Join Taylor Schuck, for an in-depth interview on the cannabis industry and the role of accountancy. In this episode, Taylor provides insight on how the Firm first got involved in the cannabis industry, changes in the industry, and key takeaways for emerging or established cannabis-related firms.
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Episode transcript:
[00:00:00] Ashley: Hi, I’m Ashley. And you’re listening to “The Business Owner’s Guide podcast, Tips, Trends, and Talks from a CPA.” Today, we welcome Taylor Schuck from our Client Advisory Services Department for a discussion on the cannabis industry and the role of accountancy. But before we begin, let’s find out more about our guest.
Taylor Schuck is a Client Advisory Services Manager here at PKF Mueller. He spearheads the Firm’s Cannabis Accounting Team as part of our Life Sciences Niche.
[00:00:34] Ashley: So, Taylor, can you start off by telling us how you first got involved in the cannabis industry and the provisions of accounting services for it?
[00:00:42] Taylor: I went to school in Michigan, uh, for college and while I was there, uh, they had a legalized medical cannabis program.
[00:00:58] Taylor: Um, while I was in school, I got hip surgery, uh, as a result of, uh, arresting. And after that, I really immersed myself a lot more in the industry, uh, being that I got a med card and I started speaking with dispensary’s and, uh, growers and other people that were involved in the industry in Michigan. Uh, at the time I was going to school for accounting and finance, so interested in, in, in cannabis and what was happening in Michigan, uh, and, and other states across the country, as well as having an accounting and finance mindset.
[00:01:33] Taylor: Uh, and so a couple of the businesses that I was working with, uh, mentioned, you know, the need for a bookkeeper. So actually, while I was in college, I got the opportunity to work with a couple of cannabis businesses, helping them, you know, just get a QuickBooks file up and running, understand, uh, what their tax filing requirements were.
[00:01:53] Taylor: Um, and so in 2015, when I graduated college at central Michigan university, uh, came back to work for Mueller, uh, in the audit department and around 2016, I approached, uh, the partners and I said, you know, hey, um, are you guys interested in the cannabis industry? Um, and a couple of them said, you know, we, we are actually, and we just don’t necessarily have anybody to help us, uh, bridge, bridge the gap and, and start to establish a niche.
[00:02:21] Taylor: And I said, well, it’s, it’s something that I’m interested in. Um, you know, are you interested in joining a few associations? Uh, and that’s really kind of what, what started at we, we joined the National Cannabis Industry Association, the Illinois Women in Cannabis at the time, there was an Illinois Cannabis Industry Association as well.
[00:02:40] Taylor: Um, and I just started to go and meet with people and, and, and many of the other people I was meeting with were, uh, other service providers. Um, but we’ve made some great connections through those organizations and, and, and, and retain some of, some of our best clients, uh, through, through some of those connections.
[00:02:57] Ashley: Awesome. So fast forward, just a couple of years later, cannabis and related products are now legal in many states, including Illinois. So, tell me how much has this industry changed in the last few years and what does that mean to business owners within this industry?
[00:03:12] Taylor: Yeah, so the only thing constant in the industry is, is change.
[00:03:17] Taylor: And, and so specifically, as you mentioned, Illinois just became fully legal for adult use purposes. Uh, so, so typically what happens is the states will legalize for medical purposes and then move forward with some type of adult use or recreational uh, use legislation. Uh, and that is, that is what has happened in Illinois.
[00:03:38] Taylor: And, and, and when those additional, uh, regulatory environments are created, uh, additional licensing, uh, happens. So, some of the licensees that we were working with were, were sort of grandfathered in and, and, and able to apply for adult use licenses. But you get a wave of other clients who are coming to you for the first time.
[00:03:59] Taylor: Uh, wanting to apply for license, uh, needing the help of. Consultants to understand how to organize their business and negotiate with lenders and shareholders and, uh, you know, other certain requirements like the state of Illinois required that business owners get a CPA to sign off on a certain amount of capitalization for, uh, the, the license.
[00:04:26] Taylor: The license application in the, in the adult use license, um, for, for at least a one of the licenses. So, we were involved in, in helping applicants, um, you know, by, by attesting to their, to their capital. Um, as well as helping applicants put together, um, their plan for how they were going to capitalize their business once they were licensed, if they were licensed.
[00:04:49] Taylor: Um, so as we see the additional licensing, Uh, it affects our current clients, obviously because, you know, they’re able to expand their businesses. Uh, they have new competition. Uh, there’s a number of considerations as these businesses grow, um, like providing additional benefits to employees. Uh, there’s a lot of ways for us to be involved with current licensees, as well as new licensees entering, entering the market.
[00:05:16] Ashley: What legal and regulatory challenges does this industry face? For example, I initially heard that banks are not receptive to cannabis related money and cannabis is not legal in every state and state laws conflict with federal. Can you provide a little bit more information on this?
[00:05:31] Taylor: Yeah. Uh, and I’m not an attorney, but there’s definitely a lot of things that affect these cannabis businesses that I’ve seen firsthand, the, the banking is definitely an issue. I think we’ve connected ourselves with a number of banks in different states, credit unions as well, that are able to provide banking services to cannabis businesses, at least checking and savings accounts. Uh, th th one of the largest issues for cannabis businesses is to be able to pay payroll taxes and federal income taxes.
[00:06:00] Taylor: Uh, the IRS is, is not keen on meeting up with people to take large sums of money. So you have to make payments, uh, you know, either in check or by EFTPs. And so those, those, those challenges, um, really hold businesses back for, for really staying compliant. Uh, so what we typically do is we help clients establish a banking relationship in the state that they’re in, uh, establish a relationship with the cash courier, uh, transport service.
[00:06:29] Taylor: And, uh, there are some that are just not receptive. Uh, you know, to, to taking, taking on cannabis clients, we’ve actually worked with a few banks and introduce them with other banks who have decided after that, after those conversations to create a cannabis regulatory program, uh, which, which has been interesting for some of our clients, uh, that we’ve been able to help them with that.
[00:06:52] Taylor: You know, some of the other things that, that the industry has issues with, uh, other than just a legal issue. Our our other service providers. So often cannabis business owners have hard times investing, you know, their, their, their return on their investment in, in their cannabis business, into the stock market.
[00:07:10] Taylor: Um, there’s even companies that do, uh, sales and excise tax compliance efficiency services. They will not provide services to the industry. Call anybody specifically out. Um, but payroll companies, uh, you know, there’s, there’s cannabis specific payroll, but there’s many payroll companies that will not do, uh, cannabis payroll services.
[00:07:33] Taylor: So I think, um, the banking aspect of it, as well as the fact that there’s just certain firms out there, uh, in, in many different types of ancillary services that have decided not to provide cannabis businesses. With those services. So it holds the industry back, um, even like employee expense, reimbursement processes and things like that.
[00:07:58] Taylor: If, if, if, if the service provider doesn’t want to work with cannabis, now you have an internal process, like an employee expense reimbursement that’s, uh, turned into an extremely, um, you know, time consuming process without being able to use these efficiencies tools.
[00:08:15] Ashley: Can you give us an overview of the services offered in the cannabis industry?
[00:08:20] Taylor: Yeah, so we provide all of the same services to cannabis businesses that we provide to our other clients, um, at the simplest level, that can be basic bookkeeping and back office, um, AP, AR internal control, documentation support. Um, the. The, the services that we provide to businesses on the consulting side, a lot of times in this industry are our due diligence services. Whether they’re going to buy a subsidiary or, or invest into, into a company, uh, we represent individuals looking to invest in the cannabis sector.
[00:08:58] Taylor: And we, we, we represent cannabis businesses looking to, to gain investment from individuals. So, a lot of times we work with companies to put together, uh, projections and financial models, uh, and then value the project that they’re going to look to raise capital for. We just worked with a client in New Jersey, uh, that in this last round of licensing, won, one of the 14 cultivation licenses, they’re in the process right now of raising about 20 million.
[00:09:23] Taylor: And so, uh, you know, we, we, we put back together a nice projection model. Uh, we, we changed some things in the, in the previous model. Uh, we worked with them to establish an internal, uh, pre and post money valuation of, for their project. So they could feel comforted. Uh, with their team, when they go to look for additional investment, that they’re, that they’re selling the correct amount for their company.
[00:09:49] Taylor: Um, and actually in this situation, we recommended that they do part of the, the raise debt, uh, to keep, uh, a majority stake in, in the, in the business. So, uh, that’s what they ended up, uh, going down the road with is, is, is, is finding somebody that was interested in, uh, in, uh, part debt, part equity, uh, capital raise.
[00:10:10] Taylor: Uh, we’ve worked with clients, uh, on the regulatory side from the assurance aspect, uh, whether it’s just, uh, audited financial statements, uh, to provide for year end financial or. Or whether it’s regulatory audits. So for the state of Michigan, they require, agreed upon procedures reports for each license type.
[00:10:30] Taylor: And so each license must report, uh, their agreed upon procedures report to the state. Uh, these procedures include, uh, substandard procedures over revenue, uh, vendors dispersants. Uh, equity and, and those types of things. So I think in, in some cases, the state really involves us, uh, in, in the regulatory process.
[00:10:51] Taylor: And then obviously we help with tax compliance, uh, and filings and, and audit support. So we just made it through our first IRS audit, uh, earlier this year, uh, with the cannabis cultivation facility. And we took some aggressive positions and we were able to make it through the audit with zero. Uh, which I think was good for our team in being that we prepared the accounting, we prepared the tax return.
[00:11:16] Taylor: Uh, and then, and then we represented the, the, the client in the audit and, and there was zero changes that the IRS, um, was, you know, was able to make, uh, on the tax return. Uh, they weren’t able to find any errors or issues with the accounts. And the aggressive positions that we took, we were able to argue those to the point that the IRS did not want to escalate the, uh, the ordinary.
[00:11:41] Taylor: So I think those are a couple of good examples of the services that we provide to clients. And, um, you know, I think one of the, the, one of the recent services that we’ve, we’ve been providing a lot more to clients, is IT consulting, uh, clients come to us, and they would like efficiency tools. They want to know how to increase their efficiency related to payroll related to billing and invoicing.
[00:12:06] Taylor: They want to increase efficiency related to payable. Um, and software tools are often needed to really change, you know, an SOP around a certain process. So, uh, we’ve been doing a lot of projects like that lately. Uh, we’ve been doing benchmarking, projects. Uh, we just, uh, completed a large benchmarking, uh, project for a publicly traded cannabis company.
[00:12:32] Taylor: Uh, that wanted to make sure that their SGNA expenses were in line with their peers, uh, and, and where they weren’t in line, uh, what opportunities they had to possibly reduce, uh, those SGNA expenses. So, I think we are getting requested to do a wide array of services, and I think we’ve built a nice team her to be able to handle a client from their infancy all the way through them, possibly selling their company, uh, someday and, and us even doing financial planning for, for the owners and, and succession planning.
[00:13:07] Ashley: What are some other important things worth noting to cannabis, business owners or entrepreneurs looking to launch their own cannabis startup?
[00:13:14] Taylor: Well, I think one thing to notice is that you’re going to lose a lot of sleep. Uh, there’s going to be a lot of times where you’re going to doubt, uh, your, your ability to move forward. Um, I would say planning ahead and building a team is going to be the biggest thing that you can do. Um, to, to head off the issues that you’re going to be facing.
[00:13:35] Taylor: Uh, don’t listen at low, listen to everybody that you talk to because there’s people that have had negative have had negative experiences in the industry. And there’s also people that have rags to riches stories that may not be what you obtain either. So, I think finding, uh, finding a middle ground. Uh, between, you know, other experiences that other people have had as well as building a team planning ahead.
[00:14:03] Taylor: Um, and, and, and understanding that that things are not better. Things are not going to be easy. I think you’re going to work really hard to get a license. And once you get that license, you’re going to work really hard to stay in compliance with the regulatory environment in your state. And it never gets easier because the states typically.
[00:14:25] Taylor: Continuously change the regulatory environment. So, I think those are a couple of things that, that, that are, that are important to pay attention to. Um, you’re going to need a good law firm. You’re going to get a good CPA firm. Uh, you’re going to need, uh, some other consultants that understand, um, you know, how to build a proper application and, and, and run a cannabis business.
[00:14:47] Taylor: So. I think that those are the things that you really need to, to, to pay attention to when, when launching your, uh, your own cannabis business.
[00:14:56] Ashley: Great. Well, I think that was a really great overview. And thank you for your time today to explain cannabis and the role of accounting. If you are an emerging or established cannabis related firm Taylor and the PKF Mueller cannabis team would be happy to speak with you and answer any business or accounting, individual questions you might have.
[00:15:12] Ashley: Taylor, would you mind sharing your contact information?
[00:15:15] Taylor: Sure thanks Ashley, you can reach me at tshuck@pkfmueller.com. Or give me a call at (847) 649-8814.
[00:15:25] Ashley: And thank you to our listeners. Don’t forget to visit us @pkfmueller.com to learn more about our firm’s services. You can also follow us on social media for updates, insights, and upcoming events.
