Bridge West Consulting had an opportunity to speak with Eric Krohn, Director of Business Incubation Programming Entrepreneurship and Innovation Partnerships for the Koffman Incubator Program.
Continue readingBridge West Consulting had an opportunity to speak with Mike Wales, Senior Enterprise HCM Consultant with Paychex. Paychex recently began serving the cannabis industry throughout the country.
Mike Wales has been with Paychex for over 29 years. Mike’s primary geographic focus is California; however, he serves clients all over the country. He began servicing the cannabis industry in January of 2021 and quickly noticed that his knowledge about payroll taxes would be valuable to the cannabis industry.
When Mike first started to serve the cannabis industry, he immediately saw many issues regarding payroll taxes. He said, “The cannabis industry has been extremely underserved and significantly overcharged for many years. Paychex was one of the first national providers to enter the cannabis space. Since Paychex is a publicly traded company, everything we do is completely transparent. We get it right. This has not been the case for the cannabis industry for a very long time.”
For example, there was a recent issue with cannabis companies not having their payroll taxes paid when using other services, affecting everything from operations to payroll. Another service provider did not pay close enough attention to this. The IRS recommends that employers review their account regularly even when using a third party. Mike explained, “There are many ways that a business in the cannabis industry can get penalized for not filing taxes correctly. Even if you outsource someone to handle your finances, the business will get penalized for not making the correct payments timely. Some states have different tax laws when it comes to payroll and taxes.”
Mike also cited a webinar titled, “FAQs for Payroll Information in Conjunction with the Cannabis Industry” presented by Roy Chaney, a veteran Revenue Officer at the Internal Revenue Service. During the seminar, Roy addressed the biggest issues he feels that cannabis companies face:
Another issue happened in the fall when a cannabis operator’s employees were set to receive their regular paychecks, and no one received their direct deposit. Mike explained, “There are many ways that a cannabis business can get penalized for not paying employees correctly. Even if you outsource someone to handle your finances, the business will get penalized for not making the correct payments timely. For example, California has a law where employers must pay their employees on time, and if they cannot pay them on time, there is a late fee on all paychecks not received by employees.
There are best practices that the IRS outlines on their website when outsourcing someone to handle payroll, taxes, etc. It dictates that whoever signs off on using the outsourced financial advisor is held responsible for any mistakes that are made. The IRS takes this very seriously. Business owners need to avoid these penalties and ensure that their business does not make these mistakes. States feel the same way, but how they address the issues varies by state.
Paychex helps its clients find future employees by analyzing the current job market conditions. Currently, people are very mobile-facing and perform most of their job searches through apps on their phones. Paychex offers to help their clients find employees by posting their open positions on multiple job boards, including free and paid listings. Paychex’s clients can perform their regular onboarding processes for new employees. They can create different screening processes from simple to specialized positions, based on the position that is being screened. The HR professionals at Paychex can help with the onboarding process and make hiring easier.
Once employers have selected the candidates and extended the job offers, the next steps in the onboarding process are to send the new employees a mobile link to submit the required information. Online and e-submissions can speed-up the process by making the documents available to view instantly after submission and is also easier to read vs. handwritten documents. Paychex also utilizes onboarding software, where the system screens potential employees, making the process much easier for recruiters. The system also provides a paperless onboarding process that helps to reduce risk and ensures that no information gets lost along the way. For example, it does not allow people to skip required fields during the application process.
Online and e-onboarding processes make hiring in various states easier because the system knows the different state-to-state laws and requirements and will ensure compliance to federal requirements. The system can also track vaccinations and make it easier for an employer to see the status of all employees, no matter the size of the company. Everyone who needs to view the records of these different aspects can have complete visibility, right at their fingertips.
The system allows employers to capture the time and attendance of all employees through the centralized system. Paychex can monitor this data whether paper or other methods are used to track employee hours. At the end of the pay period, they communicate the numbers with payroll and confirm that everything is calculated correctly — that everyone is paid on time and taxes are properly calculated. At the end of each quarter or year, there also needs to be a set of returns done for every agency that needs them. There are three ways to pay employees: cash, check, or direct deposit. Employers are responsible for paying garnishments, and this needs to be identified whether there are one or multiple.
Once payroll is done, it is essential for employers to update their accounting systems. As long as the accounting system can receive files, they can automate it and eliminate time during this overall process, which is much more efficient. This is a big issue within any industry and every industry needs to be more efficient and cut down on time wherever they can.
After the payroll process is complete, employers need to focus on paying any retirement funds, 401(k) plans, and medical benefits, since there are health care reporting requirements.
Mike explained, “What I see the most is cannabis operators having an existing systems and processes are not working. There is a huge lack of information across all industries and people don’t know what they don’t know. Paychex helps educate and guide businesses throughout all these processes before an agency contacts them, which can have higher consequences.”
Mike said, “Understand that the business is still responsible even if the function is outsourced. Review the suggestions the IRS has on their website on choosing a provider”
Bridge West Consulting had an opportunity to speak with Todd Sherer, First Vice President with Valley National Bank. Valley National Bank has been serving the cannabis industry for over a year and is one of the largest national banks serving the cannabis market.
Todd Sherer, First Vice President with Valley National Bank, joined Valley National in 2021 to help grow their cannabis practice. As an integral member of the bank’s cannabis banking team, Todd and his colleagues serve a wide range of cannabis clients nationwide. Prior to joining Valley National Bank, Todd ran business development for 13 years with a non-bank lender in New York City.
About eight years ago, Todd started a second line of financing for the cannabis industry, and he provided debt facilities to a wide variety of customers in the cannabis space. Todd provided financing to many companies in the industry including vertically integrated operators, extraction companies, and ancillary businesses.
As a panelist for many major cannabis events over the past few years, Todd regularly shares his expertise and knowledge about financial issues impacting the cannabis industry.
Valley National Bank has been serving the cannabis banking industry for a little over a year and a half and the bank is quickly positioning itself as the leading bank serving the cannabis market. Todd’s goal is to grow the bank’s presence in the cannabis industry. Valley is now offering deposit relationships to cannabis companies nationally and is currently banking some of the largest companies in the U.S. The bank is offering these services to license “hopefuls” in the NY Tri-state area as well as some the most prominent companies in the industry. Additionally, Valley offers a service called ‘Concierge Banking’ to their cannabis customers. This offering comprises a dedicated team of cannabis-focused bankers who have deep industry experience, providing customers with higher-level services. Since Valley National Bank is one of the largest national banks working in the cannabis industry, they support cannabis operations in multiple states. Customers receive one login portal and one site to visit, which simplifies the process of operating nationally and moving money from one account to another, or one state to another. Most large commercial enterprises are accustomed to all the commercial banking services available at Valley National Bank, which has been a “game-changer” in the industry. In addition to banking, Valley National Bank also provides some lending, but mainly financing as it relates to real estate for their customers. They are looking to offer more for their customers as time goes on.
Recently, Valley launched Valley Pay, a digital payment solution for the cannabis industry. Valley is constantly looking for new ways to service the cannabis industry.
Overall, the challenges in the cannabis industry have changed over the years. Todd mentioned that he consistently sees a challenge of open a simple checking account. Some states are easier than others; however, the vast majority of accounts are opened by smaller state-chartered banks or credit unions. This leaves the industry shorthanded when it comes to not having access to traditional financing and banking tools that everyone else has access to outside of cannabis. This is where Valley National Bank steps in and assists cannabis companies struggling with basic financing and banking issues. Valley provides the help they need to operate efficiently throughout multiple states.
Outside of obtaining banking, it is equally challenging to obtain financing for a cannabis operator. Todd stresses that the industry is heavily reliant on equity investors. Non-bank lenders in the space offer high-interest loans, which helped fill a void left in the market. Todd said, “Fortunately, today there are banks like Valley and other financial institutions that are willing to lend to cannabis companies.”
Ask the Cannabis Expert – Sahar Ayinehsazian: What Types of Corporate Services Should a Cannabis Company Consider at Various Lifecycles and Stages?
Continue readingAs an Insurance Advisor with Brown & Brown Insurance, Max Meade specializes in cannabis insurance policies and risk management, and he serves cannabis customers all across the country. With a wide range of experience in the industry, Max develops insurance and risk management strategies and establishes policies for growers, cultivators, dispensaries, and cannabis brands. We asked Max, “What are the most important insurance and risk management strategies for license applicants and new operators?”
Max graduated from Temple University in Philadelphia, Pennsylvania, around the time Colorado legalized cannabis for recreational adult use. When Max’s cousin and grandmother became ill, they turned to cannabis to treat their illnesses, and this is when he realized the medicinal and healing effects of cannabis.
This experience ‘sparked a light’ and changed how he looked at cannabis, which fueled his desire to learn more about the industry and help others.
When Max joined Brown & Brown Insurance, he wanted to focus on the cannabis industry to help customers with loss, claims, employee concerns, and more. He performed research to learn everything he could about the industry. In 2016, Max was able to apply all of his knowledge when he began working with his first cannabis insurance customer. At this time, insurance policies for cannabis operations were very new. As an industry trailblazer, Max helped his customers strategize, and he provided invaluable guidance in areas that they hadn’t even considered as part of their risk mitigation approach.
After his first few cannabis customers, Max noticed a disconnect in the cannabis insurance niche. Many cannabis operators mistakenly thought that their current insurance coverage appropriately addressed the risk associated with their cannabis business. However, more often than not, that is not the case. Other industries have not seen the fast-paced growth like the cannabis industry. To Max, it is essential that he takes the time to educate his customers about the potential pitfalls and risks that can potentially impact those in the cannabis industry, and how you can mitigate those risks with tailored coverage to help address their unique needs. Max works closely with his customers, providing guidance and insight through every stage and lifecycle of their business— from manufacturing and growing to marketing.
Max emphasized that proactiveness is essential for license applicants and new operators. Business owners should be fully transparent with the industry professionals that they are working with throughout the process to maximize the benefit of having a team to share their experience and best practices. Max said, “It is so important to develop your team and involve cannabis industry professionals — CPAs, lawyers, insurance agents, and others — from the very beginning, throughout the entire process, and in every aspect of your operation. The more your entire team is aware of ongoing updates, opportunities, challenges, risks, and we know what’s going on, the more we can help to make recommendations to help protect your business. It’s truly a team effort. Overall, the best advice I can give is to get knowledgeable industry specialists involved at the early stages of your cannabis business, especially when it comes to insurance and risk management.”
Cannabis professionals may not have risk management top-of-mind when insuring their cannabis business. Max said, “It is essential to have a clear picture of what you currently have and what is excluded, missing, or what might not provide the most comprehensive coverage. Then be proactive to avoid discrimination or harassment and help protect yourself against potential risks. Cannabis business owners need to have a clear understanding of what they have and how to put risk management strategies and coverages in place to help protect their business.”
When starting a cannabis business, cybersecurity is fundamental, and it is critical to ensure that data and information are protected in case your business is hacked. It is highly costly to resolve an issue involving hackers and a cybersecurity breach. The information stored in a cannabis business’s IT systems includes their customer’s private information and business records. It can be challenging to remain secure, and cyber insurance could help provide protection in situations of a cyber claim. “You shouldn’t think of insurance as an expense; think of it as protection. Don’t let risk mitigation be an afterthought – it should be part of your initial planning right at the beginning because you never know what is going to happen throughout the process.” Max stresses.
Overall, when starting a new cannabis business, insurance and risk management should never be overlooked or under-emphasized. Working with insurance professionals to develop a comprehensive program to help protect your business from early on can save you time, money, and headaches as your grow your cannabis business.
If you own a cannabis business or are thinking about starting a cannabis business, we’d like to help. As a partnership of highly skilled and seasoned cannabis industry consultants and advisors, Bridge West Consulting is ready to guide you through this exciting and challenging landscape. Feel free to reach out to us anytime to schedule a consultation.
Indoor cannabis cultivation and extraction facility design are critical when determining the building you want to occupy. Mechanical, Electrical, Plumbing (MEP) & Structural Engineering play a considerable role in the success of your facility. Now that cannabis is becoming legal in more states, counties, and cities, cultivation and extraction facilities are scrutinized.
Not conducting proper due diligence can be very costly. There are some instances where I’ve seen clients miss important deadlines, which caused them to lose their licenses. Putting together a solid, experienced team before selecting a facility is vital. When budgeting, make sure you have a professional Architect and MEP Engineer(s) on board to help guide you along the road to finding an adequate facility. When searching for a facility, keep the following seven items in mind:
Before doing ANYTHING, make sure you find a building that is appropriately zoned for cannabis cultivation. If you are building from the ground up, make sure your Architect understands the minimum property setbacks from schools, residential buildings, etc. Most cities or counties will have zoning maps available that show the “Green Zones.” The last thing you want to do is invest in a new venture to find out you can’t operate because you didn’t do your homework ahead of time.
Recently my firm, Winston Engineering LLC, provided the MEP design for an extraction facility in Long Beach, CA. The client brought in their own Architect, who provided my firm with the floor plans. The plans were submitted to the city but were denied because there wasn’t enough parking! The building was built decades ago when parking regulations were much different than they are now. Due to this finding, additional parking had to be added to the property. This caused a significant issue because the client wanted to expand the building slightly.
This change affected the architectural plans, which also affected the MEP drawings. We were forced to redesign the facility, which cost the client more money and time.
If you’re looking to purchase or lease an existing warehouse, make sure you understand your insulation requirements to maintain your grow temperature. For example, in California operators are required to adhere to Title 24, which governs energy efficiency. Unless you build insulated cannabis grow rooms within the warehouse, you will have to insulate your entire warehouse, which can be very costly.
Once you narrow down a building, make sure the location has the electrical capabilities you need. Engage an Electrical Engineer with the loads you want to use so they can determine how many total amps you need. The other side of the equation is the voltage. Ideally, you want 480V, 3 phase as this gives you a lot more options for HVAC (Heating, ventilation, and air conditioning) and grow lights. If you can’t find 480V systems, 208V 3 phase would be the next best thing. PLEASE AVOID 240V, 3 PHASE DELTA SYSTEMS! Delta systems are usually found in very old buildings and have three different voltages (120V, 208V, and 240V). As shown in the diagram below, 3 phase 240V delta systems have a “wild leg” (sometimes called a “stinger leg”). On a typical 3 phase 208V wye system, if you placed a voltage probe on any leg and placed the other probe on neutral, the voltmeter would read 120V. On a 3 phase 240V delta system, if you read between the “wild leg” and neutral, the voltmeter would read 208V.
These systems can be a nightmare to design around and costly due to the additional electrical panels you may need. For example, if you have a lot of electrical components that use 120V (i.e., circulating fans, general receptacles, etc.), you will have to avoid the “wild leg,” leaving a large percentage of your circuit breaker slots empty (unless you have other 208V loads). With so many unused open slots, you may have to install additional subpanels.
My firm has made the delta system work before, but it adds another layer of complexity.
If you can only get a building with a 240V single phase, make sure you plan your grow room ahead of time. We recently had a client with a 240V single phase, 200A service, and we had to cycle rooms at different times. We had another client with 240V single phase, 400A service but had to purchase expensive phase converters to turn single phase into 3 phase to power heavy-duty extraction machines. Again, these scenarios cost the client more time and money.
If you’re building from scratch, be sure to engage the local utility to find out if there is enough available power you can tap into that will meet your needs.
When leasing a building, make sure your landlord understands the potential facility modifications for indoor cultivation. As you probably know, indoor cultivation requires a lot of HVACS, so make sure your landlord knows about the impacts on their roof.
We recently provided the MEP design for a large indoor cannabis facility where the client specified that the condensing units be placed on the roof. After the design had been completed, we later found that the client didn’t consult the unhappy landlord, and we had to redesign the MEP drawings.
In another instance, the client insisted on rooftop units. We later found that the landlord had not provided a reinforced roof as previously agreed upon. Therefore, the roof could not withstand the additional weight.
If you plan to put the condensing units on the ground, ensure you have enough space to place them. Quite often, there is not enough space due to clearance requirements or required parking.
If you’re going to lease a building, make sure you understand the sewage requirements. If you have a public sewage system, ensure that the main sewage line is large enough for your indoor cultivation facility.
If you have a septic tank system, confirm the tank size and leech field are adequate for your needs. A septic tank holds all the solids while the excess fluid flows to a leech field and drains in the soil. If the septic tank is not sized adequately, you have to account for the additional cost to replace it. If the leech field is not adequate, a percolation test (a test to determine the water absorption rate of soil) will need to be conducted. Typically, your city or county should have the results of the initial examination. There have been instances where the records were lost or thrown out due to the age of the building. Also, make sure the septic tank has been inspected.
When selecting an existing building, consider the demolition cost. If you come across a building that was previously used for product manufacturing, you’ll find that demolition could potentially be very costly. Sometimes old equipment and abandoned electrical panels can be left behind, leaving you a mess to deal with.
Very large, heavy equipment can be expensive to remove, especially components that are hung from the ceiling, such as FAUs (Forced air units). Removing large condensing units off the roof can also be very costly. Depending on the condition of the equipment, scrap metal companies may come to remove the equipment free of charge.
Another item to consider is understanding the previous tenants intended use for the facility. One of my first projects was to repurpose a large warehouse. After the client had signed the lease, completed the architectural plans, and signed my firm to do the MEP design, we later found that the previous tenant used the facility for microchip manufacturing. Very toxic chemicals are used in the manufacturing of microchips. The health department was concerned that chemicals may have leaked into the soil. Luckily test results came back negative, but if they were positive, the client would’ve had to pay enormous fees to make the building safe again.
If you own a cannabis business or are thinking about starting a cannabis business, we’d like to help. As a partnership of highly skilled and seasoned cannabis industry consultants and advisors, Bridge West Consulting is ready to guide you through this exciting and challenging landscape. Feel free to reach out to us anytime to schedule a consultation.
Edward Culhane is a seasoned transactional attorney with hands-on experience running and managing legal cannabis businesses.
Continue readingStarting a cannabis operation from the ground up requires sharp business and entrepreneurial skills and knowledge about the complexities of this ever-changing industry. We asked Jim Marty, CPA, CEO of Bridge West LLC, to share a few best practice strategies and advice for cannabis startups. Here are his takeaways.
Continue reading