It’s important to start your CBD business on the right foot by making sure you are following the correct accounting rules for CBD.
Orleatha Smith 00:05
First, I want to thank everybody for showing up to the summit but and especially you, Andrew. This is Andrew Hunziker. I am super excited to have him here because one thing that people sometimes completely overlook is the need for a specific type of accountant when you’re going into this business, and Andrew is a founder and partner of Dope CFO with broad experience, providing executive leadership and business counsel to companies across industries, including retail, manufacturing, engineering, or I’m sorry, energy, medical, bio, and tech. Andrew co-founded Dope CFO and has built up a national cannabis accounting bookkeeping training program to help students in over 25 states unlock a new world of clients. Andrew was runner up for Portland Business Journal CFO of the Year in 2017, making him the first cannabis CFO to ever be nominated. He’s an expert in cannabis startups, CFO services, turnaround, and high growth strategies, capital sourcing, mergers, exits, and wealth protection. So we have someone here who is a powerhouse. I’m super excited. I’m so glad that you took some time out today, to share with us everything going on in your day because I know it’s crazy for you. Thank you so much for being here.
Andrew Hunziker, CPA 01:27
Well, thank you very much and be great to talk about CBD where there’s a lot of confusion and so Dope CFO, we teach accountants around the US, CPAs, and MBAs. We have almost 200 now in our group in 40 states, including tax experts that are better experts even than me, so we discuss these things daily and CBD is always a hot topic because there’s just still a lot of unknowns.
Orleatha Smith 01:54
Yeah, and one thing that I do always point out in doing these interviews is that this industry changes day by day, minute by minute, you know, and so it’s always great to double-check, you know what you’re hearing and what you’re reading because what may have been true two weeks ago, it may not be true today might have been completely different now. And so, what and this is one thing that I’ve seen a lot of people who especially bootstrappers, they go, Oh, you know what I don’t need. I don’t need an accountant. I don’t need a CPA, I’ve got QuickBooks or I’m going to do it myself. So what are some advantages of hiring a specific accountant or CPA is specifically in this industry as opposed to relying on software or doing it yourself?
Andrew Hunziker, CPA 02:38
Yeah, so my, my strong opinion, like you said, involved in many exits. I’ve only think five exits over 20 million and two in the hundred million dollar range. I know one, so when an exit occurs, which many in the CBD and hemp industry are looking at an exit later, you need to be thinking about that on day one. And a huge piece of that, of course, is your product whether you’re an oil and gas or cannabis or CBD, your product and operations and brand is important, but I can guarantee you if your accounting house is not an order from day one when they come in to do due diligence, they will, they usually knock 10 to 20% off the price in due diligence from not having good records and policies and procedures. And so we promote from day one, whether you’re THC or CBD, get your records in order upfront. So if you have a well-qualified accountant that knows your niche well, knows whether CBD’s legal or not, you still need good farm accounting, which is its own complex accounting cost accounting, absorption accounting. How do you account for a plant that grows in a pot or a field? And how do you turn that into oil? It’s very complex accounting. You can’t just hope to enter it into QuickBooks and think it’s okay. So that’s, we consider that very important. We also set up a perpetual data room for all of our clients. So that’s all of your records organized from day one to day exit. And whether you’re dealing with a lender, an auditor, your investors, the IRS, whoever, you never know when they’re going to show up and which year they’re going to look at. So we, we say, we want that stuff ready anytime all the time. So if someone shows up on my doorstep today, and they want to look at my client in 2012, that’s fine. We just give them a folder. I give it to them in two minutes. It’s got every organization doc, every lease, every bank statement, every credit card, every accounting entry, every cost accounting template, and whatnot. So you want those good records in place, and then you really can’t do it yourself. QuickBooks is not set up to do this at all. And so we’ve had to build our own Chart of Accounts and then cost accounting templates to do the cost accounting and that kind of especially CBD related people are like, Oh, it’s legal now. We don’t need accounting. The accounting is exactly the same for the farming of HIPAA. Some of your deductions can be allowed under to add or not. Once you get to the return, some of those issues are still a little bit vague, depending on where the CBD comes from. I know hemp was legalized, but we are still waiting on a lot of answers before we make hard and fast decisions.
Orleatha Smith 05:23
And that’s where a lot of the confusion comes in. So I’m glad you said that because people don’t realize and I think a lot of people don’t realize that there. It has to be different. It can’t just be you know, I’m going to use QuickBooks. Quickbooks isn’t gonna work.
Andrew Hunziker, CPA 05:39
There’s no real software and so usually what we do is we have to cobble together software, so you probably use QuickBooks or zero for your accounting. Oftentimes, these entities are set up with more than one entity. We have to do consolidations, we usually do that in Excel. Sometimes there’s going to be a farming piece of software out there like MJ Freeway or whatever. And so some of them integrate with QE, but not it’s very, very clunky. And so I don’t trust everyone, every software out there will tell you that they do everything and they integrate perfectly with everything. But that’s not how it works in the real world. And so, the smart and good accountants reconcile every account every month back to accounts and, and files and cost-cutting work papers, many I would say 90% of the accountants don’t do that at all. They just make entries in QuickBooks, and they go to the next month.
Orleatha Smith 06:30
That’s just crazy to me what so speaking of, you know, crazy, what are three questions that someone should ask an accountant before hiring them? Because you know why, of course, we have an accountant. But we had to search high and low to find an accountant trying to figure it out because we didn’t know what to look for. So from the expert, what should they What should we be asking?
Andrew Hunziker, CPA 06:52
So I would for sure, ask him how long, how long they’ve been in this industry. And is this their expertise? This is a niche that could include CBD and THC because they’re kind of sister industries. And they’re very similar and so make sure they’ve been in a long time. But not actually, I qualify that, not so much they’ve been in a long time, but they’ve been trained properly. So for example, if they’re in the double-counting program, I can guarantee you that they’ve been trained properly. And they’re doing things right. There’s actually, and this is where buyer beware, and this new industry, you’ve got to be very, very careful if you’re CEO, hiring one of these people because some of these CPAs have been in this for a long time and they’re pitching the wrong stuff to clients. We’ve had them in so many returns, and what was the pitch from early Colorado days, two or three strategies to beat the IRS. None of them are working well. The IRS is well aware of all of them. And you got to be careful that the first pitch was under 280E, you can only deduct the cost of goods sold. And so everyone’s trying to maximize the cost of goods sold. Well, you can do that with very, very poor accounting, it will not fly and face the IRS, people were calling Cost of Goods Sold 95% of sales. And so you, you want to make sure they’re doing it right. And that they’re also getting all the deductions. So for example, whether you’re whether to 280E applies or not for a hemp farm or a THC farm, you’re going to use section 471 11. Now, again, I would encourage CEOs to go read 471 11 it’s very readable, you can Google it. And but there are three types of costs and 471 11. The first type is costs that are deductible that you can get in inventory and cost of goods sold and there, they have to be put in that category, things like indirect labor and soil and whatnot. And then certain costs cannot be put in like selling and marketing and advertising. And then there’s a third category of the cost that you can put into inventory and cost of goods sold, if and only if you’re doing gap, accounting in your quarterly or monthly financials. Which again, most are not. So I tell CEOs if you’re not doing 471 11, right, you’re either. If you’re not doing that gap financials, you’re either missing a big tax deduction, which nobody wants, or you’re doing it wrong and your CPAs just taking those deductions anyway, we’ve seen that a lot. And they’re just unaware of it. And so that’s a question. I would ask your accountant right there, I would say, Are you aware of 471 11 and the requirements use gap accounting if they say there’s no requirement to use gap accounting, move on to the next accountant. And so that’s a question what niche they’re in and also a list of of the value add things that they’re going to give to you things like I mentioned, this perpetual data room, how do they tie out and reconcile all your accounts in different systems every month so if you’re in seed to sale system, a POS, the QuickBooks whatever their processes for tying it out every month, and In their process for reporting. And then also, finally, the last thing I’d say is just looking forward as well. Do they have things like cash rolling forecasts that can help you manage your ROI and manage your cash flow? Because it’s very tight in this business.
Orleatha Smith 10:16
Wow. Maybe. I’m like, maybe I need to ask Mike. You know, speaking of your peers,
Andrew Hunziker, CPA 10:29
It’s funny you said that I got interviewed on a podcast in Portland once and the guy we hung up and he called me right back and wanted to hire us for an extract company.
Orleatha Smith 10:40
And yeah, I can see that because, I mean, there’s so much that you don’t know to ask, which is why I was like, Okay, let me get the expert’s opinion here. And can you talk a little bit more I know, this wasn’t one of the questions but can you talk a little bit more about your training program in case someone is thinking of transitioning from, you know, mainstream accounting into the cannabis accounting field or the CBD accounting field because I know that there’s a huge need.
Andrew Hunziker, CPA 11:05
So there’s so we’re sky spoken Oklahoma City last week to probably 2000 CEOs, at the fairgrounds huge event. And that’s what we, we pitch these CEOs, they’re everywhere. This is growing rapidly, there is a humongous need for accountants, bookkeepers, tax preparers, there’s very, very few compared to the need out there. And most of the big accounting is still out there. They’re going to come very late to the game. So it’s a great opportunity. The average revenues in this niche are very high, you can charge really good fees for doing this right. And the simple answer is there are very few people who are doing this right. And so I would say if you’re considering this niche, get information, go read the AI CPA website, they’ve got a tab on marijuana. Check with your state rules. Most states have some kind of guidance on that now. Check with DopeCFO.com. We have a webinar right on our homepage it will tell you more about serving in this niche in our program which our programs just simply someone who’s already got their own firm. They’ve got there and they decided they want to go into cannabis or hemp. We’re just a shortcut so we sell them it’s kind of an accelerated path to success if they have already chosen that route. We’ve got something of value that can get them there quicker.
Orleatha Smith 12:25
Awesome. I love shortcuts I mean that’s exactly why I put the summit together because I’m like I’m so I want to give people a shortcut so they can come to one place and find a lot of information.
Andrew Hunziker, CPA 12:37
And it’s like the shortcut is the keyword because when I started this niche, five years ago, I got I was serving clients and I got, I landed probably the biggest, highest-profile farm in Oregon, High Five Farms. And it was so big that they recruited me as a full-time CFO, so I ended up leaving my practice. I did that for two years. I couldn’t find information anywhere. I beat my brains out and looked high and low and talked to my friends and Big Four and other accountants and attorneys and I had to create this stuff from scratch. And then I never set out to teach other accountants. It was all accidental about 2016 people started searching me out, they found me and they’re like, how do I do this? How do I get a chart of accounts? And I started helping people for free. And eventually, that evolved into a paid product.
Orleatha Smith 13:30
And that’s awesome. Like, that’s how serving is right. You start to help people and you’re like, wait a minute, you know, I can package this and give it to people to help them and I’m grateful that you did that. Because my goodness, you’ve got a wealth of knowledge.
Andrew Hunziker, CPA 13:46
I do like, I still, it’s important to help people every day and I tried to get up I try to help a couple of people every day. I’ve been mentored. I like to help others. But at the end of I got too busy where I was just like I was either gonna help nobody or get paid for it. Then Naomi came along and she helped me package it all up together and so we got 200 people and it’s an awesome network in our program too. We have our own little private community group and, and we post daily about you wouldn’t believe the discussions that go on around CBD and hemp.
Orleatha Smith 14:25
I would because actually, just being in the industry. It’s like, (change) every single day, and I know that in accounting, and bookkeeping, all of that there’s just it changes. It’s got to be all kinds of great conversations. And I know that you’d like to help people I did I read up on you and I saw that you have you even volunteer at nonprofits to help at-risk teens and I was like, man, I love to give.
Andrew Hunziker, CPA 14:50
My wife and I founded a nonprofit touchstone youth project that went for about 18 years and helped over 1000 teenagers in a mentoring program.
Orleatha Smith 15:01
That’s awesome. When I read that I was like – close to my heart – I used to teach high school biology so teenagers are close to my heart. So our last question: what are some red flags to look for when hiring an accountant? I know you gave us some questions to ask me. But as you said, some, some accountants will put it in the wrong category or miss deductions.
Andrew Hunziker, CPA 15:23
Well, first of all, if someone comes to you and tells you that you should hire them because they’re going to help you minimize your tax, I think you should run because there’s three and I’ll probably tell you specifically, they’ll say we’ll set up – it could be an accountant or an attorney. We’ll say we’ll set up a whole maze of entities and some of them will be non-cannabis and some of them will be cannabis. And we’ll move costs around to the non-cannabis. This has been pitched for years all over the US, including Oklahoma last week when I was there people on stage, setting up multiple entities, the other one is looking to maximize let’s put everything into the cost of goods sold. To pretend everything’s cost of goods sold. And the third one is having this non-cannabis division. Oh, yeah, we’ve got a different company over here that sells coffee cups and T-shirts. And the IRS knows all those strategies. There is some benefit, a little bit of using some of these strategies, which we do if you do it exactly correctly, right. And it’s very hard to do this, right. And so most of the cases coming out, the IRS has won one every single one since champs. And it’s because they’re trying to do these strategies, and they’re doing them all wrong. And it takes a massive accounting effort to even think about doing this right. If you’re going to try this strategy, so I would just be super careful about who you hire, and what they suggest. We tell 280E is punitive, whether it applies or not to companies, it’s a huge tax, you’re paying tax on gross profit. And so the strategy we’re seeing that’s winning right now and even more as to any of you guys away is the companies that CEOs the focus on market share brand, their location, they’re well funded so they can survive price collapses, like what happened here in Oregon with too much supply. So they’re very well funded, they vertically integrate, and they’re just hanging on for when they do their exits. And that income is not that big of an issue, you can have a net income of zero or net loss, and still do a huge exit on revenues. The classic example that Google Tilray it’s the most valuable cannabis company in North America. They have a huge net loss last year of 150 million, but their CEO is a billionaire. So he’s because they value these companies on market share and growth. And so they’re, they’re killing it on market share and revenue growth. And so that’s, it’s kind of the Amazon model.
Orleatha Smith 17:46
And I’m just like, Wait, how much is what?
Andrew Hunziker, CPA 17:50
Amazon’s lost money forever. And they’re highly valuable because they’ve built market share and brand and growth.
Orleatha Smith 17:57
Exactly. And they were smart about it. So I’m glad you said that.
Andrew Hunziker, CPA 18:00
We tell people that’s the strategy and don’t the people that pitch the strategy Oh, let’s beat IRS. That’s a bad strategy because A, it didn’t work. B or you can’t sleep at night because you’re gonna be worried the IRS is coming, they’re gonna come check you out. So you better be ready.
Orleatha Smith 18:16
And they’re gonna get their money, they are going to get their money.
Andrew Hunziker, CPA 18:19
That’s another point. You can’t have an LLC structure, you cannot file bankruptcy, dealing, trafficking in pot because it’s federally illegal. So like the Ultraman couple who had their little farm in Colorado, they got a half-million-dollar judgment against them, they can’t file bankruptcy. They lost everything. They lost their business. So it’s pretty important.
Orleatha Smith 18:39
Oh, that’s scary. Oh, my goodness. I mean, even just she’s saying the proper structure I’m talking to. There’s an attorney who’s going to be on this summit as well. And that is one of the questions that I have for her is making sure you have the proper structure because when people are starting businesses, you haven’t talked to an accountant and you haven’t talked to an attorney, and so you don’t know the proper structure to set up in case something happens.
Andrew Hunziker, CPA 19:03
So be careful. I just had, we have a farm client here and I got an email yesterday from their attorney proposing creating six entities out of there one, and I was like slow down. When you have six entities you have a lot more accounting work a lot more tax returns, you’re gonna have high costs, and what is the actual benefit? Can they quantify that for you in dollars? And is it worth the risk? And when the IRS comes in, they’re not looking at your legal flowchart and maybe spidering all over the place. They’ve said – go read the harbourside case. They said we’re looking at the economic entity. So if you have 100 legal entities and IRS comes in and says “Hmm, I just looked like one business. Sorry, I don’t care about all legal you have one business”. It’s all to 280E and a cannabis business. So you just be careful.