(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the cannabis industry. Kathryn Ashton and Eric Berlin are Chicago-based partners at Dentons and head the firm’s cannabis group.)
Operating a business in the regulated cannabis industry in the United States has always been challenging, and 2020 has been no exception.
The COVID-19 pandemic decreased valuations, and limited access to capital has put immense pressure on companies.
Despite such challenges, there are many reasons for industry optimism, including increasing acceptance of regulated cannabis as a legitimate business and growing support for legalization as well as the development of better, safer products that are helping draw customers away from the illicit market and ongoing medical research into the many potential therapeutic benefits of cannabis.
We recommend that you hold on to a sense of optimism and perseverance.
We also offer the following list of suggestions for emerging from 2020 stronger than ever.
Professionalization. Do things the right way from the start (or at least starting now). Drive the practices and the culture today that you want your company to maintain five years from now. This includes hiring decisions. Do not take shortcuts or ignore good corporate governance standards. Lenders, investors and strategic partners expect, and will look for, clear and transparent organizational documents and a company that operates in good standing in all areas. Keep good books and records so you don’t have to explain why you haven’t. And you’ll spend less time scrambling to assemble financial information down the road. Use legal and accounting professionals, find an insurance agent and establish a solid banking relationship (or two, or three).
- Compliance. Strong legal compliance can fend off both regulatory investigations and private lawsuits. This applies not only to cannabis regulations but every aspect of your business, including employment, environmental impact, intellectual property and securities laws and regulations. Legal compliance is critical to maintaining reliable and profitable business operations at a time when the plaintiffs’ class action bar is aggressively focusing on the cannabis industry, with potential claims by consumers and shareholders relating to product quality, advertising claims, stock performance and ADA compliance, among others. Legal compliance does not magically happen. Commit to build a culture of compliance, develop a standard operating procedure and compliance monitoring plan and then hire the qualified personnel to ensure implementation and accountability. Most importantly, when issues are identified, do not obfuscate or dismiss them. Set an example from the top of doing things the right way, even when that means admitting you’ve fallen short.
- Budget. Undertake a meaningful annual budget process and establish systems to be accountable on revenue and expenses. If your company is facing financial pressure in 2020, take action to cut costs and plans that are not critical to meet short-term objectives. Do not get overextended beyond available capital. Push out maturity dates on debt and other payment obligations to preserve short-term cash. Negotiate with lenders and service providers before you are in a default situation.
- Strategy. Have a strategic plan that will work with the realities of your budget. A strategic plan often has a longer time frame for achievement, but don’t hesitate to revisit your strategic priorities and pivot. Spend time now to think and plan. Operating a highly regulated business in a rapidly evolving industry creates time pressure, but those challenges will not significantly improve with time. Be proactive instead of reactive, as most startups tend to be. Aligning business decisions with your organization’s strategic plan streamlines vetting of opportunities and avoids wasting time and resources.
- Diversity and inclusion in leadership. Industry leaders understand the importance of meaningful diversity on the board of directors and in senior leadership. The results are in: Companies with greater diversity in senior leadership outperform their peers. Want to increase your profitability? Start by taking a look at your board, and cultivate diversity and inclusion at your company’s highest levels.
- Advocacy. Make your voice heard. 2020 is likely (and hopefully) unique, and the opportunities for contributing to the national conversation on a range of issues are enormous. What role can the cannabis industry have in addressing historical and pervasive racial inequality in the United States? What role will federal, state and local governments and governmental entities have in regulating cannabis, and how will that impact your business? Advocate today for changes in state laws that will increase the industry’s chances for success as we all adapt to new ways of doing business. Push for changes in federal laws to ease banking restrictions and ultimately pave the way for federal legalization.
- Innovate. How will the world and the cannabis industry emerge from the COVID-19 pandemic? In what ways will your company have to adapt in order to compete? Innovation (in matters large and small) is critical, so maintaining an innovative mindset is essential, whether the issue under consideration involves product development, operations, human resource management, marketing, merchandising, or simply keeping clients and other stakeholders feeling safe and confident with your business. In response to COVID-19 we have witnessed, in an astonishingly short amount of time, massive change and innovation, and all indications are that markets will continue to evolve in unpredictable ways. Let’s continue to rise to the challenge.
Many cannabis businesses are destined to fail for the usual competitive, operational and economic reasons, and succeeding in a nascent industry only lengthens the odds.
What’s more, the extraordinary adversities of 2020 have accelerated product and business life cycles.
On the bright side, industry participants that survive this challenging time will be well positioned to thrive in the future.
The previous installment of this series is available here.
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