The first full year of Oklahoma’s medical cannabis market is coming to an end and it is time to start thinking about ways to keep your business viable.
Over the past 12 months, Oklahoma has gone from zero to powerhouse in the medical cannabis industry. Boasting more than $250 million in medical marijuana sales in just the first 10 months of operation, Oklahoma has exceeded everyone’s expectations.
That $250 million takes into account only the 7 percent medical cannabis tax and does not include all applicable local or state taxes that range from 4.5 percent to 11.5 percent in Oklahoma.
As the excitement of the initial hyper-growth wears off, Oklahomans can expect to see two trends develop in the next phase of the local marijuana industry.
First, there will be an eventual collapse of many Oklahoma-based cannabis businesses and consolidation into the hands of a few operators who are executing well and have cash on hand.
A few trade associations and patient advocates did a fantastic job of giving nearly everyone a fair shot at opening their own cannabis business and the opportunity to capitalize on the “Green Rush.” As it stands now, if all licensed cannabis businesses began operating, there are simply too many dispensaries, processors and cultivators to be sustained by the Oklahoma population alone. Yet we are not too far off from federal legalization, which we will address in a moment.
As the medical cannabis industry matures in Oklahoma, there will be clear winners and many obvious closures, but that is free-market dynamics for you. Many of the businesses that do shut down will have some residual value that the better operators will want to scoop up and acquire, such as client lists, equipment and real estate. If you think you might be closing, it is imperative to position yourself for a strategic merger or acquisition.
Building on this eventual consolidation of businesses, the second trend you will see is that massive multi-state operators will begin to make their moves into Oklahoma as they gear up for the legalization of cannabis. Full legalization is likely still a few years out, but it takes time for big companies to get their feet under them as well.
Land and resources are significantly cheaper in Oklahoma compared to nearly every other part of the country, and Oklahoma seems to be quite welcoming to the industry overall, so large cultivators and manufacturers will be making their way into the Sooner State to get their facilities turn-key ready for the ultimate mad dash in cannabis.
Once interstate commerce opens up, each part of the country will begin to accept its place in the industry. As for Oklahoma, you will see a disproportionate amount of cannabis grown and processed here and then shipped out all over the country. This will eventually push prices down dramatically and really force operators to focus on having a solid brand name and excellent operations.
We do not have a crystal ball, but simply by observing how things have actually played out in the latter half of 2019, there will be two broad strokes in the cannabis industry that everyone can be on the lookout for over the next 12 to 24 months.
First, the focus of consumers will be less on the best product and more on the best branding and deepest relationships. The general public does not buy only for the utility of the product, but also for what it says about them to other people. An understandable example is the green Starbucks straw; it shows people that you enjoy “premium” coffee drinks and not just gas station drip coffee.
As better cultivation and manufacturing processes scale up, know that nearly every business will have access to the top-quality product. Certainly there will be that ultra high-grade product for connoisseurs, but that is a very small subset of the addressable consumer market.
Knowing this, understand that branding is what will set the successful long-term competitors way ahead of the businesses that are just a simple flash in the pan. By creating a brand that people trust and ask for by name, you will be creating a pull-based strategy for your products compared to pushing them onto customers. Make people love the way they feel when they associate with your brand and you will be gaining lifelong customers who market your product for you.
As for relationships, do not forget that business is just a set of contracts and operations but what gives both of those aspects power is the people behind them. If you want to be around for a long time, then you need to focus on building a real human connection with strategic partners, clients and the end consumer.
To assist in the relationship process, from time to time, we are able to connect the truly select cultivators/processors with like-minded dispensaries that are worthy. This is another very tangible reason to find a cannabis-centric CPA, law firm or insurance agent. Leverage your relationship with your vendors who are able to introduce you to other strong operators. Together, through relationships, everyone can try to differentiate themselves from the competition with the sharing of ideas or unique or superior products to help survive past spring 2020.
Winter is coming for the industry in 2020. Perils can range from licensing renewals to new regulations and lagging sales. It is happening now. We hear about someone exiting the industry every week. Leverage your relationships and start before the price of flower drops and taxes are due.
Financial compliance will determine if a business will actually be operating after its first two years. You might have heard that cash crimes are the new drug crimes, and it is true. Local and state governments have legalized cannabis, so they are less focused on you possessing or distributing it and more focused on collecting the tax revenue from its sale.
More and more cannabis businesses are experiencing audits at multiple levels of government, but those audits aren’t a problem if you are operating in good faith and keep excellent records. Having solid record-keeping helps you and your finance team be able to reconstruct your business dealings and prove the reasonable methodologies behind your tax filings.
You might brush this off as no big deal, but the reason financial compliance is so important is twofold.
First, when you make mistakes on your tax filings, you will be charged the tax debt, penalties, compounding interest and possibly fines, and those totals add up quickly. In most cases, a typical cannabis business does not have a pile of extra cash lying around for an unexpected tax bill, so working with a knowledgeable tax team who specializes in cannabis can keep you out of financial woes.
Second, and most critically, there is no access to bankruptcy protection for cannabis businesses since that is a federal protection and cannabis is still illegal at the federal level. Furthermore, those tax bills flow up to the officers of the company, and you cannot get out of those liabilities; consider it like student debt for the cannabis industry.
Don’t get blindsided by the changes in the cannabis industry. As you operate your business with your head down in the thick of things, make sure you also peek up to see which new waves are coming and how you can prepare yourself for what is coming.
Lawrence M. Cagigal is the southwest territory sales manager for GreenGrowth CPAs, a boutique accounting firm based in Los Angeles that specializes in cannabis.
Marko Glisic is the lead certified public accountant for GreenGrowth CPAs. A graduate of the University of California – Los Angeles, he has eight years of experience working with businesses of various sizes, from startups to multi-billion dollar companies.