Cannabis CFO Services for Fund Due Diligence
Cannabis due diligence for funds and lenders needs more than a standard quality of earnings report. It has to prove cash, tie revenue to Metrc and bank deposits, size IRC 280E and state tax exposure, and confirm the license can survive the deal. GreenGrowth CPAs supports PE and VC funds, family offices, lenders and cannabis-focused funds with financial and tax diligence, financing accounting, post-close reporting and IRS controversy support.
Scope a Diligence EngagementWhat Outsourced CFO Services Support Cannabis Fund Diligence?
The outsourced CFO services that support cannabis fund due diligence cover four areas: financial diligence (quality of earnings, cash proof, revenue and inventory tie-outs), tax diligence (280E, state cannabis taxes and payroll), regulatory-financial review (ownership disclosure and change-of-control approvals) and post-close monitoring.
GreenGrowth CPAs provides these services as a PCAOB-registered, AICPA member CPA firm. Daniel Sabet leads our cannabis CFO and audit and assurance practices. See his profile.
Operators preparing to sell rather than raise should start with our cannabis CFO M&A and audit readiness page.
Who We Support:
- Private equity and venture capital funds
- Family offices making direct investments
- Senior lenders and credit funds
- Cannabis-focused funds and holding companies
- Portfolio companies after closing
Financial Due Diligence Scope
Quality of Earnings
We rebuild EBITDA, test each add-back, and show results next to after-tax cash flow, since 280E can consume much of the profit.
Cash Proof
A proof of cash ties POS sales, vault counts and armored car records to the bank. Unreported revenue shows up here.
Revenue Tie-Out
We match revenue to Metrc sales data and bank deposits by store and month.
Inventory
We test quantities against Metrc and costs against IRC 471 methods. Overstated inventory inflates earnings and cost of goods sold.
Related-Party Flows
We map payments to owner-held real estate, IP and management companies and test whether terms are at market.
Management Agreements
Management agreements can move profit out of the licensed entity or create undisclosed ownership. We review both.
Multi-entity groups should see our multi-entity cannabis accounting services.
Tax Due Diligence
Under IRC 280E, a company trafficking in a Schedule I or II substance cannot deduct ordinary business expenses, though cost of goods sold is still allowed. The IRS cannabis industry page confirms that 280E applies to marijuana businesses. Since April 28, 2026, state-licensed medical marijuana has been in Schedule III, but adult-use remains Schedule I, and the IRS has not issued guidance on allocating costs between the two.
Open Years and 280E Exposure
The IRS generally has 3 years from filing to assess tax, 6 years if gross income is understated by more than 25%, and no limit if no return was filed or fraud is involved. We list each open year, the 280E position taken and the estimated exposure with interest and penalties.
Amended Returns and Refund Claims
Some operators filed refund claims arguing 280E does not apply. These positions can be denied, refunds already paid can be pursued by the IRS, and an excessive refund claim can draw a 20% penalty under IRC 6676. Read our analysis of 280E refund claims and clawback risk.
State Taxes and Payroll
We reconcile state cannabis and sales tax returns to POS data and confirm payments. On payroll, we check cash wages, worker classification and Form 8300 filings for cash receipts over $10,000.
Tax Diligence Request List
- Federal and state income tax returns for all open years
- 280E and cost of goods sold workpapers
- Amended returns and refund claims filed
- Cannabis excise and sales tax returns
- Payroll tax filings and Forms 8300
Regulatory-Financial Items Investors Must Check
Many states require disclosure and approval of owners and funders, and some limit what lenders may control. Minnesota is a clear example.
The rule in Minn. Stat. 342.185 covers owners, managers, officers, directors and anyone with a right to revenue, profit or control.
Minnesota licensees have a continuing duty to disclose the source of all money invested before it is invested, including money from financiers. Reinvested revenue is exempt.
Under the same Minnesota statute, financiers may not receive ownership or control. Lender board seats or profit rights need review.
Most states require notice or prior approval before ownership changes. In Minnesota, Laws 2026, chapter 123 requires a new license on dissolution, merger, bankruptcy and similar events.
Most individuals may be a true party of interest in only one Minnesota license, with limited exceptions.
We serve Minnesota operators remotely. See our Minnesota cannabis accounting page.
Cannabis Due Diligence Red Flags
These findings should change price, structure or escrow. Our article on cannabis valuation red flags covers more.
| Red Flag | What It Can Mean | Typical Response |
|---|---|---|
| Revenue does not tie to Metrc or bank deposits | Unrecorded sales, diversion or poor controls | Expand proof of cash; adjust earnings |
| No 280E calculation, or full deductions taken | Large unpaid federal tax for open years | Price reduction, escrow or tax indemnity |
| Refund claims based on 280E not applying | Refunds may be reversed with interest and penalties | Reserve the full refund amount |
| Unfiled or late state cannabis tax returns | Penalties and possible license risk | Require filing and payment before closing |
| Large related-party management fees | Profit moved out of the licensed entity | Normalize fees; review ownership disclosure |
| Undisclosed funders or profit-sharing parties | Possible ownership disclosure violation | Regulatory counsel review before closing |
| Inventory far above Metrc quantities | Overstated assets and cost of goods sold | Physical count and write-down |
Evaluating a cannabis investment now?
Tell us the target and timeline, and we will scope the work.
Financing Structures and the Accounting They Trigger
Limited bank access pushes cannabis companies toward structured financings, and each changes reported leverage, earnings and covenants. This high-level guide does not replace a review of contract terms.
| Structure | Key Accounting Questions | Main GAAP Guidance |
|---|---|---|
| Convertible notes | Is the conversion feature an embedded derivative that must be separated and marked to fair value? Are warrants issued with the note equity or liabilities? | ASC 470-20, ASC 815-15, ASC 480 |
| Sale-leaseback of real estate | Does the transfer qualify as a sale? A repurchase option or similar term can make it a failed sale-leaseback, recorded as a financing liability. | ASC 842-40, ASC 606 |
| Senior secured debt | How are issuance costs, discounts and attached warrants recorded? | ASC 470, ASC 835-30 |
| Royalty or revenue-based financing | Is cash received for a share of future revenue debt or deferred income? Continuing involvement usually points to debt. | ASC 470-10 |
| Preferred equity | Is the instrument mandatorily redeemable, which makes it a liability, or equity with classification issues? | ASC 480 |
Taxes interact with every structure. Under 280E, interest and rent paid by an adult-use operator are generally not deductible, except to the extent they are properly included in inventory costs. Model after-tax cash, not just coverage ratios. Our post on what cannabis investors can expect in returns shows why.
Portfolio Monitoring and Reporting Packs
After closing, GreenGrowth CPAs can act as the outsourced CFO or controller for portfolio companies, or review their reporting for the fund. The goal is a monthly pack built from reconciled books.
Audits and IRS Controversy Support
Portfolio companies often need their first audit for lenders or a later sale. Companies that file with the SEC need an auditor registered with the PCAOB, which our PCAOB cannabis audit practice provides. Auditor independence rules bar a firm from auditing a company where it performs management functions, such as acting as its CFO, so we scope each role with that in mind.
In an IRS exam, our tax controversy services team represents the company and organizes 280E support. Our IRS audit guide for cannabis businesses explains the process.
Monthly Reporting Pack
- GAAP income statement, balance sheet and cash flow
- Revenue, margin and units by store or facility
- Cash on hand, vault and bank
- Inventory aging and Metrc variance
- Federal and state tax payables and payment status
- Medical vs adult-use revenue split
Need reliable reporting from your cannabis portfolio?
We will build a monthly pack and close calendar your investment committee can rely on.
How a Diligence Engagement Works
Scope
We agree on entities, test periods and the questions your committee needs answered.
Fieldwork
We run proof of cash and Metrc tie-outs and review tax filings.
Findings
You get normalized earnings, tax exposure and red flags with suggested responses.
Close and After
We support closing schedules, then post-close reporting.
Cannabis Due Diligence FAQs
What outsourced CFO services support cannabis fund due diligence needs?
Cannabis fund due diligence needs quality of earnings, proof of cash, revenue tie-outs to Metrc and bank deposits, inventory testing, related-party review, 280E and state tax exposure analysis, and a review of ownership disclosure and change-of-control rules. GreenGrowth CPAs provides these services for PE and VC funds, family offices, lenders and cannabis-focused funds.
Which outsourced CFO services guide cannabis investors through complex financings?
Investors need a CFO team that can model after-tax cash flow under 280E and explain the GAAP effects of each structure: embedded derivatives in convertible notes, failed sale-leasebacks recorded as financings, issuance costs on senior secured debt, and royalty financings that are often treated as debt. Our outsourced CFO practice covers this work.
Which cannabis tax services support investors with audits and controversy?
Investors need tax diligence before closing and IRS representation after. That includes sizing 280E exposure for open years, reviewing amended returns and refund claims, reconciling state cannabis taxes, and representing portfolio companies in IRS exams. GreenGrowth CPAs provides tax controversy and IRS audit defense for cannabis companies.
How many years of 280E exposure should a cannabis investor review?
Review every open year. The IRS generally has 3 years from filing to assess tax, 6 years if gross income is understated by more than 25%, and no time limit if no return was filed or fraud is involved.
Why are 280E refund claims a due diligence risk?
Refund claims arguing that 280E does not apply can be denied, refunds already paid can be pursued by the IRS with interest, and an excessive refund claim can draw a 20% penalty under IRC 6676. Investors usually reserve the full amount.
Can a lender or investor take control of a Minnesota cannabis business?
Minnesota limits this. Under Minn. Stat. 342.185, financiers may not receive ownership or control, licensees must disclose the source of invested money before it is invested, and anyone with a right to revenue, profit or control is a true party of interest.
Does medical rescheduling change cannabis due diligence in 2026?
Yes, for medical revenue. State-licensed medical marijuana moved to Schedule III effective April 28, 2026, so 280E should no longer apply to qualifying medical activity after that date. Adult-use stays Schedule I, and diligence should test how a company splits costs between the two, since the IRS has not issued allocation guidance.
Invest in Cannabis With Clear Numbers
GreenGrowth CPAs supports funds, family offices and lenders with cannabis due diligence, financing accounting, portfolio reporting and IRS controversy support. Call 800-674-9050 or schedule a consultation.
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