Doing Business in the Age of Marijuana – Starting from the Ground Up
This is the second in a series of articles about the new Medical Marijuana legislation in Ohio, rolling out in 2018. Read Part I here.
In our last article on the marijuana industry, we discussed the risks of the marijuana business and why many just say, “no.” The obvious counterpoint to playing it safe is the untapped potential of a promising industry still in its infancy. It’s much like a new-age gold rush, where buying in means betting on green states winning out and winning over federal lawmakers.
For some, it’s a risk worth taking; so we’re exploring considerations for those who do dive into the industry, those who service it, and those who must regulate it.
Setting Up Shop
There are several ways to break into “the business.” Ohio House Bill 523 tiers the marijuana industry into four licenses: cultivation, processing, testing, and dispensing. Associated costs vary by tier, but each carries significant startup costs, including non-refundable application fees well into the five-figure range.
Because of federal regulations discussed in Part 1, particularly the Controlled Substances Act (CSA) and the Bank Secrecy Act (BSA) marijuana companies (and often those ancillary service companies) find it difficult if not impossible to get funding from banks. Instead, they must rely on private lenders who may take advantage of a cornered market by subjecting marijuana startups to higher interest rates. If your marijuana business fits this profile, shop around and get a feel for the market before committing to a loan agreement.
In pre-revenue states, even the most careful financial projections are speculative. At the outset, there will be an oversaturation of marijuana-based goods and services – particularly those secondary businesses that don’t need licenses to set up shop. Plan for market correction of inflated numbers in early costs and projections.
Market correction will also mean consolidation. Expect a high number of mergers and acquisitions in and surrounding the marijuana industry, demarcating those who have planned for market oscillation and those who have not.
Ohio may prove an exception to this general advice. The incredibly slow roll-out of the necessary authorizing agencies and regulations has stymied the production and distribution of medical marijuana. Indeed, there are problems at both the production and consumer end. As of this writing, only 37 doctors are even authorized to provide the necessary medical marijuana recommendations to patients, bottlenecking the consumer demand for legal marijuana.
Like any other business, a marijuana company needs an accountant, insurance, utilities, and a hundred other goods and services to function. These ancillary companies are also affected by the precarious position of the marijuana industry. As we explored in Part 1, there may be gaps in insurance coverage for all involved, leading to heightened financial risk. In addition, there is the threat of legal liability for those providing services to a federally illegal industry.
There are also practical and logistic considerations. Because of the cash-heavy nature of the current marijuana business model, financial services will have substantially more trouble establishing paper trails for taxes and audits. Employees are more likely to under-report income if they’re paid in cash. They (and their employer) are also more likely to be the target of a robbery, which might affect insurance premiums and healthcare rates, among other things.
The Regulatory Struggle
Some companies can’t help but interact with the marijuana industry, like regulatory agencies and postal services. In particular, containing marijuana products within state boundaries will prove a titanic endeavor.
Interstate commerce is governed by federal law. It is therefore illegal to transport marijuana or marijuana paraphernalia across state lines (even if both adjoining states have legalized its use). Complying with interstate commerce laws requires well-developed procedures for couriers and regulatory agencies both.
Marijuana Use in the Workforce
Every company in a legalized state must decide what their marijuana policy will be. Is cannabis use permitted for workers? Recreationally or medically? Off duty or on duty? These are questions which must be answered – and we will explore such policies in depth in the next article. Suffice to say that no company is wholly outside the influence of the marijuana industry, the scope of which we are just beginning to see.