Michigan’s cannabis industry offers lucrative opportunities, but with new policies and an influx of industry players, new challenges arise. Unlike more established sectors, cannabis is still evolving, and this dynamic environment often leads to early missteps. Among the most common mistakes are poor financial forecasting and overlooking legal obligations, both of which can cause lasting setbacks for business owners.
Financial Planning
One of the frequent financial pitfalls is failing to differentiate between variable and fixed overhead costs. Companies expanding vertically, such as moving from cultivation to retail, often neglect to account for fluctuating variable expenses like lighting, water, security, and transportation. Without precise budgeting for these changes, businesses find themselves facing cash flow shortages, putting operations at risk. This lack of clarity often forces owners to scramble for funding, leading to unnecessary, expensive, and sometimes fatal financial strain.
Working capital mismanagement also presents a serious challenge. Many cannabis operators fail to set aside enough capital for revenue growth or unexpected obstacles, such as elongated supply chains or expansion delays. The absence of properly forecasted working capital is often a primary reason for failure in this industry. Businesses that don’t adequately plan for these operational demands may find themselves unable to sustain growth or manage downturns effectively.
The financial impact of 280E is another area where many operators underestimate the toll on cash flow. Beyond the direct tax burden, the repercussions ripple into other aspects of the business, particularly in banking and lending. Premium rates from financial institutions, due to the perceived risks of serving cannabis companies, further compress already tight margins, making it more difficult to reinvest and grow.
Litigation Risks
Legal issues escalate quickly in the cannabis space, and unclear contracts can be a major source of trouble. Vague or poorly constructed agreements with suppliers, distributors, or other third parties often lead to disputes. A failure to properly define payment terms, deliverables, and obligations can result in legal conflicts that drain resources. Investing in the time and expertise of qualified legal counsel to draft clear, concise contracts is essential and can save businesses from costly litigation down the road.
When a breach of contract is suspected, mishandling the situation can escalate matters quickly. Without proper legal guidance, what could have been a manageable issue can balloon into a lawsuit, pulling valuable time and energy away from day-to-day operations. Proactive communication and early coordination with legal experts can mitigate these risks and, ideally, prevent disputes from arising in the first place. In such cases, an ounce of prevention truly is worth a pound of cure.
Buy-sell agreements are another critical area often overlooked. These agreements dictate the transfer of ownership when an owner departs, passes away, or experiences other triggering events. Failing to outline these terms clearly invites conflict among shareholders during transitional periods. Regularly reviewing and updating these agreements is key to ensuring a smooth ownership transfer and minimizing the risk of internal disputes.
Clarity around shareholder control is equally vital. Without well-documented decision making processes, voting rights, and paths for resolving disagreements, power struggles may ensue with the potential to paralyze the business. Establishing clear governance structures ensures operational continuity and reduces the likelihood of damaging conflicts.
Conclusion
By being proactive and addressing both financial and legal risks head-on, cannabis businesses in Michigan can better navigate the complexities of this evolving industry. Strong financial planning, a sufficient reserve of working capital, and carefully crafted legal agreements are critical to avoiding common pitfalls. With proactive measures in place, business owners can position themselves for long-term success in a highly competitive market.