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Book Review: BVR’s What It’s Worth

Value and Business Challenges in the Budding Cannabis Industry

QuickRead’s Technical Editor, Roberto Castro, reviews BVR’s What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry.

cannabis_industryOn November 9, 2016, nine states had marijuana measures on the ballot; four initiatives asked whether to legalize medical marijuana and voters in the other five states were asked whether to legalize recreational marijuana.  Voters in Arkansas, Florida, Montana, and North Dakota approved the former initiatives, while voters in California, Massachusetts, Nevada, and Maine voted in favor to legalize sales for recreational purposes.  These latter states join Alaska, Colorado, Oregon, and Washington State which legalized the sales for recreational use.  Voters in Arizona rejected the initiative to legalize the sale of marijuana for recreational purposes, although it does allow the sale for medical use.  With respect to medical marijuana, 28 states and the District of Columbia now approve of such sales.  This is big business.  Marijuana Business Daily projects that adult-use retail sales in California will bring in between $4.5 and $5 billion.  Whether, it is sales of medical or recreational marijuana, this is a risky business, especially since the Trump Administration has not signaled where it stands on these businesses.  Currently, the federal government has not enforced federal prohibition in states that have moved to decriminalize or legalize medical marijuana.  Further, the Cole Memo, written under former U.S. Attorney General Eric Holder, states that the federal government will not interfere with states that legalize recreational and medical marijuana provided the guidelines set forth in the memo are followed.

As valuation and consulting professionals, the question that arises, if one chooses to get involved, is how should the cannabis businesses—which include far more than farmers growing plants—be valued?  BVR’s Special Report, What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry marks the appraisal industry’s attempt to answer this budding question.

The principal editor of this guide is Ron Seigneur, CPA, ABV, ASA, CVA, CFF, CGMA.  In the forward, Mr. Seigneur states:

Legal marijuana has become serious business.  ArcView estimates that sales of legal marijuana in 2016 will grow to $7.1 billion, an increase of 26% over 2015’s $5.7 billion, and $4.6 billion the year before.  One analyst, GreenWave Advisors, predicts that, in a scenario in which the momentum toward legality included all states by 2020, U.S. retail marijuana sales could reach $35 billion.  Alternatively, even if the progression were slower paced, GreenWave expects it to be a $25 billion industry by 2020.

The Special Report is broken down into the following 10 parts:

  1. The Unique Challenges for Business Valuation in the Cannabis Industry
  2. Professional Ethics for Those Servicing the (Illegal) Marijuana Industry
  3. Valuing a Cannabis-Related Business: Normal as Apple Pie?
  4. Questions on Valuation and Marijuana Businesses” Replies from Experts in the Field
  5. IRC Section 280E After IRS Chief Counsel Memorandum 201504011
  6. 9th Circuit: Legal or Not, Marijuana Facility Cannot Deduct its Expenses
  7. Best Practices for a Marijuana Business’s Books and Records
  8. Four Value Drivers for Marijuana Dispensary
  9. What are Investors Looking for in Marijuana Dispensaries?
  10. Medical Marijuana Dispensary Financial Report from Bizminer

The first chapter presents a brief overview of the legal, banking, and tax issues that impact the industry.  Growers and retail shops are cash businesses and have limited access to capital, yet the demand and revenue growth are undisputable.  In the second chapter, the ethics are discussed.  The questions addressed here are: 1) Can CPAs, lawyers, and other professional advisers work in the marijuana industry without crossing ethical or legal lines?; 2) Do IRC sections 280E and 263A apply to the industry?; and 3) How can the industry function without banking services?  The guidance provided by the ABA and several state bars is highlighted.  As for state boards of accounting, in late 2015, the Colorado State Board of Accounting passed a provision on this very issue.  While the guidance is promising, perhaps more promising is that local laws have been enacted in some jurisdictions to raise revenue.  Mr. Seigneur opines that, “it is a situation in which local municipalities and states need CPAs and lawyers involved.”  While there is encouraging news, there is reasons for caution which is discussed in the latter part of the chapter.

In Chapter 3, Valuing a Cannabis-Related Business: Normal as Apple-Pie?, the author notes what is obviously unique about the industry, namely, that the product is illegal to grow or sell under current federal law.  What will Senator Jeff Sessions do if appointed as Attorney General?  How will President Trump respond to this growing industry?  Marijuana does produce an enormous amount of revenue that support schools, police, and other public sector needs.

Seigneur shares that, “business appraisers have to come up with workarounds in this situation (limited reliable benchmarks).”  He proposes that appraisers “look at what investors expect to receive in the public stock market, add in the additional risk of being invested in this industry, and then apply professional judgment.  In a more established industry, an investor might be content with a 20%–25% return; in this one, the investor might be looking for a 40%–50% return.”  Seigneur adds to this that there are other factors to consider and those include: location, competition, operations, and long-term lease terms.

In this chapter, Seigneur also addresses tax affecting the cash flow.  A key issue here, deciding whether to book unrecorded liabilities, is the sec. 280E treatment.

Chapter 4, Questions on Valuation and Marijuana Businesses: Replies from Experts in the Field, takes the form of a Q&A.  The chapter is three pages long.  Jim Marty, CPA, ABV, MS of Bridge West, LLC is co-author of this chapter.  The first question asked and answered is, “What are some of the valuation opportunities?  Are sales of business mostly due to divorce?”  Other questions asked and answered include: Doesn’t the IRS make you take a reasonable salary in an S corporation?; How likely are we to encounter requests for a valuation where legal compliance is in the early years and it is questionable?; What about the maintenance cost of idle land waiting to be planted as part of crop rotation?; What types of valuation multiples are you using?; and What about a discount for lack of marketability?  Although the chapter is short, the comments here come from appraisers that are seeing the changes and challenges in engagements of this nature.

Chapter 5, IRC Section 280E After IRS Chief Counsel Memorandum 201504011, is a reprint of an article co-written by Andrew C. DeWeese and Calvin E. Eith, both from Marijuana Venture and Oregon Cannabis Law Group.  The focus is on how cannabis businesses are required to calculate taxable income for federal income tax purposes.  An important issue is deciphering COGS.  The impact of UNICAP rules considering Memorandum 201504011 on the industry is accorded several paragraphs.  Despite the guidance, the authors warn that, “sooner or later, the U.S. Tax Court will have to answer the following questions: 1) Did Congress intend that cannabis businesses must use a definition of COGS as it existed in 1982?; 2) The U.S. Tax Court, in Franklin said that sec. 280E ‘deals only with deductions and credits…and does not disallow exclusion from gross income on account of cost of goods sold’, and that sec. 280E would not preclude a taxpayer ‘from taking account of any cost of goods sold.’  Does the memo conflict with the U.S. Tax Court’s view, or perhaps signal a new view, of the reach of sec. 280E?; 3) If the IRS takes the view held in the memo, does it create constitutional issues—might the IRS be viewed as impermissibly trying to limit a cannabis business’s ability to capitalize its costs?”

Chapter 6 is a reprint of a July 10, 2015 Forbes article written by Tony Nitti, CPA.  The focus here is 9th Circuit: Legal Or Not, Marijuana Facility Cannot Deduct its Expenses.  In this article, Nitti examines two legal opinions, CHAMP and OliveCHAMP seemed to offer a loophole based on separating the business between growing marijuana and trafficking it, but Olive makes clear the rules must be followed precisely.  The chapter concludes with a discussion of the Olive 9th Circuit Court opinion.  The issue before the court was whether the Vapor Room had additional lines of business in addition to selling marijuana, which would escape the denial of deductions required by the statute.

Two recent cases worth reading, decided after the Special Report went to press, are Beck v Commissioner, T.C. Memo. 2015-149 (August 10, 2015) and Canna Care, Inc. v. Commissioner, T.C. Memo. 2015-206 (October 22, 2015).  Both cases discuss CHAMP and Olive, and the deductibility of expenses.

Chapter 7, Best Practices for a Marijuana Business’s Books and Records, is based on a BVR webinar by Jim Marty, CPA, ABV, MS.  Here, Marty shares his views on COGS, record keeping, whether partnerships and Schedule C’s are better than S corps, and what are non-deductible selling expenses.  For those interested in knowing more about the issues, the insight is valuable.

Chapters 8 and 9, respectively, Four Value Drivers for a Marijuana Dispensary and What are Investors Looking for in Marijuana Dispensaries are short chapters.  Despite being short, they offer additional insight of this segment of the industry.  Chapter 8 takes the form of a Q&A and features Hilary Bricken, lead attorney with the Canna Law Group, a downtown Seattle law firm.  Troy Hayton is interviewed in Chapter 9 and begins answering, how and why do investors play a role in the marijuana dispensary industry?  Other questions asked and answered are: What do investors consider before giving a dispensary a loan?; What can business appraisers learn from investors in cannabis businesses?; and What do you think the future holds for the cannabis industry?

The final chapter, Medical Marijuana Dispensary Financial Report from BizMiner, provides readers with rough metrics and common-sized statements.


The report does not contain a sample valuation report.  This Special Report is aimed at practitioners that are interested in knowing more about the ethics, laws, and issues in the cannabis industry.  It delivers.  The unknown for appraisers, lawyers, and those in the industry is what will now come with the new administration.

Roberto H Castro, JD, MST, MBA, CVA, CPVA, CMEA, BCMHV is an appraiser of businesses, machinery and equipment, and Managing Member of Central Washington Appraisal, Economics & Forensics, LLC. Mr. Castro is an attorney with a focus on business growth and succession planning with offices in Wenatchee and Chelan, WA. In addition, he is Technical Editor of QuickRead.

Mr. Castro can be reached at (509) 679-3668 or by e-mail to either or

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

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