Now you’ve decided to take your cannabis business public or have your sights set on that goal for the future. One of the first steps to complete the process is to fill out a registration statement, generally known as an S-1.
The SEC Form S-1 is an SEC Registration required for all US companies requesting an initial public offering on a national exchange.
Form S-1 Basics
There are multiple aspects to this document. The maximum dollar amount a company intends to raise and strategies around growth strategy.
In addition, companies that want to be listed on an exchange are responsible for detailing the company’s historical business and financial information.
For this article, we will focus on the importance of historical financial information, which includes audits of the core business and potentially any previously acquired companies.
After reading this article, you will be able to understand the following:
- Which acquisitions will need an audit?
- Why are certain acquisitions exempt from audits?
- How to determine if your business needs additional audits before filing your S-1
Due Diligence for M&A Deals
When planning on going public, you will need to set a business valuation. You also must demonstrate to the public markets why you are worth the specific value. And provide data to backup your claims.
As you know, when acquiring a business, you should always complete a due diligence process. This process verifies the value is correct and you understand the ins and outs of the company you are purchasing.
For normal M&A deals, you set how rigorous you want to investigate the business or asset you are acquiring. You may just need to see a few financial statements and do an on-site visit. Then you may be ready to write the purchase check.
But, when listing your cannabis company to go public, you will likely need audited financials. And the audit needs to be based on a detailed set of data and records.
Importance of Data & Record Keeping
Audits are not limited to just the one cannabis entity going public. Instead, it could entail auditing all of your past acquisitions in great detail. Therefore, it is imperative that you gather all relevant documentation during the acquisition.
You will need a history of previous financial performance in the event of an audit on the acquisition in the future. We also recommend operator’s keep open communication with previous owners if possible, in the event you need to reach out to them.
A lack of sufficient records can significantly hinder the audit process, if not stop it completely. If you have junk data or missing paperwork, then not only can the audit become more expensive with excess fees, you may also have to discount the value of your business.
Another factor to consider is how bad data can disrupt the timeline for going public. You can quickly burn through cash or waste resources when trying to get across the finish line to finally list your business on the exchange.
For more information on mergers and acquisitions, reach out to one of our audit associates for a review.
Asset Acquisition vs. Entity/Business Acquisition
Not every acquisition needs to be audited when going public in cannabis. So, how do you know if your transaction will need an audit?
Here are the key insights for operators for operators deciding on the necessity of an audit.
There are two types of acquisitions:
With an asset acquisition, an operator may have purchased an option to buy a dispensary or intellectual property such as a trademark or manufacturing process.
Generally, it is when you have only one asset or a tight collection of assets that have value, but do not have any inputs or outputs of money.
For instance, purchasing grow lights or growing containers are an obvious asset acquisition. These purchases do not require an audit since they are viewed as assets and not an actual business sale or purchase.
An entity or business acquisition, are also commonly referred to as business combinations.
In these types of acquisitions, the company you are purchasing combines with your company to create a larger operating business. While the companies may still operate under separate legal entities, their financial interests align because of shared ownership.
A common practice in the cannabis industry is vertical integration. For example, a dispensary that purchases a cultivation facility is a form of vertical integration. Although, the organizations may still operate as separate businesses and under different names.
In contrast, a successful dispensary may decide to increase their market share by purchasing another local dispensary.
Either way, many of these business acquisition transactions will result in the need for an audit.
For more information on whether or not you will need an audit, reach out to one of our audit associates at GreenGrowth CPAs to discuss your options. Or check out one of the video or article links below. Audit Services and What You Need to Know about an audit.
To learn more about taking your cannabis business public, reach out to our team of financial experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting, tax filing, or business cycle.
We employ several financial programs that can assist the company with its fiscal responsibilities including, tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.