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  • Joseph DiDonato

COVID-19 Highlights Issues Facing Cannabis Businesses

Even before COVID-19, applicants and recipients of cannabis licenses were experiencing extensive market stress from multiple considerations. The troubles facing cannabis businesses have investors eyeing significant opportunities.

Though many factors are causing businesses to fail, four important ones are:

The first is local control. To obtain a cannabis license, your cannabis business must first secure local approval to proceed. Each local community (if they even permit commercial cannabis activity) has a different regulatory regime for each “new” business. From permitting to local licensing to comprehensive development agreements, would-be cannabis licensees experience a myriad of barriers to entry and costs and taxes; in addition to social equity considerations.

The second is compliance costs. No cannabis company correctly predicts compliance costs because the regulations are constantly changing and market volatility. To obtain state licensing, you typically must have a deed or a lease in place before you even receive a license. Once you finally obtain a license (which can take months), you must ensure all your product is made in accordance with regulations, packaged and labeled properly, and tested accordingly; and this does not even take into account the additional compliance challenges faced in distribution. The many rules and ambiguities ensure that cannabis companies need to retain experienced cannabis professionals (accountants, attorneys and cannabis consultants) to protect against rule violations. Few cannabis companies plan for and recognize these high costs of compliance.

The third is the illegal market for cannabis. The illegal cannabis market is large and it will take years for law enforcement to tame, much less eliminate. In the meantime, it isn’t easy a for law-abiding, licensed cannabis business that bears the heavy burdens of compliance and state and local taxation to compete with an illegal competitor sell its cannabis product at lower prices.

The fourth is inexperience and naiveté. Many companies, rushed into the cannabis business without sufficient (or sometimes any) business planning. The cannabis industry quickly became very competitive, especially with unclear licensing and when local governments have the power to ban commercial cannabis activities.

The above factors have put many cannabis companies on the path to failure. This means that investors are starting to acquire (in various forms) failing cannabis businesses. The investors, not surprisingly, take a controlling interest (or at least secure controlling authority through debt instruments) in the cannabis business they want to turn around or restructure.

Applicants and “newly” licensed cannabis companies (especially dispensary and retail license holders) should start to revise their business plans to recognize all of the issues, eg. regulatory, business and intellectual property.

Photo by Michael Fischer from Pexels.

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