.
While many similar legislations have been proposed, this was viewed by many as the bill that might actually make it through. It passed in the House of Congress by a landslide, and was largely starting to be regarded as a bipartisan, apolitical concern.
Hype notwithstanding, it will soon be a year since anything has been done with that bill. The more practical-minded are losing hope that it will ever progress in any significant way. After all, say experts in the industry, If progress were to be made, it would have done so already. The fact that it didn’t pass was quite a blow to the cannabis community, which could have greatly used a break, for once. Being able to receive financing options from banks would mean less leg-work, less need for creativity, and somewhat drastic measures… like the sale-leaseback.
Drastic as it is, the sale-leaseback is a viable option for many cannabis entrepreneurs out there.
The Sale-Leaseback: One Of Today’s Most Popular Solutions
Also known as just “leaseback” for short, the sale-leaseback is a process in which you sell the real estate your business is operating out of, then lease that property back as a tenant.
As with all things, there are pros and cons that have to be weighed out before taking the leap, like effects on monthly budgeting. Here’s what you need to know about unlocking funds with a sale-leaseback for your cannabis business:
Some cannabis businesses are selling their properties on a leaseback deal, for quick cash. (Image: freepik)
1. The sale-leaseback provides your cannabis business with a significant influx of cash flow all at once.
True, you’ll still be spending money on renting the space back each month, but whereas that is an expense stretched out over time, the money you get immediately can be used to grow your business in the meantime.
There is also the question of how being a tenant may affect your business. Being the King/Queen of the Castle allows for pride in your space and freedom in your business. But with the right contract and the best terms, there will be very little impact, if any, on the day-to-day operations of your business.
2. Some of the most successful cannabis businesses have negotiated leasebacks for their businesses.
3. To fill this need, there are real estate investment trusts (REITs) that have a niche in the cannabis industry.
The greatest comfort in having to sell your place would be knowing that you can be a tenant with terms that are ideal for your business. Some other landlord who does not understand the needs of, say, a cannabis sativa cultivator, or a producer of CBD oil and edibles, may provide terms that restrict your business’ operations. Not so with a company like GreenAcreage Real Estate that was created for this exact purpose, and has a solid grasp of what’s par for the course when it comes to having a cannabis business as a tenant.
4. It’s not right for every business.
Some businesses found that the sale-leaseback was not right for their cannabis business. Perhaps your mortgage terms won’t allow you to receive enough cash on your property, or the lease would be much higher than monthly-mortgage rates.
These and other valid concerns are why no business should make these decisions without the guidance of a financial professional.
If you would like to explore the idea of a sale-leaseback for your business, or other cashflow solutions, contact us today. Call now: +1.424.274.3188