Clay Kniepmann, Forensic, Valuation, and Litigation Principle at Anders CPAs + Advisors, joins Guillermo to discusses the surge in litigation, the importance of clear operating agreements, and the challenges of valuation in the volatile cannabis market. They explore how to avoid cannabis business mistakes, the impact of state-level regulations, the implications of federal reclassification, and the complexities of financial structures in cannabis businesses. Emphasizing the need for transparency and accurate record-keeping, they also consider the future of federal legalization and its potential effects on the industry.
“It's hard to play a game if the rules keep changing, and that's unfortunately part of this being such a new industry.” —Clay Kniepmann
The finer details of this episode:
Episode resources:
Timestamps:
The podcast begins (00:00:00)
Introduction to the Cannabis Success Show and its purpose in the cannabis industry.
Clay Kniepmann's background and expertise (00:00:25)
Introduction of Clay, his legal expertise, and his role in forensic valuation and litigation services at Anders.
Clay’s journey to becoming an attorney (00:02:58)
Clay shares his journey to becoming an attorney and his transition into working with cannabis clients.
Challenges faced by cannabis companies (00:11:19)
Discussion on the challenges and complexities faced by cannabis companies, including profitability, investment expectations, and operational complications.
Taxation and financial impact on cannabis companies (00:16:31)
Exploration of the financial impact of taxation on cannabis companies and the challenges related to expenses and profitability.
Importance of proper documentation and separate accounts (00:18:02)
Importance of maintaining proper documentation, having contingency plans, and keeping separate accounts for cannabis businesses.
Formal valuation for cannabis companies (00:23:34)
Reasons why a cannabis company would want to have a formal valuation and the importance of documented valuation services.
Valuation in the Cannabis Industry (00:23:55)
Challenges in valuing cannabis companies due to limited history, income approach, and market approach.
Regulatory Environment and Forecast (00:26:10)
Impact of unstable regulatory environment and forecasting challenges due to regulatory changes.
Federal Legalization and Tax Implications (00:29:03)
Discussion on the potential federal legalization and its impact on tax deductions and cash flow.
Entity Structures and Financial Transparency (00:31:08)
Complex entity structures, financial transparency, and the importance of accurate record-keeping.
Bookkeeping and Cleanup Work (00:34:36)
Challenges of maintaining accurate books, mistrust, and the cost of cleanup work.
Recreating Information and Litigation (00:37:52)
The complexity of untangling financial mess, recreation of information, and the need for expertise in litigation.
Prediction on Cannabis Legalization (00:39:55)
Predictions on the potential rescheduling and legalization of cannabis.
Conclusion and Podcast Information (00:40:49)
Closing remarks, podcast website, and resources for business success in the cannabis industry.
Intro (00:00:00) - Welcome to the Cannabis Success Show. If you're a cannabis company owner or operator who's ready to scale your business, grow your profits, and plant the seeds to take your business to new heights. This show is for you. We'll share expert insights, industry trends, and actionable strategies to help you blaze a trail of success in the cannabis industry.
Guillermo (00:00:25) - Welcome to the Cannabis Success Show. Today we have Clay Kneipman join us. He's an attorney, a principal on the forensic valuation and litigation services here at Anders. I won't even start to mention all the credentials because it's quite a bit after the after the name. But you can go on his LinkedIn and kind of get a little bit more on that background. but Clay, welcome. Welcome to the show. It's good to have you here.
Clay (00:00:54) - Thank you so much for having me and those credentials. You know, when you're doing this, as long as I've been doing it, they just tend to accumulate over the years. So, a lot of CPE to track.
Clay (00:01:05) - But yeah, don't let those confuse you.
Guillermo (00:01:08) - The CPE has got to be the horrible part of all that right?
Clay (00:01:11) - Luckily, you know, we do have a pretty good CPE tracking system here. So, it helps out a lot. And there's tons of overlap obviously. So yeah.
Guillermo (00:01:21) - Well, good. Master of chaser of all credentials. Right? Is the, the nickname.
Clay (00:01:26) - Collector? Yeah, I guess. Yeah.
Guillermo (00:01:28) - Collector of credentials. Yeah. Well, good that that's a that's a good intro. But, Clay, it's good to have you here because as we're, we're talking about cannabis on the, on the legal side of things and you focus on the legal part litigation, forensic and valuation. And, I think the last time we spoke, we met in person in Missouri were not happy hours. Right. We were chatting. And you'd mentioned that you're a speaker at the AICPA conference and looking at some of the information that that you, that you, that you spoke about, you know, you, you kind of went through the whole history of, of the cannabis industry, right? I mean, we're talking 400 years, really, right, of legal changes and, and really we've had an industry that was legal much more longer than, than what we've dealt with, with prohibition.
Guillermo (00:02:20) - And now we see a few things changing. But with all that to say is, I think that given the newness of it. Right, we're seeing a lot of, a lot of, a lot of litigation, a lot of issues that that come up, not a lot of history on doing, valuations. So, we'll get into all that. but before we start, I always like to just kind of, you're an attorney. Kind of what made you become an attorney or, specifically, you know, working with, with cannabis clients and, and the specific area that you chose, which is forensic and valuation.
Clay (00:02:58) - Yeah. Thank you. And yeah, you mentioned the AICPA conference. So, I had the opportunity to present last year at the AICPA Forensic and Valuation Services Conference. In the topic was, Litigation and Forensic Services in the cannabis Industry. High times for CPAs is what our session was titled. And to be honest with you, I think I learned a lot when I started delving into the history.
Clay (00:03:26) - That's not something that I focused on at all. the way I became involved in, in cannabis clients in any way was that we just had a deluge of cannabis clients reach out, over the last year due to various reasons that, you know, we'll get into, I'm sure, during the course of this, but, my, my background, my history, the way that I kind of well, I guess a long story on how I chose to go to law school and, became an attorney. Was my mom, growing up was a court reporter in the federal courthouse over in East Saint Louis and the southern District of Illinois. And from time to time, I would go with her, to her, her work and kind of sit. And as I got to be an older kid, obviously not when I was little, but, you know, watch the courtroom proceedings and, things like that. So, I had kind of an early exposure to it in that way. So that's what drew me to law school.
Clay (00:04:28) - I finished, my undergrad in accounting, got my accounting degree, and I needed to get the additional credit hours for the CPA requirement exam. Yeah. So, I, I did some research and found out that, you know, I had enough accounting credit hours already, but I needed some just additional credit hours in law school would apply to that. So, a lot of people go, you know, straight from undergrad into the Masters of Accounting program. Instead of doing that, I chose to go into, into law school and use those credit hours towards my CPA requirement. So that was kind of my, you know, the path into getting into law school. I don't know at that time, to be honest, that I had a grand plan for I'm going to become a tax attorney or, or any sort of attorney or, or forensic accountant even at that point. At that point, it was forensic accounting wasn't as well-known as it is now. Today, I think, most schools didn't have any classes on it or anything.
Clay (00:05:38) - which is interesting to where we are today, because I actually teach a class on forensic accounting and a master's program at Lindenwood here in, the Saint Louis area.
Guillermo (00:05:48) - So was there a moment when you decided legal as you were going through that? I always ask the question, like, I know, for me, when I decided to go accounting, it was when I heard the words 100% placement rate, you will get a job. And this is the salary range. I think at that moment I just I selected the major. Was there something like that for you on the legal side?
Clay (00:06:10) - Yeah. So, it's interesting. It was kind of similar for accounting. That was it was the one major that everybody told you you're it's going to be marketable. You're going to have opportunities. And I actually started out as an IT major. so I took my first coding class, and I had a professor at the end of that class, God bless him, that came up and said, you might want to think about considering other paths.
Clay (00:06:40) - And he was so nervous to tell me, but I just started laughing when he told me because I'm like, you know, I was thinking the same thing because I was really struggling with those coding classes, to be honest. I took my first accounting class the next semester and something about it just click, you know? It just it all made sense to me in my in the way I'm wired, I guess. And that paired with the, the outlook for, the job outlook for CPAs really kind of drove me. It was no question after that that was going to be my major, law school. I kind of decided on later on. It's something that I kind of, I think always had in the back of my mind that I wanted to do. And it worked out that I had an opportunity. I had a grad assistantship set up at the school that I was going to already, and so it just made sense at the time. It's kind of funny. You can plan all you want, but sometimes life has a way of, you know, planning for you, too.
Clay (00:07:44) - So it just kind of naturally happened that way. And then, when I graduated, it was 2008, which was a very, low point for anybody graduating law school. If any attorneys are listening, they're probably nodding their head. but accounting firms were still hiring. So, it, you know, having that focus on something that you knew would be, Give you opportunities was really a blessing. So, I was able to start out at a tax firm, and had done a couple of busy seasons and gone through, you know, learned a lot about the tax side of things. But I always had this kind of feeling. And in burning, I don't know what you would call it, but I always had this desire to do the fraud investigation type of work. And with the legal background and the accounting background that opened some doors and opportunities for me to get into the forensic accounting business, rather than kind of doing a reset and going into the legal side. It just made natural sense at that point.
Clay (00:08:56) - And. I couldn't be happier that that's the route that, you know, I ended up taking. Yeah.
Guillermo (00:09:02) - Yeah. I don't blame you for not wanting to do the coding and all that. I, I could not do that in, in high school nor in college and not something I would want to do.
Clay (00:09:13) - And you know it. It's funny because now it's, it's you're doing borderline coding work when you're doing, you know, Excel work and other, you know, other programs as well. But yeah, it just it didn't click like accounting clicked for me, that's for sure.
Guillermo (00:09:30) - Yeah. And and so with with fraud investigations, how does this when you, when you mentioned earlier that cannabis, clients started to reach out was this more on the, on the defense side for litigation, or can you talk about how fraud, kind of weaves into the needs that cannabis clients were that you were seeing?
Clay (00:09:53) - Yeah. And I'll kind of speak at a, at a high level. but generally speaking, they weren't necessarily solely fraud investigations.
Clay (00:10:04) - What I noticed the commonality between the clients that reached out and some reached out on the plaintiff's side, some reached out on the defense side. But the commonality was they got into this business venture. A lot of people saw a lot of opportunity in it, which, you know, obviously there is this isn't a new industry after, like you said, the history, it had been prohibited for a long time. And now it was this new industry so similar, like you said, to coming out of alcohol prohibition, a lot of investment sometimes from people who had some sort of experience in either agriculture or even cannabis. but a lot of, you know, investment from people who had really no touch point on either of those, like, this is a totally new business for them to, you know, doctors, attorneys, things like that, that see an opportunity and want to be part of it. And I, I think for some people, you know, when, when that time was, going on, everything you'd look at online is, hey, you can expect 15% net profit.
Clay (00:11:19) - You know, you're going to drop money to the bottom line. Everything's going to be great. It's just opportunity. Opportunity. And maybe when.
Guillermo (00:11:28) - You say 15% for those who are not familiar. So that'd be 15% net income of revenue at what a normal retail business would do. Right?
Clay (00:11:38) - Yep. Exactly. And. I don't think that that had a lot of basis in, you know, because there was no history that didn't have a lot of basis in the historical operating performance of cannabis companies. It was just kind of an estimate, right. And I think when the reality hit that there are a lot of complications in operating in this space. The profitability is less. And when you have multiple investors who expected one thing and that didn't come to fruition. There was a lot of finger pointing, right? Like this isn't going right because you're stealing from me or whatever the case might be. So, there were some fraud, allegation aspects to some of those cases. Not all. but there was a lot of, I guess, positioning, like, how are we going to go forward? And so that gave rise to a lot of litigation at the time.
Clay (00:12:36) - And I'm. And still.
Guillermo (00:12:38) - Yeah.
Guillermo (00:12:39) - And would you say a lot of this would happen? because there wasn't clear operating agreements or, you know, formalities in terms of how the professionalism of how the, the entity and the business was structured. Or would you say it's just more of a of mismanagement in some cases, or kind of what, what usually leads to, to some of these issues?
Clay (00:13:03) - Yeah, I think it's a bit of both. and we certainly did have some cases where there wasn't a clear, you know, cadence for the operating agreement on, you know, who's going to run this thing. what are we going to do if we if we do come up short and have to have a capital call to, you know, fund the company while it has a few years of, of net losses. so that was some of it. but a lot of times I think it was just different ideas on how the business should be run or could be run. and so that led to some disagreements.
Clay (00:13:38) - So, it's also, you know, startups in general have a very high failure rate, and I forget the statistic, but it's over 80% of all start ups. And here we are in an industry that is 100% startups, right, at least in Missouri at the time. And so. I don't. You never get into a business agreement. Just like you never get into a marriage thinking like, what am I going to do when this goes wrong? You always think. Think of the upside. And sometimes that upside doesn't turn out to be the case. And then, you know, you can end up in litigation that way.
Guillermo (00:14:20) - Yeah. And I'm sure just some of the basic, basic things that we know about cannabis now as, as you know, we've had now rec programs that that been in place for, for many, many years and some new. Yeah. And in what we know now that, you know, I would bet some investors didn't really even know how the, the taxation or the tax burden on a cannabis company or how the local sales and excise taxes can impact sales, retail sales at a local level.
Guillermo (00:14:53) - That kind of just makes it not on par with a typical retail business. And so, I think now we're kind of getting more to a point where, well, you could just see it, right, with the lack of, capital that's, that's flowing in. Is that that there's been there was a learning curve. Right. And kind of a rush of funds into the. Into the market that you're just kind of not really seeing anymore. Right. And even. You have newer markets that I think some of this is happening. Right. Like Missouri, there's. It's doing really well. But I think by now even the newer markets, like folks in Missouri, know that at some point, you know, there's going to be some changes in retail prices, maybe more licenses are starting to be issued now and that kind of thing. So, I would say like it seems like there has been the learning curve is kind of maybe flattening out now, but there's still some of that kind of what you mentioned earlier.
Clay (00:15:52) - Totally agree. Yeah. And as far as the taxation goes, that was a shock to me. So, there was a learning curve for us coming in as you know, forensic accountants and assisting in litigation. I you know. If you'd asked me three years ago, I would wouldn't be able to tell you what section 280 was, right? And when you find out that none of your expenses, aside from your cost of sales, cost of goods sold are going to be deductible. Well, that's a major, major issue. that's going to eat into that 15% profitability line pretty quickly,
Guillermo (00:16:30) - right.
Guillermo (00:16:31) - That that 15% you mentioned after taxes, about 3% or
Clay (00:16:36) - Right
Guillermo (00:16:37) - could be zero.
Clay (00:16:38) - Right. Exactly.
Clay (00:16:39) - Yeah. And it yeah, I mean, if you think about say you think you're going to have a 15% profit margin and then you're not able to deduct any of your expenses. I mean, it can drop you negative. Just based on that. And that's only one of the hurdles.
Clay (00:16:56) - There are many more in terms of how are we going to bank this, you know, how are we are we going to be cash only or are we going to allow, you know, point of sale ATM type things, there. And the administrative burden of making sure that you report from seed to sale, all of your, information to the state as well, because they're tracking that too.
Guillermo (00:17:23) - On the metrics side. Yeah. And so, I'm sure everybody's wondering, you know, as some of these things happen, we mentioned like having a good solid operating agreement. what are some of the other things that, you know, if you're starting a cannabis company or investing in it in a, in a cannabis company to, to really just some basic things that you really don't need to hire an attorney, but just things to do to avoid some of the things that happen in litigation in terms of, you know, not having proper documentation and being able to really decipher, you know, how the business is doing.
Clay (00:18:02) - Yeah. And I think one of them, we, we kind of touched on a little bit ago, but when you go into any investment, you know, you always hear that with any investment there's a risk of loss. Right. So, you should always think about what happens if this is worst case scenario or not worst case. But it doesn't go as well as I planned. Have contingency plans for that. And don't you know, just invest the amount and expect net cash to start flowing to you? realize that there is a learning curve here in this industry, and it might be some years before you see that profitability. What are you going to do? Are you going to have a cash reserve set aside? You know, let your investors know there may be capital calls over the next few years as we kind of figure this thing out. so those are some of the things. And, you know, one thing that you and I had talked about before, another big issue that we kept running into with, with some of our cannabis cases was don't conflate all of your cash into a single account.
Clay (00:19:08) - you want to keep this separate as its own legal operating entity? I know for a long time it was very difficult to find banks that would, you know, take on cannabis clients. That's starting to change. And while there are not that many. And I would say most of the states I know for sure. In Missouri, there are banks that will, you know, will work with you. It's just make sure that all the transactions that have to do with the business are kept in that account. Anything that has personal aspects to it, separate businesses, things like that. Don't mix those all together. and that's, I guess, me pleading from a forensic standpoint because it's really tough to unwind that. and it can be very expensive for the client.
Guillermo (00:20:01) - Yeah. Keeping separate I mean that, you know, what we do on the on the advisory side is it's not uncommon, right, to have a client that's got some expenses mixing in there. A lot of times we have, an expense platform, solution that can kind of automate some of the coding.
Guillermo (00:20:20) - Yeah, to be able to separate things. Of course, that's a headache. But we can do it with, with the cannabis operator. We can't quite recommend an expense. platform. Right. And then the other reason is for what we do, you know, as advisors, we want to be able to measure the business operationally, you know, and financially month to month. And that gets pretty hard to do when you have mis coding's. And so I think a lot of folks just think, well, my accountant wants me to do it correctly, but, you know, we can see that there's things from the legal side that could cause a lot of headaches and a lot of big expense, but also just from managing the business and being able to manage, to review your performance, to make better decisions. That's another, another reason to do it. And I think it's easy to say it's just it's just my account or my lawyer that wants me to do this correctly. But there's a lot, a lot more,
Clay (00:21:15) - There's a reason that they want you to do it correctly, for sure.
Clay (00:21:18) - And, you know, there's always that, where there are some there's some potential for, you know, a personal expense when it's a closely held business like that. You know, you end up with that debit card and you don't have your personal card. Sure. That's one off that happens. It's the situation where, hey, I have one bank account. I'm running three businesses out of it. I'm going to dump it all in there. And then hopefully, you know, we're tracking it well on the accounting system side so that it never becomes an issue. But if it does become an issue, boy, it's tough to unwind. You know, each transaction, you got to make sure that it doesn't make its way into the accounting system. If it's a personal transaction or a transaction for another business, it. Basically comes down to you're going to be reviewing every single transaction, you know, and that's even more difficult in, the case of cannabis operators. A lot of times, you don't have a clear cut.
Clay (00:22:24) - Here's the, here's the source of the cash or here's where the cash went. A lot of times we're looking at, you know, PayPal, PayPal comes into play because it's, you know, it's fintech. It's not your traditional bank. It's a way that. Because of the regulations. Sometimes cannabis companies are forced to use that. and I mentioned the point of sale ATMs. When you see that cash come in, it doesn't show where that cash is coming in from. It just shows that it's coming in. You know, it shows up like an ATM transaction. So, it becomes very, very difficult and sometimes not possible to unwind.
Guillermo (00:23:04) - To track. Yeah. Or to unwind. Yeah. So, let's get back to valuation. You know this may be a basic question for you, but why. you know, because in cannabis right now, you know, valuations are or there's a lot of, M&A activity. Right? A lot of, companies that have are having cash flow issues. And so, the question is how much is a business worth? A lot of, you know, I just always say it's worth whatever somebody's willing to pay for it.
Guillermo (00:23:34) - But there's also these valuation services like what you do. So, what are some, some reasons why a cannabis company would want to have more of a formal valuation. Just, just kind of maybe for those who don't understand the process or why a, you know, documented, formalized valuation would have to take place.
Clay (00:23:55) - Yeah. And I will preface this answer by saying I have not done a single cannabis value company valuation yet. a lot of times the way that we perform our valuations is we look at an income approach which looks at, you know, five, five years or however many years into the past and looks at what your net profitability was for. You know, I know that's not precise, but that's generally what you're doing. And then extrapolating that out into the future. Well, in the cannabis arena that becomes tricky because right now, we don't have that much history. And when we do have that history, it's in that startup phase. So, it's not necessarily indicative of what the business is expected to do into the future.
Clay (00:24:44) - there are firms that focus heavily on valuation in the cannabis space, but it is difficult from a traditional valuation standpoint. If you're unable to use that income approach, then you have to consider things like a market approach. What are similar companies selling for? Well, as you mentioned, there is starting to be a lot of, M&A activity in this space. What it seems like is there are all of these licenses, new operators, they're cash strapped, and unfortunately they don't see a way to make it work. And so, what do you do? You start marketing it. And a lot of the bigger players are kind of coming in and buying smaller players. no different than what we see in the accounting industry, right? It's M&A activity all the time. It's kind of seems to be the natural way of things, where you get a market that expands and then kind of consolidates it's back in. So, but you're right. What you said about, what your company is worth is dead on accurate. It's whatever somebody is willing to pay.
Clay (00:25:53) - it's just. When you go into that transaction and you don't know what they're willing to pay, you don't know if you're underselling, overselling. It becomes really important to have a good idea of what you know, you feel your business is worth. Otherwise, you can't make intelligent decisions.
Guillermo (00:26:10) - Yeah. And the regulatory environment is, is not stable like you would see with, with any other industry. Right. And it's definitely localized and, and certainly at the state level like, I know like in Colorado, there was a point in time where under the state, the state program required a retailer to produce 70% of its inventory. So, retailers had to do some form of cultivation. and so, they built up their facilities thinking that would be a long term requirement. Will then later. I can't remember the year, but the state went away, did away with that. So that just really brought in bigger cultivators and, and made all these changes. And so those are the like the kind of things that you really can't predict.
Guillermo (00:26:58) - Right. But at least not back then. But now it's like you can kind of look at what are all the regulatory things from a regulatory standpoint, what are all the things that could change, whether improve or move backwards, that could change that, that forecast? especially with, new Rec programs coming on, new licenses being issued in that kind of thing. And that that all completely changes the outlook on the business.
Clay (00:27:25) - Makes it really hard to plan, especially for a long term. Right. If you're putting together a business plan and you don't know what the rules are going to be, you know, it's hard to play a game if you if the rules keep changing, you know, and that's unfortunately part of this being such a new industry. And I will say in some states, you know, it's been going on it's been legal for over a decade now. Right? So, some are more mature than others. But the states are trying to figure out what to do with it as well.
Clay (00:28:00) - And obviously then you have the whole issue of it being a schedule one, controlled substance at the federal level. So, you have a, you have with the states, do you have what the feds say? If a fed administration changes, then you might see a step backwards, a step forward. It's really hard to predict. it seems like right now that. At the federal level at least, the trend is toward starting to make this more and more, federally legal. We see that with, the potential of getting it moved from a schedule one drug to, or controlled substance, I should say, to a schedule three. And that opens up all kinds of opportunity, especially from the IRS section 280 standpoint. If you can now deduct your expenses that that makes a I mean, that would be you'd see cannabis operators just jumping for joy if that ends up being the case.
Guillermo (00:29:03) - Yeah, I think I always throw out the statistics, but I believe it was Witney Economics that came up with right at about, I think it was 1.8 billion just additional, Cash flow into the industry in one year, just from just from the 280 going away, which would result from the reschedule.
Guillermo (00:29:23) - Right. So, it's a huge for the size of the market. I mean that's a for a $27 billion market. That's a pretty obviously I actually think the number is much higher. But that's a good chunk of cash.
Clay (00:29:37) - Oh that would.
Clay (00:29:38) - It's yeah it's a life changer for sure for operators. And I haven't kept on it as much as I probably could or should. But it the last that I saw, it seemed like each step of the way it's moving closer and closer to becoming a schedule three versus schedule one. So, I hope that trend continues and hopefully that's settled before long just so people can start to plan, you know. So that makes it volatile.
Guillermo (00:30:10) - So going back to kind of legal structure and some of these things and I think we've mentioned you know capital especially institutional capital is limited. We've seen like a lot of friends and family kind of private capital flowing in. just from an entity structure. We talked earlier about making sure that, you have the right, you know, you have an operating agreement if you're an LLC, all that kind of stuff.
Guillermo (00:30:39) - given that, you have a lot of situations where it's family and friends, you see a lot of times where a lot of this, kind of the having the right entity in place or really having to analyze that isn't in place. And could you really maybe kind of give an overview of what are some of the kind of the typical entity structures that you see in what, what you should think about when you're starting a cannabis business?
Clay (00:31:08) - Yeah. Typical entity structure complex. Yeah. So, you see a lot of, like. Obviously, family, friends. but you also see a lot of, I guess, venture capital groups that, you know, they may come together and, form their own investment company in order to get into the space. But you also have the issue of ultimately, the license has to be held by a single entity. Right. And so, you do get a lot of kind of tiered, org structures that can become pretty complex. And where that gets complicated from the forensic standpoint is.
Clay (00:31:52) - You get a lot of allegations of kind of moving money from the left pocket to the right pocket from. So, give an example. We may have a company that has a holding company up here. and then another holding company over here. Underneath that they may have a grow facility. transport facility and, a dispensary. Right? So, if the dispensary is pushing expenses or profit over to our Grove facility over here. How do you know that that's done at a fair rate, such that somebody who's controlling up here at the top might not be shifting money over to this entity where they have a slightly higher stake. You know, so those complex org structures can be problematic in, in many ways. Now if. If it's a well set up, you know, structure. There's also ways you can do some tax planning. And, you know, if you can push things down to certain levels, there might be more cost of goods sold versus traditional expenses at that point. And you can do some clever planning that way.
Clay (00:33:10) - Hopefully some of that becomes less important when, when the, scheduling or reducing of the scheduling happens.
Guillermo (00:33:21) - And what are some, what are some ways to, you know, how could you avoid some of that ambiguity and how cost or, or schedule or are allocated between entities when you have different ownership.
Clay (00:33:33) - So accountants favorite word transparency, right. Keep the books and records up to date and make sure that the people who are entitled to that information are getting that information as accurate as you can make it and as timely as you can make it. where we see problems is where when that's not necessarily being done, you don't really know where you stand. At the end of the year, you find out, oh my God, we've got a loss of $300,000 this year. Where did all my money go? and that's when you get into trouble. You know it. That's when the fingers start pointing and it becomes more complex to unwind. The problem is. Because we're seeing pretty razor thin margins. It seems to me that a lot of the companies are hesitant to invest in doing the bookkeeping, the administrative work, the right way, and that's unfortunate.
Clay (00:34:36) - It. While it might seem like an easy place to cut costs at the onset. It's totally the reverse if things go poorly, I mean, and it is tenfold more expensive to try to figure it out on the back end.
Guillermo (00:34:52) - Yeah, I think that's been a that's been a theme for years, right? Is that there's some mistrust on top of it, but also that if, you know, it's a bit of a catch 22, right. If the cash flow is not there, then if it's not an absolutely necessary service, it becomes harder to just to spend the money on it. Right. And not a shameless plug, but definitely
Clay (00:35:15) - I was just having some.
Clay (00:35:17) - I mean, I was just gonna say that. Yeah, having.
Guillermo (00:35:20) - Having someone.
Clay (00:35:21) - Is a great option. It really is.
Guillermo (00:35:23) - It is. And a cost effective of way. And we both know that once you mentioned earlier heart you know, you said it becomes hard to untangle. and a lot of times accountants are hired just to come in and do that.
Guillermo (00:35:40) - And just the, the cleanup work is a huge cost. And so, it's kind of like, you know, staying healthy and avoiding, you know, medical costs down the road. It's just even from a cost standpoint, it still makes sense to maintain your books every month. And it's really not that hard. and the cost is pretty reasonable when you have an outsource option to at least do the basic, coding of transactions and just making sure the controls are in place and, and all that kind of thing. I love. Which leads us.
Clay (00:36:14) - It. Yeah. Compare it to. Yeah. Staying on top of your health. I mean it sucks when you're doing it right. You want to go out and hit up Arby's on the way home. But yeah, it's going to come back to bite you at some point. Right. you know, and we've, we've seen. I don't want to single out any client or anything like that, but we've seen some books that are very, very messy.
Clay (00:36:38) - and that is somewhat common for the cases that we've dealt with. Now, bear in mind that the cases we deal with, there's already a controversy, you know, so something's gone wrong. But things like, you know, negative profit or negative, gross income, it, you know, how do you get that negative cost of goods sold. How do you get that in the books?
Guillermo (00:37:01) - Negative payables.
Clay (00:37:02) - Exactly. Yeah. So, it's like reverse world. And when you get into that situation, it's very difficult to figure out which end is up. And that's not a situation you want to be in.
Guillermo (00:37:14) - Yeah.
Guillermo (00:37:15) - So you know from the from the accounting side you know I know what a, what a cleanup looks like. But you know when it gets to, to your, to your level especially there's litigation involved and, and all these different things. it's a, it's a pretty big, big deal in that you have to have an expertise on how to do this. So, I'm sure some people are wondering like, what is the cleanup really look like? Or what are some of the things that you have to do to, to like untangle all this mess because it gets pretty creative in how you're able to recreate information and all that.
Guillermo (00:37:49) - Right? I mean.
Clay (00:37:49) - Yeah.
Guillermo (00:37:50) - What are the some of the things like.
Clay (00:37:52) - A lot of times it's it is back to the bank statements. It's all the way back to like square one and recreating it from, from whole for the entire period. And that is not a situation that you want to find yourself in, you know. And. It's one thing to code something properly when the transaction happens, it's a whole different thing to figure out what that transaction was supposed to be three years down the road, so it can become difficult and sometimes not possible. You almost have to, like, cut off, start over.
Guillermo (00:38:28) - Yeah.
Guillermo (00:38:29) - Yeah, I think the theme here has been, you know, it's a it's a huge headache, the cost, the risks of it. And then just not being able to manage your business effectively or, or raise additional capital when, when things just aren't, aren't clean. So I think if we haven't made it clear enough, there's definitely, a lot of tips that you shared on.
Guillermo (00:38:52) - What are some of the things to look out for? what you, what you would want to do from the get go to make sure you, you set yourself up for success or if you haven't been, you really makes a lot of sense to hire someone from outside and get things to a good point. So, you so you can. So, you can move forward. So, I think it's been a great discussion. You shared a lot, and I don't think a lot of, folks are familiar with, you know, what you do on the, on the valuation, litigation and fraud side. So, I think it was a really unique perspective to bring in on, on some of the things that can happen, particularly in, in cannabis. And so I appreciate you being on the, on the show, clay. And I always or here lately I've tried to end each, each episode by asking if you have a, a prediction doesn't even need to be an informed prediction, but, I've been seeing that maybe 80 to 90% success rate on a reschedule this year.
Guillermo (00:39:55) - it could be a yes or no, but, Yes. Just seeing. What's your prediction?
Clay (00:39:56) - Yes.
Guillermo (00:39:58) - Okay. Yes.
Clay (00:40:00) - Yeah. Okay. Legalization of cannabis is extraordinarily popular at the national level. You know, it's it is popular. And we're heading into an election year. Yeah, I think it gets scheduled this year.
Guillermo (00:40:19) - Good. So, I think everyone have asked. We're at about 100% right now and so.
Clay (00:40:24) - Well, I'm glad.
Clay (00:40:25) - I'm not an outlier then.
Guillermo (00:40:27) - Yeah, that's right. You don't want to be the one pessimistic, but, we'll get Clay. I appreciate you. you being on, I think, I think we enjoyed the discussion. I think everybody's going to enjoy this one. And, and I appreciate you being on.
Clay (00:40:43) - Thank you so much for having me, I appreciate it.
Guillermo (00:40:46) - All right.
Outro (00:40:49) - Enjoy this podcast visit our website Anders, cpa.com/virtual CFO cannabis to get more tips and strategy for achieving business success in the cannabis industry.