Navigating the Top 3 Post-Startup Challenges for Cannabis Businesses
The following excerpt is from The Staff of Entrepreneur Media, Inc. and Javier Hasse’s book Start Your Own Cannabis Business. Buy it now from Amazon | Barnes & Noble | iTunes | IndieBound
This article is part of Entrepreneur’s series on How to Start a Cannabis Business. We seek to promote financial inclusion through cannabis. In previous articles, we’ve looked into numerous aspects of getting into the marijuana industry, including how to convince investors to give you money, how to brand your cannabis business and craft your story, and how to navigate the murky waters of cannabis marketing.
Setting up a cannabis business is complicated. However, the challenges won’t end when you open your doors. As per Marijuana Business Daily, the top challenges that at least one in three cannabis businesses face are federal laws, compliance and scalability/growth.
Make sure you have a really solid understanding of compliance requirements and have a compliance program in place. “Consult with your legal counsel, your accountants and any other professional you’re working with. "Spend the money necessary to ensure you have these compliance programs in place,” Matt Karnes, founder and managing partner of GreenWave Advisors, recommends. “If there’s just one deviation from the regulations, it could be reason for regulators to come and shut you down for not being in compliance with the law.”
What other type of problems should you look out for?
According to Anne van Leynseele, cannabis-focused attorney at 7 Point Law, there are two major liabilities in any business, marijuana- related or not: employees and taxes. One relatively easy-to-remember (and apply) rule of thumb is this: As soon as you make your first dollar, start saving 10 percent of your revenue for emergencies and fluctuations in cash flow, and another 40 percent for taxes. Almost everything that’s left (at least during the first few years) should be allocated to funding your operations, rather than returning cash to the founders.
“Licensed businesses are particularly vulnerable to disgruntled employees,” Van Leynseele says. “Most of the regulatory agencies are so overloaded with work that they’re responding only to complaints, and the largest source of complaints is disgruntled employees.”
One way to handle this is to avoid the “living room culture” prevalent in the cannabis industry. This means you should be careful when deciding what facets of your operation you’ll share with your employees. Revealing financial information, payroll data and other numbers to your subordinates can come back to haunt you later down the road.
Another big source of legal issues is disputes among partners. “Most of the failures we’ve seen so far stem from internal issues, from partners fighting,” Bradley Blommer of Green Light Law Group says. Make certain your partners’ views and goals align with yours before going into business with them.
Navigating Turbulent Waters
“Remaining compliant isn’t rocket science,” Green Light Law Group’s Bradley Blommer says -- almost joking. “Just don’t sell weed to kids, only trade with licensed and authorized businesses, those kinds of basic things.”
Any order you get, any client that comes through the door, check their credentials; you could lose your whole business just to avoid losing a few thousand dollars.
“Whether it’s a vendor, a client, a partner, a supplier, or an advisor, you need to check they’re compliant as well because they impact your own business and compliance,” MJIC’s CEO Sturges Karban agrees. “Also in this line, another trip wire hiding in plain sight is advertising. Even if you sell ancillaries, be careful.”
Here are a few compliance questions for you to think about:
- Are your customers old enough to buy from you?
- Do they have ID to prove it?
- Do they have a medical marijuana card, if needed?
- Are your vendors and providers licensed?
- Do they have the paperwork to prove it?
- Are all their products properly tested?
- Is their packaging compliant?
- Are they fulfilling labeling and childproofing requirements?
- Are the delivery/distribution services your vendors use licensed as well?
Most experts in the U.S. cannabis industry believe that, sooner or later, cannabis will be federally legal. It’s a matter of when, rather than if.
You’d assume that cannabis becoming federally legal will make compliance easier. But this won’t be the case in every sphere. Federal legality will bring new requirements: workers’ comp, OSHA guidelines, Environmental Protection Agency (EPA) obligations, consumer protection standards, etc. And even if cannabis doesn’t become federally legal any time soon, the case for ever-evolving regulation is still valid.
“Rules will continue to change quite often as regulators get a better sense of how to regulate the industry,” Sturges Karban says. “We are the canaries in the coal mine. So don’t assume that because you’re in compliance with one set of regulations today, you will be tomorrow, because those regulations may no longer be in place.”
Experts recommend that you try to anticipate which regulations will come into effect and get familiar with their requirements beforehand. “This shows a level of maturity and forward planning that is unique,” Viridian Capital Advisors’ President Scott Greiper says.
You should also plan for the expansion of recreational markets. “When the recreational market comes into a state, it disrupts the growth of medical marijuana businesses,” GreenWave Advisors’ Matt Karnes says. “What we’re seeing is that these markets are combining into one market in those states, because it’s not practical to have both.”
So if you go for a medical license, take into account that your business will be grandfathered into the recreational system when its day arrives in your state, and plan accordingly.
As a legal business, you have to pay taxes. There’s no way around this, even though some unscrupulous consultants will tell you there is. And if you think filing your personal taxes is difficult, confusing, and boring, doing the same for a cannabis business takes it to a whole new level. So hire a CPA or tax accountant to do it for you.
“Less than 1 percent of small businesses in the United States are audited by the IRS. Contrast that with the fact that 16 percent of cannabis businesses are being audited by the IRS,” Anne Van Leynseele points out.
So definitely pay your taxes in full. “Make sure to pay all of your personal income taxes, payroll taxes, property taxes, etc.,” cannabis activist Jodie Emery says. “Sometimes it can be hard to pay your taxes with cash, but make sure to do it anyways. We all know that Al Capone got caught for tax evasion, so paying taxes is something you should do consistently.”