By Liz Gold
As a CPA in Colorado, Jim Marty saw a need for a large, sophisticated accounting firm to handle the booming cannabis industry. As a result, he designed his Longmont, Co.-based firm, Bridge West CPAs – focused solely on cannabis clients – to be acquired. And as it turned out, his plan and the timing were excellent.
But let’s back up a bit: In 2009, Marty, who already had a successful traditional CPA firm with a staff of 10 and nearly 1,000 clients, decided to accept cannabusinesses into his clientele.
“It was my own clients who asked me to do due diligence for them because they rented their warehouse to people who wanted to grow medical marijuana,” he says.
So, Marty did due diligence on behalf of his long-term clients and for his firm because he had an interest in the cannabis industry and wanted to see it succeed.
“Certainly, over the years I participated in the product and the cocktail party talk was always, ‘Shouldn’t marijuana be safe and legal and taxed?’” he says. “I wanted to be part of that and make those changes. I had always been politically active and had concerns about people going to jail for growing a plant, so it served my activist side as well as my accounting side and Colorado was at the epicenter. It was exciting.”
Marty also describes how the industry exploded in Colorado – 500 dispensaries opened during the last half of 2009 – without any statewide regulation. This meant people could open dispensaries by borrowing a few thousands of dollars from friends and family and just start selling cannabis.
“Today, it takes millions of dollars and there is a very heavy regulatory process before any licenses are issued. You have the licensing and regulation before you have a legal sale,” he says, adding, “They say what happened in Colorado will never happen again.”
By 2014, his marijuana practice grew bigger than his 30-year practice, which prompted him to merge out his traditional business at the age of 59 to another CPA firm in Longmont.
“That’s been a very successful merger,” he says. “Even after I split my practice, my cannabis practice continued to grow. We were getting three to five new clients a week and by 2016, we were in a place that we were not accepting new clients because we did not have capacity.”
When Marty merged out all of his noncannabis business, that’s when he put all his cannabis clients under Bridge West, which has, as of January 1, 2017, been acquired by Boeckermann Grafstrom Mayer (BGM) in Minnesota. As a result, Bridge West is a subsidiary of BGM, and now is a combined 110-person firm, with approximately 35 people solely focused on cannabis clients. With the added resources and reach, Bridge West could open its doors again, adding more than 120 new clients just this year – fueling Marty’s goal of building a national CPA firm for the cannabis industry.
“We are expanding geometrically,” says Marty, who is the chief executive officer of Bridge West. “We are working on acquiring a practice in Michigan and we are anticipating at least 100 license holder clients in Michigan in 2018. We’ve been onboarding just enormous clients where capital raises are $50 million, we’re doing reverse merger work on the Canadian Stock Exchange and we’re doing corporate reorganizations. All of that work would have been way outside the scope of our pre-merger capabilities.”
Bridge West is keeping its name and is what Marty describes as “100 percent devoted to the cannabis industry.” Its sweet spot? License holders.
“If you don’t have the license to grow or sell marijuana you probably don’t need us,” he says. “If you are a support company, if you sell the plastic bottles or if you sell the safes or you offer security services, then you aren’t a ‘touch the plant’ company and you can probably work with your local CPA firm. But if you are a ‘touch the plant’ company or an applicant for a license, that’s our strong spot.”
Bridge West works with cannabusinesses in every state there is legal marijuana and the services that are needed run the gamut.
“They need business plans; they need to know how much it will cost for them to grow marijuana and what they can sell it for,” he says. “And when they are licensed we do their tax returns and audits.”
Licenses are hard to come by in states and are very expensive to obtain. Marty compares it to how the state legislators are controlling alcohol and gambling licenses.
“It’s really no different,” he says. “Colorado did not allow any out-of-state investors for the first few years because it needed time to get its regulatory framework up and running.”
It’s not surprising then, that Marty and his team are part of assisting regulators on the state level as they navigate this new industry. He’s consulted with a variety of states including Maryland, Nevada, Illinois, Colorado and Michigan.
“For the regulators, this is all new to them, too,” he says. “They have more questions than answers and it takes them a number of years of visiting dispensaries and grow facilities to figure out what they should be looking for. Everybody’s concern is cannabis going out the back door because when you’ve invested millions of dollars to get a license you don’t want to compete with the black market. You want regulations and enforcement.”
Marty has worked closely with the state of Colorado and the IRS to decipher Tax Code 280E – going back and forth to ask what is allowed. For example, he’s had numerous meetings with the IRS about allowing deductions on the cost of labor for rolling joints.
“280E is the biggest challenge to the industry right now,” he says. “Where you can deduct your cost of goods sold but not administrative or what the IRS calls ‘selling’ costs. The big ones are retail rent, retail labor and advertising. The IRS has never allowed those. But some of the victories we’ve had include storage, where you store the product at night and labor for keeping track of the inventory. That’s why it’s kind of humorous but labor for rolling joints is considered part of goods sold. Those are the things we’ve battled out over the last five or six years.”
That said, Marty says he sees 280E changing – currently there are 33 co-sponsors on the bill, Small Business Tax Equity Act of 2017, that would amend the rule to exclude state license cannabis businesses. Still, it’s attached to President Trump’s first tax bill so whether it will withstand committee wrangling is unknown.
Another major challenge for his cannabis clients is being in excess of 100 percent tax bracket, which makes profitability challenging for many.
“Say that because you are just getting started and building out a large grow facility, for any other business, your tax return would show a $200,000 loss, a legitimate tax loss because you are in startup mode,” he says. “But then as your accountant, I have to add back $500,000 of nondeductible retail expenses and you’ll pay tax on $300,000 in a year where you actually lost money. That is how you get excess of 100 percent tax bracket. If you do everything right you can make 25-30 percent of sales after taxes. Very few people do it, but it can be done.”
Marty says he now knows which business models work, how to advise his clients on the cost of growth and how to set up companies so 280E doesn’t put an operator in the position of being in excess of 100 percent tax bracket.
“It wasn’t that anybody was super smart, we just threw enough spaghetti against the fridge that we know which models work and now we can advise our clients on how to be in that profitable model,” he says.
Not surprisingly, now, in Colorado there are many cannabis businesses who would love to sell – after all, they started on a shoe string and are now seeing the fruits of their labor. But while more deals are on the table, Marty says many interested buyers balk during due diligence.
“You have to find the right buyer who has the cash to close,” he says. “There are a lot of businesses for sale, very few of them actually sell. There’s unrecorded liabilities, mishandling of 280E, lack of reliable financial statements and historical data. We spend a lot of time cleaning up the books for our clients.”
His word of advice for CPAs who might want to venture into the industry?
“It’s very interesting and dynamic,” he says of the sector. “There’s certainly a risk involved in it but if you believe that people shouldn’t go to jail for growing a plant, it can be very satisfying and profitable work.”
Posted on November 17, 2017