Author Topic: Would You Invest in This Business?  (Read 11964 times)

joer1212

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Re: Would You Invest in This Business?
« Reply #50 on: May 30, 2018, 11:26:18 AM »
Absolutely not.

1.  You are talking about borrowing against your 401K, which I assume is traditional/non-Roth.  What happens if the business turns bad AND you need to or choose to change jobs?  The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).

2.  While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.

3.  Your Bro has no skin in the game.

4.  Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.

Best of luck, either way!!

1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).

2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.




Tester

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Re: Would You Invest in This Business?
« Reply #51 on: May 30, 2018, 11:30:05 AM »
Absolutely not.

1.  You are talking about borrowing against your 401K, which I assume is traditional/non-Roth.  What happens if the business turns bad AND you need to or choose to change jobs?  The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).

2.  While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.

3.  Your Bro has no skin in the game.

4.  Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.

Best of luck, either way!!

1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).

2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.

I will tell you what you already heard: don't do it.

It seems that this is about your brother (except if you are not trolling us :)), but I can't stop thinking something is wrong with the part I highlighted.

Anyway, as you asked us if we would invest in this business, I think you got a lot of responses.
If you decide to still do it please keep us posted on the progress.

I can only wish you luck, as with any business you need it.

joer1212

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Re: Would You Invest in This Business?
« Reply #52 on: May 30, 2018, 11:30:26 AM »
Wait, so both your brother and the grower are convicted felons?

My brother copped a plea bargain (never formally convicted) and got 1-3 years (non-violent crime [selling drugs]). He ended up serving only 8 months.

The grower got a felony for growing pot in Brooklyn in his apartment. One of 'friends' ratted him out.

joer1212

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Re: Would You Invest in This Business?
« Reply #53 on: May 30, 2018, 11:33:43 AM »
I'd be leery of any projections on cannabis businesses right now because the prices are still very much in flux. For example, prices in Oregon have dropped by 50% (http://www.bbc.com/news/business-44237305). To make matters worse, the floor could really drop out on the market if we start to see mechanized outdoor production with interstate shipping.

Do you realistically think that marijuana legalization at the federal level is imminent? The plan my associates have in mind is to profit before this happens. Once it does, we agree that it will be much harder to make money.

MJseast

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Re: Would You Invest in This Business?
« Reply #54 on: May 30, 2018, 11:38:19 AM »
If you really want to get into the industry at this point, look to ancillary businesses to the industry

My brother's plan also included possibly opening a hydroponic store (cannabis supplies). No regulations to deal with.

This could maybe work if there's strong home grow business in your area, but most legal, large-scale growers buy their equipment and nutrients online where its usually cheapest.

Like all new businesses, you need to evaluate the market demand before jumping in, even for ancillary businesses - Who is the customer? Where are they currently being serviced? How many of them are there in your area? What products/brands are they buying and what amount are they currently spending on these? How will you take them away from their current products/stores to buy from you? At least for ancillary businesses you can usually find real data from similar companies.

Honestly, it sounds like a lot of "half-baked" business plans that I've heard over the years. Also keep in mind that the ancillary businesses will be even more competitive because there are no regulations and lot less risk, so many more people are willing to take their chances on these.

Have you already dug through his pro formas on each of these separate business lines?

patchyfacialhair

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Re: Would You Invest in This Business?
« Reply #55 on: May 30, 2018, 11:43:45 AM »
Wait, so both your brother and the grower are convicted felons?

My brother copped a plea bargain (never formally convicted) and got 1-3 years (non-violent crime [selling drugs]). He ended up serving only 8 months.

The grower got a felony for growing pot in Brooklyn in his apartment. One of 'friends' ratted him out.

Sounds like they both have a proven track record of bad decision making. That's not a comment about whether the product should or shouldn't be legal, but it's a comment that they both have crossed that line and broken the law each in their own regard. It's one thing to jaywalk in the moment, it's another to put time and energy into trying to make a living from illegal activity. To give them access to cash to run a "business"...just seems...like a really really bad decision on your part if you do it.

joer1212

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Re: Would You Invest in This Business?
« Reply #56 on: May 30, 2018, 11:53:12 AM »
Quote
I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.

As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.

And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.

I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.

-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.

-Growing superior weed to your competitors isn't rewarded?

-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.

-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.

-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??
« Last Edit: May 30, 2018, 12:22:25 PM by joer1212 »

wbranch

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Re: Would You Invest in This Business?
« Reply #57 on: May 30, 2018, 12:07:01 PM »
Absolutely not.

1.  You are talking about borrowing against your 401K, which I assume is traditional/non-Roth.  What happens if the business turns bad AND you need to or choose to change jobs?  The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).

2.  While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.

3.  Your Bro has no skin in the game.

4.  Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.

Best of luck, either way!!

1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).

2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.

No!! That's not how investing/starting a business works. What kind of work has he been doing for the last 18+ years? He sounds clueless about starting a business.


I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.

As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.

And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.

I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
Quote

-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.

-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.


Income from all illegal activities is taxable at the federal level and you can only deduct COGS, like others have mentioned. I thought this business proposition might start to sound better as the thread continued but it sounds much worse.  Your brother sounds like a bullshit artist and I would not rely on anything he says and would not go into business with him.

MJseast

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Re: Would You Invest in This Business?
« Reply #58 on: May 30, 2018, 12:13:20 PM »

Quote

-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.

For experienced business people with cannabis industry experience elsewhere, I think it's possible. From what you have written about your plans and backgrounds, no, I don't think it's likely. Maybe possible, but not likely.

-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.

OMG. I don't even know how to respond to this. You ABSOLUTELY have to pay federal taxes! You need to consult a cannabis business attorney ASAP. This comment makes me realize just how little your brother understands about this business. If you go forward with this, you are insane. Yes, that is tax evasion.

-Growing superior weed to your competitors isn't rewarded?
Not really. Depends on your market and if it's it actually willing to pay more for "good" weed. In my many years of experience, the market that is willing to pay for good weed, isn't as big as we expected or would like it to be. You can look at the data from legal states to see this.

-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.


Because the government wants your tax money. I've yet to hear of a case of a legal entity in a legal state (granted, I'm talking recreational, not medical) where assets were taken. Now, if you're not planning on paying taxes, that's a whole other thing. In that case, plan to have your assets taken :).

-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.

Not most, but many. Those who are doing shady things (like not paying taxes) and luck of the draw. Yes it's extreme, and yes it's absolutely happening.

-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??

Well it's not a guarantee, but it happens. Happened to me. They sent me a letter stating that they can't have clients who are in the cannabis industry. They gave me 60 days to move my assets from their accounts else they would liquidate them and send me a check (that I would've been taxed on).


MJseast

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Re: Would You Invest in This Business?
« Reply #59 on: May 30, 2018, 12:22:28 PM »
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.

One more point on this particular topic: Just because Massachusetts recently legalized doesn't mean that experienced cannabis business owners from other legal states haven't been already getting involved in the Massachusetts market. Most people that I know in the industry already have their hands in multiple states, usually prepped before the state even legalizes. You are  going to be competing against people with a lot more experience and lot more money.

Again, I'm not saying that it's not possible to succeed in this industry, just that you are not properly set up for success. You need the right people with the right experience and about 5 times the amount of money that you think you'll need.



maizeman

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Re: Would You Invest in This Business?
« Reply #60 on: May 30, 2018, 12:24:02 PM »
-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.

With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

But don't take it from a bunch of people on the internet. Take it from the new york times.

https://www.nytimes.com/2015/05/10/us/politics/legal-marijuana-faces-another-federal-hurdle-taxes.html

Quote
The country’s rapidly growing marijuana industry has a tax problem. Even as more states embrace legal marijuana, shops say they are being forced to pay crippling federal income taxes because of a decades-old law aimed at preventing drug dealers from claiming their smuggling costs and couriers as business expenses on their tax returns.

Congress passed that law in 1982 after a cocaine and methamphetamine dealer in Minneapolis who had been jailed on drug charges went to tax court to argue that the money he spent on travel, phone calls, packaging and even a small scale should be considered tax write-offs. The provision, still enforced by the I.R.S., bans all tax credits and deductions from “the illegal trafficking in drugs.”

Marijuana business owners say it prevents them from deducting their rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-marijuana businesses with the same earnings and costs.
« Last Edit: May 30, 2018, 12:33:43 PM by maizeman »

patchyfacialhair

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Re: Would You Invest in This Business?
« Reply #61 on: May 30, 2018, 12:32:10 PM »
Quote
I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.

As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.

And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.

I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.

-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.

-Growing superior weed to your competitors isn't rewarded?

-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.

-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.

-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??

I believe that literally every single person, before you posted this said that it's probably not a good idea. Now that your brother is clearly showing that he doesn't know what he's talking about, if you don't blow him off immediately, I really hope that you start a journal on this forum so I can revel in your crash and burn to distract me from my own shortcomings.

Dude, your original post has now become the equivalent of "What do you all think about me taking a 175k loan to go all in on Bitcoin? Oh I won't be investing it, my brother, who is a convicted felon, and his friend, also a convicted felon, will be starting a business allowing others to get in on this new thing."

See how absurd that sounds? Hopefully you do.

ShoulderThingThatGoesUp

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Re: Would You Invest in This Business?
« Reply #62 on: May 30, 2018, 12:43:19 PM »
Forget the taxes, quality, rent, and so forth. @mozar is right, this sounds like a scam where these “associates” disappear with all the money.

tralfamadorian

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Re: Would You Invest in This Business?
« Reply #63 on: May 30, 2018, 01:09:10 PM »
I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales...

Oh.My.God

Nevermind all the other issues- all the owners would end up going to jail for tax evasion.

joer1212

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Re: Would You Invest in This Business?
« Reply #64 on: May 30, 2018, 01:10:27 PM »

One more point on this particular topic: Just because Massachusetts recently legalized doesn't mean that experienced cannabis business owners from other legal states haven't been already getting involved in the Massachusetts market. Most people that I know in the industry already have their hands in multiple states, usually prepped before the state even legalizes. You are  going to be competing against people with a lot more experience and lot more money.

Again, I'm not saying that it's not possible to succeed in this industry, just that you are not properly set up for success. You need the right people with the right experience and about 5 times the amount of money that you think you'll need.

Bear in mind that cannabis grower licenses in Massachusetts are going to be issued by territory, just like a McDonald's franchise. It's not a free-for-all. So, if we actually did get a license, we would be the only grower/dispensary within a given area or even town. I'm not saying this will guarantee our success, but it's definitely an advantage. I wouldn't even have considered this business otherwise.

SpreadsheetMan

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Re: Would You Invest in This Business?
« Reply #65 on: May 30, 2018, 01:13:05 PM »
I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales...

Oh.My.God

Nevermind all the other issues- all the owners would end up going to jail for tax evasion.

Is this going to be the first thread where the OP ends up in jail?

Could be a milestone for the MMM forum....

joer1212

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Re: Would You Invest in This Business?
« Reply #66 on: May 30, 2018, 01:24:45 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

MJseast

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Re: Would You Invest in This Business?
« Reply #67 on: May 30, 2018, 01:26:39 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.

joer1212

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Re: Would You Invest in This Business?
« Reply #68 on: May 30, 2018, 01:32:17 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.

Thank you for enlightening me to this, MJ. As I've said, I mentioned this to my brother today, yet neither he, nor the manager, had even heard of 280e. This business proposition is looking worse and worse to me by the minute, and I haven't even scratched the surface yet.
I do have one question, however. How are all these cannabis businesses surviving, with such onerous rules in place? I would think that no one would get involved in this industry if it was so bad.
« Last Edit: May 30, 2018, 01:35:50 PM by joer1212 »

MrSal

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Re: Would You Invest in This Business?
« Reply #69 on: May 30, 2018, 01:32:43 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

Yes! This is standard in most countries. The IRS/Fiscal authority is agnostic to the origin of the money. It can be even drug money or prostitution or anything illegal. They are taxed! I;m not american and even I know that! It's standard in most 1st world countries.

Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.

MonkeyJenga

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Re: Would You Invest in This Business?
« Reply #70 on: May 30, 2018, 01:36:24 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

Have you met the federal government before?

tralfamadorian

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Re: Would You Invest in This Business?
« Reply #71 on: May 30, 2018, 01:38:04 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

Not so much wrong but rather that the IRS is penalizing those profits made by the sale of federally illegal goods by disallowing many deductions.

Tester

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Re: Would You Invest in This Business?
« Reply #72 on: May 30, 2018, 01:40:47 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

I am sorry but I am getting more and more convinced that you are just trolling :).
You started the thread asking us what we think and then you tried to "solve" the issues raised convincing us that you should go in.
I already said: if you go in good luck and please keep us posted.
I genuinely think that in order to succeed in business you need to have courage so this might prove that you are right and we are wrong.

Sidenote:
I lack that kind of courage, but I still tried to start a business - and failed because of not enough funding, not enough planning, not understanding our competition, plus not getting along with some of the business partners. But I planned to finance that business for 6 months to see if it takes off, had the money for it and it was a small amount. In those 6 months we even had one month when we were able to pay everything from the business income....
/Sidenote

If yo decide to go in, do your homework:
A lot of things were already mentioned but I will try to think what I would to before going in into a business:

1. Income/expenses - try to get as much detail as needed.
2. Law - see what laws govern that business. What permits do you need? What is the worst which can happen? How easy is it to get in jail?
3. People - DO NOT DO BUSINESS WITH FAMILY (from your brother's approach on "allowing" you to have 1/3 of the business I think this is already broken). I am not bringing up the felony part as I really think everyone should get a second chance. DO NOT DO BUSINESS WITH GOOD FRIENDS (work with them if you want, don't do business. I have refused doing business with 3 good friends and I can still drink beer with all of them. They had a long period where they would not drink beer with each other...). Understand the track record of people you want to hire.
-Did the grower grow only for him? Does he know to scale? Again, I am not bringing up the felony part as I believe in second chances. But do you homework because you might be liable for his actions.
-Manager - you said he "knows people". Why would those people buy from him?
4. Customers:I think you also mentioned hospitals. Why would they buy from you?
5. Time - how much time do you have to work on this business? Do you have 24 hours a day to focus on this?

Again, I wish you luck and keep us posted.

joer1212

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Re: Would You Invest in This Business?
« Reply #73 on: May 30, 2018, 01:43:48 PM »
the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.

But, it stands to reason that, if the IRS is taxing our business, then we should automatically qualify to write off our business expenses as well. They go hand-in-hand. You can't separate them. This is purely a fiscal matter, not a judicial one. The IRS is NOT being 'agnostic'; to the contrary, they're being selective and self-serving. Pure hypocrisy.

joer1212

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Re: Would You Invest in This Business?
« Reply #74 on: May 30, 2018, 01:47:12 PM »


Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.

If the IRS were truly agnostic, they would treat cannabis businesses like every other, by taxing them AND allowing deductions. Clearly, they're not.

joer1212

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Re: Would You Invest in This Business?
« Reply #75 on: May 30, 2018, 01:51:34 PM »
Not so much wrong but rather that the IRS is penalizing those profits made by the sale of federally illegal goods by disallowing many deductions.

If the IRS is "penalizing" cannabis businesses by not allowing deductions (yet at the same time taxing them), they're making a judicial assessment, and they're clearly not being agnostic, as several posters have claimed.

patchyfacialhair

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Re: Would You Invest in This Business?
« Reply #76 on: May 30, 2018, 01:52:46 PM »


Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.

If the IRS were truly agnostic, they would treat cannabis businesses like every other, by taxing them AND allowing deductions. Clearly, they're not.

Is my post about to be a comment from a late 20s dude to a late 40s dude that life is not fair?

Yep!

Life is not fair.

https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_the_United_States

wbranch

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Re: Would You Invest in This Business?
« Reply #77 on: May 30, 2018, 01:54:55 PM »
280e is part of the Internal Revenue Code and the IRS is enforcing it. It is congress you have a problem with. Not all business expenses can be written off and certain expenses have to be written off (depreciated or amortized) based on the rules. For example there is no deduction for penalties/fines or county club dues, you can only deduct 50% of meals & entertainment. There are further differences on expenses and income for different industries, sizes of business, accounting methods, documentation required, etc. Not all businesses are treated equally under the IRC.

MrSal

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Re: Would You Invest in This Business?
« Reply #78 on: May 30, 2018, 01:58:33 PM »
It seems to me you are spending more energy trying to convince us or yourself to go into this venture - even against most peoples advice - than to accept what the IRS states.

It does not matter if it's hypocrisy from IRS or not... it's what it is and no one in here can change it. Your brother on the other hand seems to be clueless about that, which says a lot of what he did during these past 365 days.

If indeed he had done a thourough research, analysis, SWOT and a sound business plan with numbers forecast he would have answers.

Does he actually have a little folder with a business plan? Structured data? Forecasts? Anything? Or is it mostly saying things and then approach things as they come? I would never be in business without a detailed plan and I would run if someone just pulled numbers out of their ass and without support from data or at least an attempt of crunching the numbers.

maizeman

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Re: Would You Invest in This Business?
« Reply #79 on: May 30, 2018, 02:00:10 PM »
Yup. Life isn't fair. Neither is the tax code.

And it is the IRS's job to enforce the tax code congress passes, not decide what will and won't be taxed and by how much. There are even times I would argue the IRS goes too far in "interpreting" the laws passed by congress. But in this case they are very clearly following the law exactly as it was written by congress.

So @joer1212, up to this point, it has sounded like you are intent on continuing to move forward with this business, regardless of all the feedback you've received to the contrary. ... is that still the case?

joer1212

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Re: Would You Invest in This Business?
« Reply #80 on: May 30, 2018, 02:10:11 PM »
Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.

MrSal

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Re: Would You Invest in This Business?
« Reply #81 on: May 30, 2018, 02:23:56 PM »
Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.

Exactly. Seem them as strangers. They are pitching the idea to you, they should know all the numbers by heart... they should have a business plan in place. If they do not, I would be out if it were me.

And if I learnt anything is to never do business with family. There is no authority usually between family members and the easiness of family relationships usually brings unaccountability... I know this, because my step dad, after entering business with his sister - at first everything was rosey and now they can't even see each other. She just screws things up and thinks she knows so much but doesn't know a thing...  most likely it will end in court unless they reach into agreement and the 8-10M in assets at that rate probably will be split among the lawyers which is ridiculous

MJseast

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Re: Would You Invest in This Business?
« Reply #82 on: May 30, 2018, 02:49:51 PM »
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.

Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.

YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.

Thank you for enlightening me to this, MJ. As I've said, I mentioned this to my brother today, yet neither he, nor the manager, had even heard of 280e. This business proposition is looking worse and worse to me by the minute, and I haven't even scratched the surface yet.
I do have one question, however. How are all these cannabis businesses surviving, with such onerous rules in place? I would think that no one would get involved in this industry if it was so bad.

There are lots of reasons that people still get into this industry:
- Some don't do their homework and fool themselves into thinking they can get rich quick
- Some love entrepreneurship and want to take a risk and be actively involved in the "next big thing"
- Some love the plant so much that the thought of having a career in the industry is enough to keep them going
- Some are very experienced business people and know how to still make a profit despite the fact that the margin is thin

But the reality is that many cannabis businesses are actually NOT surviving. I could tell you so many heartbreaking stories, and many of them begin like your original query. From what I see, it's only the businesses that have been around for awhile and have learned from experience and/or have a shit ton of money behind them to weather the many, many storms.

Luckily for you there are many states that are already at play and much of the data is public. You would be wise to hire an experienced cannabis business attorney or consultant before you put your savings into something like this.

As for your previous comment about limited licenses - Yes, I know how that works. It's pretty much the same in every legal state.

Best of luck to you. I sincerely hope it all works out well for you.

skeptic

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Re: Would You Invest in This Business?
« Reply #83 on: May 30, 2018, 02:54:40 PM »
Joer1212,

Although you seem to be skeptical of the proposal, I am concerned that you have not yet slammed the door on this opportunity, hard, based on the super strong advice that has been shared thus far. I don't think there are any possible answers from your brother, grower, or manager, that could make this a remotely good deal. Even if you got 100% ownership and profits for your investment, it doesn't matter... it will be 100% of nothing.

Just a few highlights:

-mixing family and business: run away fast
-new industries are highly volatile (lots of businesses will go to zero) and will face quickly increased competition and falling product prices: run away fast
-you and the other owners aren't already experienced in this industry or in start-ups generally: run away fast
-the fact that your brother proposed you get 1/3rd ownership in exchange for 1/2 of the investment shows he is either trying to scam you or is clueless about business. Either way, it doesn't matter what you negotiate in the future; if this is the deal he proposed to you, run away fast
-you said you were willing to give your brother a little better deal because he is family. This is a very dangerous mindset to begin with and your generosity will be pushed to the limit: run away fast.
-Even if the opportunity were strong, the cashflow already existed, you and the other owners were experts in the field... this is still a large sum of money that you can't afford to lose 100% of and feel fine about. Maybe a sum of 5% of your liquid net worth would be better... for a great opportunity, not this opportunity.

So... I beg you to stop considering this and end discussion of the possibility. There is nothing that can be said to allay what makes it a terrible idea.

patchyfacialhair

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Re: Would You Invest in This Business?
« Reply #84 on: May 30, 2018, 03:00:57 PM »
Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.

I acknowledge that I've been snarky to you throughout this thread (no ragrets), but I honestly hope that you learn from this one way or the other. It seems you've learned a lot. And I hope you don't go through with it.

One of the things I value most in my life is options. I love knowing that if something doesn't go right, I can do something else. Options mean so much to me. If you end up owing a ton of money after this failed venture (since you would have to take a loan to even consider this), you won't have options. God forbid you want to help a family member going through truly hard times in the future. You won't be able to! God forbid you want to travel to a dream destination...sorry...gotta make the payment on my six figure business loan. Say there's a market dip, and you want to buy the low...sorry...no free cash to invest. Just something to think about.

the_fixer

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Re: Would You Invest in This Business?
« Reply #85 on: May 30, 2018, 09:43:12 PM »
Ask this guy how taxes work.
https://en.m.wikipedia.org/wiki/Al_Capone

As for the business from what I have seen here in Colorado the companies that were in the medical side had a jump start, others were involved in the legislation years in advance and business plans were in place ahead of it becoming legal to be successful. If you are coming into it after it has been passed you are already way behind the ball.

Felons, no thank you.

Doing business with friends / family that suck at money no thank you

Risk my house, life, career no thank you

Plenty of them here in Colorado have been raided, busted for illegal stuff, broken into and robbed.

Sounds like a bunch of smokers and joker's with pipe dreams that they want you to fund...





Sent from my Pixel 2 XL using Tapatalk
« Last Edit: June 01, 2018, 09:48:01 AM by the_fixer »

Rocketman

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Re: Would You Invest in This Business?
« Reply #86 on: June 01, 2018, 02:50:17 PM »
As for the taxes - remember this one fact - Al Capone went to jail for the rest of his life - not for any of his mobster activities, but for NOT paying taxes on his illegal activities.

Just food for thought...

joer1212

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Re: Would You Invest in This Business?
« Reply #87 on: June 02, 2018, 05:29:22 PM »
Great advice from FINate.

This all sounds very sketchy. Where is the Business plan? Detailed start-up budgets and cost-of-sales projections? There is some digging to be done before this can be considered as a serious investment opportunity.

Who are the manager and grower? What is their track record in business? Are they honest? Have their backgrounds been investigated?

There are a hell of a lot of red flags here and this currently smells like a scam.

This was the original proposal and business plan sent to me by the manager:

Business Models
 
On our own:
We will be the sole owners of the entire business including the debt.  Form an LLC to protect
our personal assets.  We can set up ownership percentages anyway we want to have them.
They can be scaled to go along with the debt payoff.  For example, Joe would own 70% of the
total business with Jeff and Jay owning 15% each until 50% of the debt that Joe incurred is paid
off, then Jeff and Jay would increase to 20% each.  When 100% of the debt is paid off it will
become 50% Joe, Jeff and Jay at 25% each.  I am including Angelo in the percentage that Joe
gets.  Financing the mortgage with a bank is typically 5-7% they may charge different for
marijuana businesses.  Term is typically 15-20 years but again this may be shorter due to the
unknown with the business. 
 
Rate 5% loan amount $750,000  ($1,000,0000 with 25% down)
20 year term = $4,950/month
15 year term = $5,931/month
3 year term = $22,478/month
2 year term = $32,904/month
 
Now we would love to have it go out as far as possible to lower the monthly amount due.  We
have to be sure there is no pre-payment penalty.  The biggest risk here is the months we are
not selling because it is still growing, the 4 months of set up and grow.  After those months, the
company will be paying all the bills from the revenue of the sales.  My plan is to take a loan out
for 20 years so we have a $5,000/month payment but pay it off in 2 years.
Loan payments not included below.
 
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $840,000
        Jeff $255,000
        Jay $255,000
 
Year 2 Revenue - $2,400,000
Year 2 Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $720,000
        Jeff $240,000
        Jay $240,000

Year 3 Revenue - $2,400,000
    Year 3 Expenses - $700,000
    Profit - $1,700,000
    Debt Payoff - $0
    Profit Split - Joe $850,000
            Jeff $425,000
            Jay $425,000
    These are simple estimates to show how the math would work out.  Year one total back to Joe
    is $1,340,000, year 2 and beyond is $1,350,000.  In terms of an ROI on the investment it is
    134% year 1 and 135% in year 2, year 3 and beyond is 100% profit for Joe.
     
    Now we have to take out for other insurance (workers comp and health), taxes, annual fees,
    and charitable donations.  The town will require significant donations.  I would like to keep
    control of where the money goes, police, fire, animals, and kids.  For example, buy the K9 unit a
    bullet/stab proof vest, supply the force with tasers so every member has one, drop off coffee
    and snacks often, buy supplies for the animal shelter, buy sporting equipment for an entire
    league, and things like that.  I do not want the city to put in their general fund to pad their
    wallets.
     
    Bringing in and outside investor
     
    We use their money to do everything.  How this will work is they will get either a scaled equity
    position in the company along with interest on the money borrowed.  Our benefit is we are not
    incurring the debt directly.  Personally I would rather Joe get the equity and the interest.
    Assuming the investor wants 12% interest and 30% ownership to start. Joe would now be at
    50% with Jeff and Jay at 10% split levels.  The interest payment alone is $47,073/month.
     
    Year 1
    Debt total - $1,000,000
    First Yr Revenue - $2,400,000
    First Year Expenses - $700,000
    Profit - $1,700,000
    Debt Payoff - $564,876
    Profit Split - Joe $567,562
            Jeff $113,512
            Jay $113,512
            Investor $340,537
     
    Year 2 - 20% investor ownership
    Debt total - $1,000,000
    First Yr Revenue - $2,400,000
    First Year Expenses - $700,000
    Profit - $1,700,000
    Debt Payoff - $564,876
    Profit Split - Joe $624,318
            Jeff $141,890
            Jay $141,890
            Investor $227,024
     
    Year 3 - 10% Investor Ownership
    Debt total - $1,000,000
    First Yr Revenue - $2,400,000
    First Year Expenses - $700,000
    Profit - $1,700,000
    Debt Payoff - $0
    Profit Split - Joe $1,020,000
            Jeff $255,000
            Jay $255,000
            Investor $170,000
     
     
    Taking Evan as a 50% Partner
    Evan will not be responsible for 50% of the expenses but he will also take 50% of the profit.  In
    this scenario we can grow faster.  I will assume we start at 10,000 sqft not 5,000 like the
    examples above.  Our company will remain at the original 70-30% split and scale as if we
    owned it all ourselves.
     
    Year 1
    Debt total - $1,300,000
    First Yr Revenue - $4,800,000
    First Year Expenses - $1,240,000
    Profit - $3,560,000
    Debt Payoff - $650,000
    Profit Split - Joe $1,018,500
            Jeff $218,250
            Jay $218,250
            Evan $1,455,000
     
    Year 2
    Debt total - $1,300,000
    First Yr Revenue - $4,800,000
    First Year Expenses - $1,240,000
    Profit - $3,560,000
    Debt Payoff - $650,000
    Profit Split - Joe $873,000
            Jeff $291,000
            Jay $291,000
            Evan $1,455,000
     
    Year 3
    Debt total - $1,300,000
    First Yr Revenue - $4,800,000
    First Year Expenses - $1,240,000
    Profit - $3,560,000
    Debt Payoff - $0
    Profit Split - Joe $890,000
            Jeff $445,000
            Jay $445,000
            Evan $1,780,000
     
    Again here Joe would get the debt payoff on top of his ownership percentage.  Year 1 to Joe
    $1,638,500, year 2 $1,493,000.
     
     
    There are many assumptions that I made to keep things simple to understand.  I do think we will
    expand within the 3 years and make more revenue, in doing so we will have higher expense as
    we hire people to work for us.
     
    Some basic knowledge that we have, the City of North Adams is very pro marijuana.  They are
    telling the dispensaries that they will have to pay a 3% City tax, and a 3% Community tax on top
    of the 14% sales tax.  As we are NOT selling to the public but rather wholesaling it the taxes are
    less.  I do not know for sure but I think the state is 10.75%, so assume the same 6% to the
    town.
     
    If we grow above 10,000sqft we will need a new state license not a city one.  I have spoken to a
    high end lawyer, he is my brother in laws brother in law.  He is currently representing MGM for
    the casino in Springfield.  He knows the guys who will be buying out businesses once it is
    federally legal.  They will not touch under the 10,000 sqft places, just put them out of business.
    He has offered to help us, not represent us, but put us in touch with the right people.
     
    The State license is run like a liquor license.  The company owns it not an individual.  Joe is our
    clean cut, former cop, great credit guy.  Jeff is the local business end of the company, he will
    run the day to day operations.  Jay is our grower, without him we have nothing,  he will be taking
    care of the plants, not worrying about the bills being paid, maintenance, etc.  Of course with any
    small company we will wear different hats at different times.  Jeff and Joe may be called in to
    help Jay when he needs it. Jay and Joe will help Jeff when he needs it.  I am hoping by the time
    this all comes together we can have Angelo involved, there is legislation now to allow such
    people as him to do so.
     
    As for the property itself.  I got an ok from one of the city councilors, that is one level done.  Now
    we need planning board approval, the town needs to hold a community meeting for the public to
    ask questions and get the answers they want.  Then on to the state to get the actual license.
    With the shopping center, we own all the parking including the spots by the Friendlys but they
    have an easement for 40 spots, leaving roughly 150+ for us.  The commercial tax rate is
    $38.54/$1,000 of assessed value.  They have a new assessment of $950,000 so the taxes are
    $36,613, the two rental cover that completely.  The reason it is so far below the assessment is
    they got an estimate to replace the roof for $300,000.  Now when I went in during a rainstorm
    there were 2-3 leaks but plenty of dry areas to grow in without replacing or even fixing the leaks.
    I would patch the spots for now.  Then look into doing solar on the roof to get us a better “green
    rating” with the town and to possibly lower our electric costs.
     
    I am close friends with the agent selling the property so he told me stuff he really wasn’t
    supposed to tell me.  They have had 2 offers on the property.  One was full of contingencies and
    a lot of “bullshit” at just over $600,000.  The other one was just over $500,000 cash.  They
    turned them both down because one was too complicated, the other too low.  They have plenty
    of money to hold this forever. They privately own a very successful supermarket chain here in
    MA and NY.  They are not interested in holding a note for anyone or doing any kind of owner
    financing.  If we get it for $550,000, we will be looking at $137,500 in cash needed to put down.
    That leaves $412,500 for the building loan.  One option is to get one loan for that, a
    $2,723/month payment.  We then get a business loan for the equipment of $300,000, $75,000
    cash $225,000 loan.  This will probably be a higher rate and shorter monthly term.  Figuring on
    7% for 3 years it is a $6,948/month payment.  All totaled up we would need $212,500 in cash to
    put down and a monthly payment of $9,671/month for first 3 years and $2,723/month for the
    next 17 years.
     
    You will have to call the bank and talk with the mortgage/loan person.  If you tell them they can
    divulge anything and everything to me, I can then talk to them to kind of translate what they are
    saying.  We can schedule a conference call or an in person meeting too.
     
    To sum all this up.  We have 2 loan options.  Borrow it all from one source or borrow seperately
    for the real estate and then for the setup costs.  We have to see what they offer and the costs of
    doing it each way.
    The building will pay the taxes now.  There is repair work to do but I do not feel as we need to
    do it as extensively as a full roof replacement yet.  We can subdivide the space, roughly 30,000
    sqft any way we want.  This opens up the possibility to have a dispensary and/or grow shop and
    still have room to expand up to around 20,000 sqft of the cultivation operation.   


MJseast

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Re: Would You Invest in This Business?
« Reply #88 on: June 02, 2018, 06:06:56 PM »

This was the original proposal and business plan sent to me by the manager:


This is not a business plan - It's a documentation of someone's wishful thinking. You should google "business plan examples" and "Pro Forma examples" to see what it is that you should be reviewing. At the very least you need to understand their assumptions for the revenue and expense numbers they're using. These numbers seem way out of line to me.

Also, I'll mention this again, but I have yet to hear of a bank who will finance property to be used for a cannabis business. Here in WA state it's one of the many hurdles of getting into the industry because the building needs to be owned outright. Also, I've never heard of business loans for cannabis having that low of an interest rate. I've seen 12-17% for 5 year terms.

I really, *REALLY* recommend that you consult an experienced businessperson, cannabis entrepreneur, and/or business attorney.

maizeman

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Re: Would You Invest in This Business?
« Reply #89 on: June 02, 2018, 06:13:48 PM »
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $840,000
        Jeff $255,000
        Jay $255,000 

That's _it_? No breakdown of what the first year expenses are? Just "yeah let's say $700k but also there's a lot of stuff we haven't factored in to that estimate yet"? So that's red flag #1 regardless of what line of business he'd be talking about.

Now red flag #2 is even scarier, because this is the guy you're trusting to know all the numbers and run the books: in year 1, the expenses, debt payoff, and profit split sum to $2.55M, but even using his numbers (no idea where he is getting them from), you have only $2.4M in revenue. 

Good rule of thumb, when the numbers don't add up, the difference is coming out of your share.

In addition, remember the tax treatment of marijuana profits. Since you own 70% of the LLC in year one, you would owe taxes on 70% of $2.4M (so $1.68M). So let's say most of that is taxed at the maximum federal rate of 37%, you'd owe $620k in federal taxes. Since you are a NY resident, but own a business in Massachusetts you'll end up paying the higher of the two tax rates (although the breakdown of which part of it you owe to which state is complicated). Let's assume most of that income is in the 6.85% tax bracket, so the combination of the NY and MA checks is going to be about $115k.

So we're up to $735k in taxes, on $840k of profits-$150k in mystery money gap between incoming and outgoing transactions means that even if his (apparently pulled out of thin air) estimates of revenue and expenses are right, and even if there are no unexpected expenses or delays or legal challenges, your $350k at risk (since it looks like he is combining your investment with your parents') is buying you a net after-tax loss of $35k/year.

Let me reiterate that: despite investing in a business area with substantial legal, technical, and biological risks* AND using extreme amounts of leverage with a giant and long term mortgage, the best case scenario your business manager has managed to present you with is a -10% a year net cash on cash return.

*For example, what happens when you've got an outbreak of whatever the pot equivalent of powdery mildew is, you have to close down and sterilize the whole grow room, and then find yourself four months away from any of your new plants maturing and bringing in new revenue?

MoStache

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Re: Would You Invest in This Business?
« Reply #90 on: June 02, 2018, 06:54:25 PM »
My $0.02 on this (and I'm an entrepreneur)...  OP, you must REALLY dislike your job and REALLY love your brother.  Don't make business/financial decisions based on negative feelings.  I sense that you're trying to get out of a job you don't like sooner and you are worried about your brother finding his way.  Not good reasons to start a business.  Trust me, I speak from experience.  This will not end well if you go through with it.  No one on your team has shown the slightest bit of common sense about starting a business.  I'm sorry to say that, but it's the truth, and I'm trying to protect you from yourself.  There's no reason to have another meeting.  That's only going to provide another opportunity for you to be a victim in this story.

Not liking your job and wanting to support your brother are VERY valid feelings.  There are a lot of ways you can address those issues.  Investing in this business isn't one of them.  It will only make it worse. 

FWIW, I don't think your brother (and his "team") are trying to swindle you out of $175k.  If they were they would be doing a lot better job of coming up with a viable plan.

lhamo

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Re: Would You Invest in This Business?
« Reply #91 on: June 02, 2018, 08:42:05 PM »
One other issue that I don't think has been mentioned yet -- where are you going to get insurance for this operation?  Both to cover losses (fire, theft, pestilence (if that is even available) and liabilities (somebody high on pot you sold them kills somebody in a DWI -- becoming increasingly common in the news here in WA and I sure wouldn't want to be the first high profile case....)

joer1212

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Re: Would You Invest in This Business?
« Reply #92 on: June 02, 2018, 09:09:06 PM »
My $0.02 on this (and I'm an entrepreneur)...  OP, you must REALLY dislike your job and REALLY love your brother.  Don't make business/financial decisions based on negative feelings.  I sense that you're trying to get out of a job you don't like sooner and you are worried about your brother finding his way.  Not good reasons to start a business.  Trust me, I speak from experience.  This will not end well if you go through with it.  No one on your team has shown the slightest bit of common sense about starting a business.  I'm sorry to say that, but it's the truth, and I'm trying to protect you from yourself.  There's no reason to have another meeting.  That's only going to provide another opportunity for you to be a victim in this story.

Not liking your job and wanting to support your brother are VERY valid feelings.  There are a lot of ways you can address those issues.  Investing in this business isn't one of them.  It will only make it worse. 

FWIW, I don't think your brother (and his "team") are trying to swindle you out of $175k.  If they were they would be doing a lot better job of coming up with a viable plan.

This post really nailed it. Thanks for empathizing.

joer1212

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Re: Would You Invest in This Business?
« Reply #93 on: June 03, 2018, 12:24:34 AM »
Hi, guys. I just want to post an update.

I've had a rare falling out with my brother a few days ago, when we spoke on the phone. He was going on and on, trying to convince me how this cannabis business can't lose, and how everyone on MMM are "squares" that are "too dumb" for this business and giving me bad advice. I countered that not everyone on MMM can be wrong, especially since some of them are actually in the cannabis business. Long story short, I ended up offending him, when I accused him of being "simple-minded" and lacking the ability to see pitfalls. We hung up on each other and haven't spoken since.

At this point, I'm virtually sure that I won't get into this business. But, I still feel that I have to do my due diligence, just so no one can accuse me of being fickle (after all, I did make several trips to Massachusetts to look at properties, so my brother had high hopes that I was being serious).

I compiled a list of questions, which I'll show my brother once we start talking again (mind you, we haven't had a fallout in years, and this is the longest time we haven't spoken to each other in memory). Here's what I came up with (I'll probably think of more questions as time goes by):

(1) How are we going to avoid the damage that 280E will inflict on our profits?

My brother actually forwarded this question to the manager (Jeff) and got this response verbatim:

280E is for deducting business expenses from your revenue. You could pay 100% of the revenue as income tax. A good CPA and lawyer will set it up so we don't get hit quite that hard. So if the business makes $1,000,000 you pay your portion of the business as income tax. So at 70% you will pay on 700k even though profits were only 400k so 70% is 280k as income. Big difference.

Hmm. Not sure I follow, but I guess he's trying to say that we can wiggle our way out of onerous federal taxes using a good tax accountant. Does he know this for a fact? Has this been done before, or is he just speculating?

Anyway, here are the other questions and comments (which haven't been answered yet):

(2) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.

(3) My 401(k) investment company can drop me because I'm violating federal law. I can be forced to liquidate my assets, thus incurring a 10% early withdrawal fee in addition to a 35% income tax on the lump sum. What do you say to this?

(4) I am probably prohibited from participating in a cannabis business by my NY state civil service job. Yet, I can't ask my employer if this is the case, because then they'll have their eye on me.

(5) I know that Jeff (the manager) runs a real estate business, but has he ever been in the cannabis business? What qualifies him to run one?

(6) Jay and Jeff (grower & manager) are going to be part owners of the property, even though they didn't contribute capital. How do we prevent this?

(7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?

(8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after cannabis?

(9) How can my parents contribute money to this business without being legally involved and without tax consequences?

(10) How on earth will I pay Jay and my brother (who have felonies)? In cash?

(11) Who are the financial institutions that will take our money? Also, if they are not federally insured, who are they insured by?

(12) What happens when Jay and Jeff decide to bail? I know nothing about running a pot business.

(13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?

(14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop our grower and/or manager to jump ship to a competitor, who will pay them more?

(15) What if we lose a crop? We don't have the money to ride the storm out.

(16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?

(17) Where is our detailed start-up budget and cost-of-sales projection?

(18) What is our specific strategy for achieving efficient regulatory compliance?

(19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?

(19) Assuming we find these reliable markets and distribution channels, how will they pay us? In cash?

(20) I don't like that we're entering into a contract that limits our ability to terminate or change the compensation of our manager and grower.

(21) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just those who have contributed capital (my parents and I)?

(22) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?

(23) Is it true that we will not only be liable for federal taxes (with limited deductions), but for Massachusetts AND NY state taxes as well (because I'm a resident)?

(24) Are you sure that we are not underestimating the amount of money we're going to need to get this operation off the ground and keep it afloat?

(25) What if the grower and/or manager get injured or even kidnapped on the property? How liable am I?




« Last Edit: June 05, 2018, 12:00:57 PM by joer1212 »

maizeman

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Re: Would You Invest in This Business?
« Reply #94 on: June 03, 2018, 12:39:31 AM »
(1) How are we going to avoid the damage that 280E will inflict on our profits?

My brother actually forwarded this question to the manager (Jeff) and got this response verbatim:

280E is for deducting business expenses from your revenue. You could pay 100% of the revenue as income tax. A good CPA and lawyer will set it up so we don't get hit quite that hard. So if the business makes $1,000,000 you pay your portion of the business as income tax. So at 70% you will pay on 700k even though profits were only 400k so 70% is 280k as income. Big difference.

Hmm. Not sure I follow, but I guess he's trying to say that we can wiggle our way out of onerous federal taxes using a good tax accountant. Does he know this for a fact? Has this been done before, or is he just speculating?

I don't quite see where you think he's saying that. To me it sounds like he's explaining that yes, you'll owe taxes on $700k in "income" even though your share of the business's actual profits is only $280k. However, he thinks a good accountant can probably reduce that $700k of apparent taxable income a small amount (although obviously not anything like all the way down to $280k).

I'm sorry to hear about your falling out with your brother. Hopefully with a little time to cool off he'll realize that you're not judging his lifestyle and you did indeed investigate this business extremely seriously.

FINate

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Re: Would You Invest in This Business?
« Reply #95 on: June 03, 2018, 12:47:49 AM »
The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?

Also, extremely unlikely to get a 20 yr $1MM loan for a business w/o a proven track record, even more so in the pot industry. Seriously, what bank is going to want pot (inventory) and/or funds derived from pot (drug money) as collateral? Yeah, they're not going to allow a loan to be secured by assets tied up in an illegal trade because the Feds regulate banks.

The whole idea of borrowing 20 yr term (for lower monthly payment) with the plan of paying off in 2 years indicates that the numbers are BS. Shorter term loans typically have lower rates, so why extent it dramatically if brining in enough to pay off much sooner? They answer is that they have no idea, really, what the numbers will be, so keep the monthly loan payment as low as possible. Oh, and 5% is very unrealistic, as the prime rate is currently 4.75% and new businesses have a risk premium.

There's no breakdown of anything backed by detailed estimates. For example, if you have a 5000 sqft operation: what are the capital expenditures to build out (broken down into line items for each element of the build...facility, tables, lights, irrigation, ventilation, security, transportation, etc.), fixed costs (lease, utilities, insurance, interest, etc.), variable costs, how much can an operation that size produce (how many plants, how many crops/year, and how much is each plant worth wholesale), what are the taxes, and what is the break even point (how many plants do you have to sell before covering your fixed costs)?

These guys are playing fast and loose with numbers - wishful thinking.

joer1212

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Re: Would You Invest in This Business?
« Reply #96 on: June 03, 2018, 01:15:54 AM »
The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?

The original post had my parents and I each contributing 175k (350k total). The manager's proposal was an earlier plan to purchase a shopping center for 520k, and borrow up to 1 million to fund the business. Alas, that plan fell through. Way too expensive.

maizeman

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Re: Would You Invest in This Business?
« Reply #97 on: June 03, 2018, 09:47:33 AM »
For question #24, it's a little more complicated than that, and it helps to separate out that the business (as a passthrough entity) isn't going to be paying state or federal income taxes, although it may pay other kinds of taxes.

On your personal taxes, you'll need to file in both MA and NY. MA will tax you on all your income derived from the state. Because you are a resident of NY, they will tax you on all your income from anywhere in the world. However you'll probably get to deduct taxes payed in MA (up to the amount of tax you would have paid on that same income in NY) from your tax liability to the state of NY. That's why I said it generally works out that you pay the higher of the two state tax rates.*

If your brother lives in MA, he wouldn't have to worry about filing in NY, just in MA when it comes to paying taxes on his 10% of the profits.

*Disclaimer. I am not a tax attorney or accountant and could very well be wrong about this stuff. What I'm describing above is the best I've been able to figure out from my own experience with passthrough entities, and maxing out at having to file income tax returns five states in a single year. Fortunately one of the LLCs had an extremely well paid accounting firm who did the actual tax filing, and I'm now back now to only two state returns a year.

joer1212

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Re: Would You Invest in This Business?
« Reply #98 on: June 03, 2018, 10:11:23 AM »
For question #24, it's a little more complicated than that, and it helps to separate out that the business (as a passthrough entity) isn't going to be paying state or federal income taxes, although it may pay other kinds of taxes.

On your personal taxes, you'll need to file in both MA and NY. MA will tax you on all your income derived from the state. Because you are a resident of NY, they will tax you on all your income from anywhere in the world. However you'll probably get to deduct taxes payed in MA (up to the amount of tax you would have paid on that same income in NY) from your tax liability to the state of NY. That's why I said it generally works out that you pay the higher of the two state tax rates.*

If your brother lives in MA, he wouldn't have to worry about filing in NY, just in MA when it comes to paying taxes on his 10% of the profits.

*Disclaimer. I am not a tax attorney or accountant and could very well be wrong about this stuff. What I'm describing above is the best I've been able to figure out from my own experience with passthrough entities, and maxing out at having to file income tax returns five states in a single year. Fortunately one of the LLCs had an extremely well paid accounting firm who did the actual tax filing, and I'm now back now to only two state returns a year.

Thanks for clarifying.

FINate

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Re: Would You Invest in This Business?
« Reply #99 on: June 03, 2018, 01:21:05 PM »
The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?

The original post had my parents and I each contributing 175k (350k total). The manager's proposal was an earlier plan to purchase a shopping center for 520k, and borrow up to 1 million to fund the business. Alas, that plan fell through. Way too expensive.

You're right, my bad.

I'm still not clear on are the precise definitions for things like "interest," "owner," and "partner." It sounds like he's describing multiple classes of equity for a multimember LLC, but not clear who gets what (e.g. in the case of liquidation, profits) and who is passive vs. active in running the LLC. IMO you need an attorney to draft an operating agreement that spells these things out in fine detail.