Running a cannabis business is difficult and many people fail. These ventures bottom out for myriad reasons, although owners tend to blame federal law issues first of all. It’s true that federal law creates a tough environment for cannabis businesses (tax issues, market saturation, geographic constraints, etc.), but federal prohibition also has kept big money sidelined, giving small business a real head start.
My view, after seeing many spectacular failures and slow motion crashes over the past several years, is that most bad outcomes are a combination of the following: 1) a challenging legal and regulatory environment, 2) saturated markets, and 3) operator error.
A start-up cannabis business cannot control the first two items listed above, but should be able to navigate them. The third item is a different animal. Margins of error tend to be slim for most cannabis ventures, and self-inflicted wounds are difficult to overcome. This blog post covers the five biggest mistakes we continue to see in early-stage cannabis businesses—specifically in Oregon—and gives suggestions to avoid them.
1. Failure to properly estimate license acquisition timelines
The Oregon legislature passed a moratorium on new marijuana license applications last year. This means that market entrants must buy their way in through asset or stock sales from existing licensees. The OLCC has a small team of change-in-ownership investigators who work with both buyers and sellers on these transactions. Based on current, published timelines, applications submitted the first week in April are currently being assigned and reviewed. So, we’re a little over two months out.
Does this mean a new market entrant can expect to be licensed two or three months after inking a deal? No, it doesn’t. Five or so months is a more common timeframe. Here is how the process works:
- Once an application is assigned, the OLCC investigator will inevitably task a buyer with information requests, to-dos, etc.
- An approved file will eventually make its way to an inspector, after which point an inspection is scheduled, and more to-dos may ensue.
- Finally, the OLCC will approve the new license application, at which point the buyer may pay for the license and the seller’s license is terminated.
As a general rule of thumb, change-in-location applications tend to take longer than purchases of licenses “in place.” But many of these processes take five to seven months regardless. The trick for buyers is to deploy as little capital as possible during the dead zone.
It’s worth noting that cannabis business sales aren’t unique in taking some time. I’ve seen many non-cannabis business sales delayed by diligence issues, lease negotiations, ironing out terms in final agreements, etc. In the Oregon cannabis industry, administrative vetting and disclosure requirements must be added to that list.
Finally, I’ll add that delays are usually (but not always) on the buyer side, stemming from initial business structuring, filling out OLCC forms, submitting fingerprints, etc. Again, buyers should create realistic timelines to avoid hemorrhaging cash during this phase, and should strongly consider working with someone who has navigated the change-in-ownership process before. It’s a singular process and there is some art to it.
2. Not using a lawyer to purchase a license or business. Also, paying lawyers to expedite your OLCC application.
A couple of months ago, I wrote a post called “Please Do Not Use Agreements from Brokers.” I wrote this after dealing with three or four messed up transactions in a compressed period, all stemming from brokers providing recycled forms for OLCC transactions. In fairness, the problematic deals are not always broker-related. Many purchasers and sellers wing these deals in one way or another. I recommend hiring qualified counsel to assist with these.
The place to save a few bucks in license acquisition is the OLCC application process. Our Portland office philosophy has always been not to blow through client retainers on lawyers doing ministerial work: We want people to succeed so we can work with them for years. For that reason, we have licensing paralegals who help push these applications through efficiently and expertly. Attorneys only come in for unusual situations. The bottom line here is that new businesses should save their legal budgets for work that cannot be done by non-lawyers.
3. Starry-eyed forecasting
In 2025, the word is out that you are not going to sell your marijuana for $2,000 a pound in Oregon. But we still see unrealistic projections up and down the supply chain.
You should not budget a six-figure salary for yourself. You should avoid oppressive lease and financing terms—and debt at all costs, if you can. You should realize that marijuana is likely not going to Schedule III this year, and that IRC 280E will continue to kneecap margins. You should understand that industry standards can be low, and that vendors and other parties will sometimes let you down.
In short, it is crucial to dial in your research and expectations before starting out – especially if you are taking on investment and the legal risk attached to that. An Oregon cannabis license is not a certificate to print money, especially in 2025.
4. Employment issues
For whatever reason, employment practices are often subpar with cannabis businesses. There are a couple of important things to note here.
The first is that employee actions, even if unauthorized, can lead to license revocation in Oregon. This means you must ensure your employees are well versed in compliance, and you have to watch them.
The second thing to note is employment law is complex and seems to change as often as cannabis licensing rules. Whenever there is a dispute, courts and administrative bodies tend to favor employees, so it’s important to keep your team in order.
5. Bad (or no) business agreements
You do not need a tall stack of complex documents to start a cannabis business. You do need the basics, though, and those agreements should be thought out and solid.
If you are renting property, get a tailored industry lease. If you are organizing an LLC, get an operating agreement that covers matters important to your business— including management, distributions, protocol for when someone jeopardizes the OLCC license, etc. Or, if you have a white label agreement, ensure that all processes and intellectual property ownership are delineated. The list goes on.
Starting a business can be expensive, and people tend to skim on legal. But nearly all of the cannabis litigation matters my firm is currently handling (and there are so many right now) stem from defective contracts, and from people operating informally in that sense. Reasonably tailored contracts should be a part of any new business plan, and they should not break the bank. These contracts will set both guidelines and expectations for the business, and they operate like insurance when things go wrong.
