It’s Back to the Basics for the Cannabis Industry

Pre-pandemic, the Cannabis industry was already beginning to see signs of distress. Following more than a year of euphoria, during which states were legalizing recreational use at record pace, demand and valuations were at an all-time high, and cash flow issues were the farthest thing from anyone’s mind, 2019 was a bitter disappointment and a stark reminder of the dangers of an industry growing too quickly.

Similar to the dot-com craze of the 1990s, when investor hysteria sent values skyrocketing, only to see them come crashing down, the rapid rise of the burgeoning Cannabis industry made it an attractive but risky pursuit.

Fortunately, unlike the original dot-com sector, the cannabis industry deals in tangible goods that can be more easily valued and sold than digital assets. We also have predecessors like our counterparts in Canada who have gone before us with federally approved recreational use and shown us the pitfalls and lessons learned from growing too quickly without taking the time to regulate or plan.

But while the U.S. cannabis industry may not be facing a complete crash, there is an urgent need for a healthy correction back to where it should be. And this starts with cannabis companies going back to the foundational elements that all businesses need to be built on, including:

  • Benchmarking – Unlike the early years of the Cannabis industry, we now have solid data and analytics to base business decisions on. Harnessing the power of this business intelligence to benchmark against your industry peers, identify key performance indicators (KPIs), and measure your progress is essential to your short- and long-term business success.
  • Tax planning – Every smart business considers ongoing tax strategies as part of their financial plan. While there are limited opportunities available to the industry while cannabis is a still a Schedule 1 substance, don’t count this area as a total loss. Various tax strategies and CARES Act incentives can help you recoup some of the lost tax savings.
  • Disaster recovery plans – The COVID-19 crisis sent most businesses into a tailspin, and the ones that recover best will be those who reinvent their business models to adapt to a new reality. Working closely with your advisors, pivot your business plan and put risk management strategies in place to prepare for the continued impact of COVID-19 and whatever crises the future holds.
  • Cash flow projections – At face value, your company may look profitable. But do you know what your financial picture will look like after the impact of 280E tax consequences, cash flow slowdowns and the rising expenses of operating in COVID-19 world? A proactive cash flow plan that forecasts the cash flowing in and out of your business in 6-12 months from now is more important than ever to understand and improve your financial position.
  • Investor relations – Your investors were most likely just as euphoric as you were in the industry’s hey days, and they may have asked limited questions about your strategic plans. If this elation had not already turn to skepticism before the economic crisis, it may be only a matter of time. If you have not already, it is not too late to develop a value proposition that gives your investors reasons to stick with your company through the crisis and the confidence that your business plan is on the right track.

Going back to the basics and putting these crucial elements in place in the middle of a crisis is a daunting task. Grassi’s Cannabis advisors have a deep understanding of state regulations, risk management strategies, data analytic tools and the minefields of tax complexities, lending challenges other obstacles to your success. We help dispensaries, growers, distributors and other cannabis companies just like yours make these important business decisions each day.

John V. Pellitteri John V. Pellitteri is a Partner at Grassi and leads the firm's Healthcare and Cannabis Service Practices. Possessing over 30 years of experience in accounting, auditing, tax planning and business consulting, John is now applying his talent to the burgeoning cannabis industry. John possesses comprehensive accounting and taxation knowledge, which combined with his healthcare consulting experience, allows him to provide an all-inclusive assessment of... Read full bio

Categories: Advisory