The cannabis business is different from others due to several factors including a confusing, conflicting patchwork of state laws, and peculiar practical and political obstacles resulting from its recent – and still ongoing- emergence from prohibition. Yet cannabis is still a business, albeit one that exists in novel and largely untested waters. It generally behaves like other businesses. Ergo, cannabis executives tend to succeed or fail for reasons not dissimilar to those attached to more mainstream industries.
My experience tells me that to be successful in cannabis takes building upon these four pillars:
- A Sound Business Strategy
- The Right Business Structure
- Adequate Capitalization/Financial Controls
- A Healthy Workplace
With four legs, an enterprise like a table is stable. Lacking any single leg causes one to teeter or even collapse. When pursued consciously and as part of a company’s grand vision, these four elements will be mutually reinforcing and assist cannabis executives to plan for and manage unusual financial and systemic challenges they are bound to encounter. For example in California, legacy cannabis entrepreneurs, except those wishing to remain strictly medical, had to convert from non-profit collectives to conventional for-profit companies. To comply with stricter new policies and procedures and increased tax rates and reporting in response to stronger and increasingly consistent government oversight, it became essential to adopt traditional and transparent management approaches. To join the new (and dynamic) legal framework, the more sturdy companies brought in investors to either secure, maintain or relocate to compliant real estate, and to pay costs of permitting and tenant improvements, often enduring lengthy and expensive waiting periods while applications remained pending. Uncertainty and transition in one’s business are always challenging. These tried and true pillars for success can make all the difference.
Sound Business Strategy
Identify a market need or niche in which to compete, ideally, with barriers to entry i.e. licenses, intellectual property advantages, and stay focused. Don’t be swayed from your vision by the next best thing, especially not before the company has highly functioning management and operational systems upon which to build.Growth for growth’s sake can be limiting. Best to embrace a sustainable business model. In today’s world, it is incumbent as well upon entrepreneurs and their companies to help solve societal problems as part of their missions in addition to delivering high quality products to consumers.
Right Business Structure
Among other unique aspects of the cannabis trade is the distorted income tax treatment under “280e”, a provision of the tax codified to ban the industry from deducting expenses other than cost of goods sold (COGS) from gross income. Other than growers, whose costs all tend to be deductible as COGS, others down the food chain: manufacturers, distributors, and retailers are dealing with a ton of non-deductible expenses. This results in phantom income and steep federal taxes. An array of state residency requirements and banking regs also may complicate fundraising but can be mitigated with the right business structure.
Adequate Capitalization and Financial Controls
These are vital to planning any new venture. Due particularly to limitations imposed by federal law, cannabis operators can find it difficult to borrow money or even lease equipment at market rates (though rules are easing and banking on the whole is likely to be regularized in the near future). In such an environment, it is good practice to commit to positive cash flow and profitability. Cannabis companies with actual track records and a realistic set of projections ought to be well positioned to attract equity at reasonable valuations. It’s a business truism that over-leverage is a dangerous practice. Staying power is the name of the (long) game.
Healthy Workplace
Job One in my due diligence book is to identify people who talk straight with a passion for what they are doing and the energy and smarts to actualize credible business plans. I look for well-rounded, well-adjusted folks with a gene for innovation, ambition, a strong work ethic, and healthy attitude. Ethical business practices, transparency, a code of honoring commitments, and a disposition to reward hard work forges a collegial workplace. Good karma has intrinsic value: in treating people well, one makes more money in the long run. By investing in your people and corporate culture, you are investing in your brand. It also helps to make a genuine effort to give back to the community. Cannabis is psychologically and culturally linked inextricably to consciousness raising and to efforts to fix the broken criminal justice systems, and to advance reform in health, social, and environmental justice.
There is no doubt the cannabis industry, both in the United States and in countries adjacent and abroad, presents vast oceans of opportunity. Growth and expansion across the board are a cause for celebration for cannabis executives. Those who nurture the four pillars can more readily respond to an ever-changing rule set and intensifying competition. Enterprises built upon (i) a coherent business strategy, (ii) a cohesive and aligned structure, (iii) a cogent capital stack and (iv) a caring culture have the best odds to stand the test of time.
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