Financial Normalization on the Horizon

Melissa Diaz

Rebel Rock executive looks at current trends and makes predictions for the near-term future of the industry

Melissa Diaz is the co-founder and CFO of Rebel Rock, a woman-owned accounting and consulting company based in Scottsdale, Arizona, and focused on the cannabis industry.

Along with her co-founders, Diaz saw the importance of a business uniquely dedicated to the cannabis space once their other accounting firm started to draw clients from the industry.

There was a glaring need for legitimate cannabis companies to get business services such as accounting, even while many companies declined to work in the sector. Diaz’s mission is to help normalize the industry and offer her clients the same consulting and accounting professionalism that a client from any other industry could expect.

 

It seems to be a particularly tough time to raise money in the industry. Is this trend likely to continue?

There are technically three ways to raise money:

  • Generate your own revenue, which is what most companies are doing.
  • Take out bank debt.
  • Find an investor.

But because the No. 1 hurdle to generate your own revenue is startup costs, you generally need debt or investment. As we know, each option comes with its own challenges.

Because of the federal limitations in place, securing a loan is far more difficult than it is for a non-cannabis business.

What’s hurting the investment market is very similar to what happened during the internet boom of the late ’90s. A lot of people and potential investors are coming into the cannabis industry because of the hype and potential growth, but they don’t really understand the industry or the complex regulations surrounding it. Also, we’ve seen these massive valuations for a handful of early movers only to see them go through the IPO process and not perform as well as expected to justify such a large valuation.

Companies need to be realistic with themselves. They will not be able to grow 200% year-over-year on a sustainable basis. We need to temper our expectations.

 

What do you see as some of the bigger financial trends to develop during 2020 in the cannabis space?

We see merchant processing getting easier. More companies are entering the space and developing creative solutions for the industry. Another big trend will be dispensaries being able to accept credit card transactions as some of the bigger players in the industry look to roll out those solutions in the next year.

With the U.S. House of Representatives passing the SAFE Banking Act, I think it’s only a matter of time until we see banking addressed further at the federal level.

We also could see lower valuations in the industry and an overall slowdown in investment due to the possibility of an economic downturn or recession. If that does happen, cannabis companies need to understand that landing investment may tighten up or even become far more difficult than it is now.

 

What mistakes are entrepreneurs and cannabis companies making when it comes to operating their businesses profitably?

They aren’t setting up the right accounting and business systems to handle the robust reporting requirements in the industry. Rather than just going with the easiest solution, they must carefully evaluate and fully vet everything about the overall internal operating structure, from technology down to how they’re handling banking relationships.

Also, the difficulty in finding bank debt or equity investment really must be acknowledged, because these companies are going to run into cash-flow issues and end up going under. Whereas a traditional company can secure a loan or investment far more easily, cannabis operators find it far more difficult to find such funding.

Entrepreneurs must look ahead and plan for their future needs. Because of the many challenges inherent in the industry, it is vital to accurately project what your company’s performance is going to be.

 

Are there certain industry sectors you see gaining more traction than others? Which sectors aren’t doing as well?

CBD and hemp are gaining traction mainly because of their big advantage over true THC/marijuana producers: They are not subject to the limitations under Section 280E of the IRS Tax Code. They simply don’t have the same barriers to entry.

Ancillary companies also are doing well, particularly merchant processors willing to take on cannabis clients; they’re making quite a bit of money. Professional services such as legal as well as insurers are doing well, too.

We are seeing several firms getting hit with big tax bills because they didn’t fully understand the nuances of 280E. It’s just a matter of time before those companies that aren’t paying attention to the intricacies of the tax code limitations get into big trouble.

 

If there is one piece of financial advice you could give to aspiring cannabis entrepreneurs, what would it be?

Don’t underestimate your startup costs. It’s easy to be optimistic as an entrepreneur—and you should be. But because of how much it costs from a tax and operating standpoint, it will be tough to accurately project your profitability point. Be sure to give yourself more runway than you are anticipating, because it will take longer than you think to reach profitability without investment.

Also, talk to a good accountant and a good lawyer who have experience in the industry. Get yourself set up properly from the outset so you don’t get into a big mess down the road. It’s very easy to make some small mistake that can cost a lot of money.