Still hoping to take your cannabis business public? Then the stakes are much higher for you today to make your business appetizing down the road. And depending on the outcome, a qualified audit opinion could crater your dreams of ever going public.
Like we mentioned in part 1, everything from the financial operations to the management of your business will have to be audited.
When our team conducts an audit, we review the income statements, balance sheets and POS data. In addition, we hone in on specific details such as, inventory counting procedures, cash logs, and managing your cap table.
Mess up one of these small or larger items and you could end up with a qualified audit opinion…and that’s not qualified in a good way!
In part 2 of this series, we cover what operators should do if their auditor gives them a qualified opinion and how it can impact your cannabis business valuation.
What to do if your audit gives you a qualified opinion?
If your dreams were to hit the public markets, then your dreams are pretty much over at this point! That’s right, we said it!
Operators who receive a qualified opinion are unable to make an initial public offering (IPO). An initial private offering is when companies become public and sell their shares on the stock exchange. A qualified audit opinion will prohibit your company from taking this imperative step to go public. In essence an IPO is the first step in transitioning from a private to public company.
In addition, a qualified audit opinion can also prevent you from participating in over-the-counter (OTC) trading, which is another major step in taking your company public.
And lastly, a qualified audit opinion also prevents your company from a reverse take-over (RTO). Although many operators can choose this route to avoid an IPO, a qualified audit opinion can still hinder your ability to become a publicly traded company.
Moreover, it’s important to note that the SEC rarely, if ever, accepts companies that receive a qualified audit opinion.
What if I just want to stay in the private market?
Now, if you’re looking to stay in the private markets, all is not lost. Unlike an adverse or disclaimers of opinion, a qualified opinion is generally acceptable to lenders, creditors, and some investors, but this will vary depending on the details of the opinion and the third party risk tolerance.
You also may be subject to pay higher interest on your debts or take less than favorable deal terms with investors. However, the business relationships are likely still salvageable.
How does it affect your cannabis business valuation?
In short, it depends, just like a lot of things in this industry. It depends on what the specific qualification is. For instance, did you have a minor gap in your cash logs for 30 days or did you not accurately track cash for a couple years? Also, did you have a small portion of your inventory inexplicably disappear one time or is it that you never ran proper inventory counts at year-end?
Each business valuation needs to be analyzed on a case-by-case basis due to the nuances of each type of qualification, the market comps, and many other factors.
Interested in Going Public?
We can help! To learn more about the audit process and going 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 to 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.