Marijuana

High Dive: How To Fail In The Marijuana Industry

Since so many cannabis businesses tend to fail in newly legalized states, and since 2016 will almost certainly be a big year for legalization, here are 10 ways entrepreneurs can be sure to fail in the marijuana industry.

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Hilary Bricken

Hilary Bricken

I usually write about how to succeed in the emerging marijuana industry while navigating its many legal pitfalls. But since so many cannabis businesses tend to fail in newly legalized states, and since 2016 will almost certainly be a big year for legalization, this post is on how to be sure to fail in the marijuana industry.

  1. Go all in and ask no questions. Those with a “gold-rush” mentality are best suited to avoid the cannabis industry. Though enthusiasm for a new enterprise is a great thing, anyone who believes they will get rich quick in the cannabis industry is sorely mistaken. Cannabis businesses are increasingly behaving and being treated much like any other business, so any new entrant or even industry veteran needs to constantly be examining their bottom-line, their financial strategy, their ability to market, their market share, and how to compete. The concept of the “Green Rush” is slowly fading, along with the opportunists with no real business plan.
  1. Lie to your bank. Cannabis businesses are still deceiving their banks into giving them bank accounts. We hate that folks feel the need to do that to avoid the public safety crisis created by an all-cash business, but we equally hate to see anyone violate federal and/or state law by lying to their bank. You should not be “omitting” what you are really doing when you apply to a bank, nor should you camouflage your business with a personal account or a shell management company, all of which can create personal liability by causing you to lose your corporate protection. Even worse, they can (and sometimes do) invite federal agency scrutiny. If at all possible in your state, you should bank with a financial institution that follows FinCEN guidelines. The best plan is to just tell the truth about your operation and make the rounds of financial institutions until you find one willing to bear the risk of taking on your account.
  1. License IP you don’t have. One of the fastest ways to invite bank-breaking litigation is to license intellectual property you don’t actually own. For whatever reason, much of the cannabis industry is in denial about IP rights generally. Industry players seem never to tire of coming up with ornate and lengthy licensing agreements that sound nice and official, but that don’t really provide any IP rights or protections to anyone. Though there are definitely legal solutions for navigating the hairy interstate IP issues, you should not make the mistake of entering into hardcore negotiations for a licensing agreement if there’s really nothing there to license in the first place. Do your IP due diligence because many of cannabis IP licensing agreements are going to be tested and many of those are going to be found lacking.
  1. Ignore local laws. Too many marijuana businesses have tunnel vision when it comes to knowing and navigating their local marijuana laws. Marijuana businesses forget that though their state is the arbiter of their operational license, their city and/or county also has plenty of say in whether they actually get to operate. Failing to acknowledge and abide by local laws, like zoning, land use, additional permitting or licensing, or time, place, and manner restrictions, can lead to costly disputes with the marijuana business usually on the losing end. Don’t make the rookie mistake of thinking your city or county doesn’t matter.
  1. Rush your due diligence. Marijuana entrepreneurs are notorious for jumping into bed together without having performed any due diligence regarding their putative partner company and its members. The cannabis industry is a new industry and that means you should take extra care in conducting due diligence on those with whom you will be doing business. On top of this, because the laws relevant to the cannabis industry are changing so frequently and because the regulatory stakes are so high, no business deal should be rushed. You do not want to enter into a deal only to find out that for whatever reason your new partner or the deal itself is illegal because of some new law. The faster you go, the more susceptible you are to these sorts of mistakes.

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  1. Do everything on a hand shake. The marijuana businesses with the toughest (often irreversible) issues are those with nothing in writing. Though the legal enforceability of marijuana contracts from state to state varies (there are some legal workarounds even for this), our cannabis business lawyers still encourage all marijuana businesses to memorialize all of their deals and transactions in a written contract. Indeed, certain transactions must be in writing to be enforceable at all. You are a real business now and real businesses have written contracts.
  1. Don’t pay your taxes. Even writing this makes me roll my eyes. Anyone at this point who thinks they can successfully evade the IRS or their own state and local taxes is ignoring reality. The IRS is not flexible regarding how it treats marijuana businesses and unless Congress reforms the tax code, that isn’t going to change. If I had to name one thing that has led to the ruin of more cannabis businesses than anything else, it would be failing to pay taxes.
  1. Don’t worry about your neighbors. Woe to those marijuana businesses that think they can snub their neighbors without consequence. Many marijuana NIMBYs (“Not in My Back Yard” neighbors) have the ability to derail the establishment and success of a marijuana business. The best way to prevent massive NIMBY problems is by doing all that you can to get early buy-in from your neighbors. For more on this, check out “How to Handle a Neighbor Who Wants to Shut Down Your Cannabis Business.”
  1. Take advantage of every loophole.We recognize that sometimes in the cannabis industry it can be better to ask for forgiveness instead of permission, but cutting corners can lead to business-ending state or local law violations. Not every loophole in state or local rule-making is going to be worth the risk and you need to engage in high-level risk analysis in figuring out when you should step on the gas and when you should yield to allow the state to catch up.
  1. Don’t have an exit strategy.The failure rate in the cannabis industry is and will no doubt continue to be high, especially as states and local governments continue to constantly tinker with their laws in an effort to get everything just so. If you are thinking that failure is no big deal because you can just file for bankruptcy, you are probably wrong on that as well since bankruptcy isn’t an option, and even state receiverships are of dubious legality. Successful marijuana businesses plan for their end.

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Here’s to a better and brighter 2016 for the marijuana industry!

Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.

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