Running a cannabis business is difficult and many people fail. There are a myriad of reasons why these ventures bottom out, although owners tend to blame federal law issues first of all. It’s true that federal law creates a tough environment for cannabis businesses (banking issues, tax issues, branding issues, etc.), but federal prohibition also kept big money sidelined at first, giving small business a real head start. My personal view, after seeing many spectacular business failures and slow motion crashes over the past several years, is that most are some combination of the following: 1) a challenging legal and regulatory environment, 2) saturated markets, and 3) operator error.
A start-up cannabis business cannot control the first two items listed above, but should be able to navigate them. The third item is a different animal. Margin of error tends to be slim for most new ventures, and self-inflicted wounds are difficult to overcome. This blog post covers the five biggest mistakes we continue to see in early stage Oregon cannabis business, and gives suggestions to avoid them.
- Failure to properly estimate license transition timelines
Because the Oregon Liquor Control Commission (OLCC) “paused” review of applications submitted after June 15, 2018, most new market entrants are buying their way in through asset or stock sales from existing licensees. The OLCC has a small and overtasked team of change-in-ownership investigators who work with both buyers and sellers on these transactions. Recently, agency higher-ups have advised us that these changes can still happen in as quickly as four to six weeks. However, that almost never occurs. Four to six months seems more common.
Even a non-cannabis business sale can be delayed by many things, from diligence issues to lease negotiations to ironing out terms in final agreements. In the Oregon cannabis industry, administrative vetting and disclosure requirements must be added to that list. Delays are almost always on the buyer side, stemming from initial business structuring, filling out OLCC business structure and individual history forms, submitting fingerprints, etc. Buyers should create realistic timelines to avoid hemorrhaging cash during this phase, and should strongly consider working with someone who has navigated the change-in-ownership process before. It’s a singular process and there is definitely some art to it.
- Paying lawyers to expedite your OLCC application
This is a bad idea, but many people do it. Whether for new applications (pretty straightforward) or change-in-ownership (harder) many new businesses spend significant money on lawyers to guide them through the application process. Our Portland office philosophy has always been not to blow through client retainers on ministerial work: We want people to succeed so we can work with them for years. For that reason, we have trained licensing paralegals who push these applications through efficiently and expertly. Attorneys only come in for unusual situations. The bottom line here is that new businesses should save their legal budgets for work that cannot be done by non-lawyers.
- Starry-eyed forecasting
You are not going to sell your marijuana for $2,000 a pound in Oregon. Forget it. You also do not have a strain of marijuana that you will patent and license one day to big pharma. You are not the only person trying to run down hemp for distillate, and, closer to home, you should not budget a six-figure salary for yourself or anyone else in the early stage. Although the market challenges have been well publicized, too many people believe that an OLCC marijuana license is tantamount to a license to print money. It’s not. All of this means that it is crucial to dial in your research and expectations before starting out – especially if you are taking on investment and the legal risk attached to that.
- Employment issues
For whatever reason, employment practices are often subpar with cannabis businesses. There are a couple of important things to note here. The first is that employee actions, even if unauthorized, can lead to license revocation in Oregon. This means you must ensure your employees are well versed in compliance, and you have to watch them. The second thing to note is employment law is complex and seems to change as often as cannabis licensing rules. We have a host of new employer requirements coming online January 1, 2019 in Oregon, for example. Whenever there is a dispute, courts and administrative bodies tend to favor employees, so it’s important to keep your team in order.
- Bad (or no) business agreements
You do not need a tall stack of complex documents to start a cannabis business. You do need the basics, though, and those agreements should be solid. If you are renting property, get a tailored industry lease. If you are organizing an LLC, get an operating agreement that covers matters important to your business, such as management, distributions, protocol for when someone jeopardizes the OLCC license, etc. Or, if you have a white label agreement, ensure that all processes and intellectual property ownership are delineated. The list goes on.
Starting a business can be expensive, and people tend to skim on legal. But nearly all of the cannabis litigation matters my firm is currently handling stem from defective contracts, and from people operating informally in that sense. Reasonably tailored contracts should be a part of any new business plan, and they should not break the bank. These contracts will set both guidelines and expectations for the business, and they operate like insurance when things go wrong.