Marijuana Dispensaries
Review of BVR’s Special Report on Marijuana Dispensaries
What do business valuation advisors and consultants need to know before providing consulting services to marijuana establishments? There are opportunities and challenges; keep in mind that marijuana is listed as a Schedule I Controlled Substance. At the national level, one Presidential candidate introduced the Ending Federal Marijuana Prohibition Act in the Senate. In its simplest form, the bill would remove marijuana from the list of Schedule I drugs. Schedule I drugs are deemed by the federal government to be highly addictive and offer no medical benefits. For those valuation analysts interested in knowing more about this evolving industry and ethical issues, we review BVR’s Marijuana Dispensaries: A Budding Industry Brings Opportunities and Challenges for Business Appraisers, which was published in January 2015.
Just over two weeks ago, Ohio voters rejected an initiative put forth by ResponsibleOhio to legalize recreational marijuana. In the interim, efforts are underway in Arizona, Massachusetts, Michigan, Missouri, Vermont, and Rhode Island to legalize the sale of recreational marijuana. In Florida, efforts are underway to legalize the sale of medicinal marijuana. Since 1996, 23 states have decided to allow physicians to prescribe marijuana for medicinal purposes, while four states—Oregon, Washington, Colorado, and Alaska—along with Washington, D.C., have approved recreational marijuana sales for adults ages 21 and up.
At the national level, one Presidential candidate introduced the Ending Federal Marijuana Prohibition Act in the Senate[i].  In its simplest form, the bill would remove marijuana from the list of Schedule I[ii] drugs.  Schedule I drugs are deemed by the federal government to be highly addictive and offer no medical benefits.  For those valuation analysts interested in knowing more about this evolving industry and ethical issues, we review BVR’s Marijuana Dispensaries: A Budding Industry Brings Opportunities and Challenges for Business Appraisers, which was published in January 2015.
BVR’s Special Report is broken up into six chapters that address the ethics in the marijuana industry, unique considerations for valuing marijuana dispensaries, best practices for medical marijuana business’s books and records, issues that increase marijuana dispensary values, what drives investments in marijuana dispensaries and provides a recap of the 3rd Annual marijuana Business Conference and Expo.  Chapter 1 addresses the ethical considerations of serving this budding industry. As the author of this Special Report notes, practitioners need to familiarize themselves with state and federal laws and recognize that “the major unanswered questions for CPAs and lawyers working in the medical marijuana industry (emphasis supplied by yours truly to underscore that there are multiple parties involved in this industry and one may need to distinguish between growers, processors, retail licensing, manufacturers, and lessors of real property) [are]:
Can CPAs and lawyers work in the medical marijuana industry without crossing ethical or legal lines?  Do IRS sections 280E and 263A apply to the industry?  How can the industry function without banking services?”
This book identifies the myriad of challenges to accountants and lawyers serving the industry and significantly identifies must-know resources for those considering serving the industry. Those sources include the 2011 Department of Justice memorandum from Deputy Attorney General James Cole titled “Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use”[iii] and American Bar Association’s (ABA) Model Rule of Professional Conduct 1.2(d), which dictates in part that an attorney shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.[iv] The Special Report identifies the varying state law positions and the choices professionals must make…recognizing there is fluidity and that there could be another showdown between state rights and federal law.
Chapter 2 delves into valuation issues.  Specifically, it focuses on what to do when valuing a marijuana dispensary. The author notes: “you have to switch your net income to a cash flow by adding depreciation and taking away capital expenditures.  You also have to add (or subtract) your working capital requirements to get to enterprise cash flow and take away debt service and add loan proceeds. This brings you to cash flow to equity.” While this is recognized as the standard approach, the challenges include: assessing a forecast, annual capacity, understanding IRC sec. 280E,[v] identifying risk factors, developing a discount rate, and assessing the competitive environment. These issues are addressed.
Chapter 3 focuses on best practices for medical marijuana businesses books and records. The payroll and banking issues are key here and these are discussed. Parties interested in delving deeper should consider (FinCEN) downloading Treasury Department guidance, specifically the Financial Crimes Enforcement Network 2014 guidance that sought to clarify the Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services in this industry in light of state initiatives to legalize different levels of cannibas activity.[vi]
Chapter 4 identifies the legal issues that increase marijuana dispensary value. The authors compare a marijuana dispensary to a liquor store to make important and valuable observations about the operating and regulatory environment.
Chapter 5 focuses on what drives investments in marijuana dispensaries. The chapter contains an interview with Troy Dayton, CEO of ArcView Investor Network; this is a network of 300+/- accredited investors “with eyes on the cannibas industry.”  This interview underscores how this group views the industry and may be of value to consultants that represent high-net-worth accredited investors, VCs, or PE funds.
The final chapter is a “Brief Recap of the 3rd Annual Marijuana Business Conference and Expo”. In this article, the author shares the value and benefits of participating in industry events. Since the book was published, multiple entities have emerged to provide education and networking opportunities to professionals.
In conclusion, BVR’s Special Report is a must have for valuation and CPA professionals that are interested in serving companies in the marijuana industry or those that may (inadvertently or unknowingly) assist lessors, estates, lenders, or parties involved in a shareholder/member dispute.
Note: None of the information provided here is intended to rise to the level of legal advice. Â The information shared herein is purely educational. Â Readers are advised to consult with a qualified attorney and CPA to address any tax, ethical, business planning or other issue related to the marijuana industry or operation of a marijuana-related business.
[i] See https://www.mpp.org/wp-content/uploads/2015/11/Sanders-Bill.pdf for language. Â A similar bill was introduced in the House by Reps. Barney Frank (D-MA) and Ron Paul (R-TX) in 2011; this bill did not move. Â In 2013, Rep. Jared Polis (D-CO) provided a model for the Sanders bill with a bill he proposed in 2013, and reintroduced this year (2015) as the Regulate Marijuana Like Alcohol Act (HR 1013), although there are slight differences. Â The Polis bill would shift authority over marijuana from the DEA to the Bureau of Alcohol, Tobacco and Firearms, while the Sanders bill would not, and the Polis bill would amend federal alcohol laws to include provisions for shipping marijuana, while the Sanders bill would not.
[ii] See http://www.dea.gov/druginfo/ds.shtml
[iii] In August 2013, the U.S. Department of Justice Deputy Attorney General James Cole issued a subsequent memorandum to all U.S. Attorneys that provides guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substance Act. This is referred to in the legal community as Cole II Memo. This memo expanded upon Cole I Memo; the consensus view is that although marijuana was identified as a dangerous drug that remains illegal under federal law, the federal government will not pursue legal challenges against jurisdictions that authorize marijuana provided the state and/or local governments maintain strict regulatory enforcement controls on marijuana cultivation, distribution, sale, and possession that limit the risks to the public safety, public health, and other law enforcement interests..
[iv] The model rule, Client-Lawyer Relationship reads “(d) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning, or application of the law.”
[v] For a recent U.S. Tax Court case on this issue [Canna Care, a California not-for-profit corporation v. Commissioner (Oct 15 2015)] see http://ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10586
[vi] Under FINCen guidance, financial institutions that decide to provide financial services to a marijuana-related business is required to file a Suspicious Activity Report (SAR) if the financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from a marijuana-related business. See the February 2014 memorandum https://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-G001.pdf.
Roberto H Castro, JD, MST, MBA, CVA is Managing member of Law Office of Roberto H Castro, PLLC a Central Washington State law firm that focuses on exit planning, M&A, bankruptcy, and trust and estates. Mr. Castro is also Technical Editor of NACVA’s QuickRead, Managing Member of Central Washington Appraisal, Forensics and Economics, LLC, and an Associate Business broker with Murphy Business & Financial Corporation. Mr. Castro can be reached by phone at: (509) 679-3668 or e-mail to: rcastrolaw.com.
