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Prepping for a Cannabis Recession

Written by on September 29, 2022

A cannabis recession may be coming and no cannabis business is immune. Prices are rising, operations are expensive to run, over regulation is rampant, local control is stifling, and you can’t even take many business deductions with the IRS because of IRC 280E.

While things like interstate commerce agreements are getting a lot of attention, cannabis businesses should maybe be thinking about how to prepare now for a cannabis recession in the future. Here’s how:

Cut the non-essentials and get lean and mean

This one is obvious. To a certain extent, cannabis businesses have been permitted to grow relatively comfortably for a while now– mainly because legalization has been somewhat novel and exciting to consumers. Lots of cannabis businesses have invested heavily into their IP, work fleet, fee slotting agreements, and expansion efforts in order to capture the upside of these democratic experiments (before bigger business interests jump in).

However, with a cannabis recession potentially looming, examining work force size and unnecessary expenditures is bound to happen. From the legal front, when cutting employees or trying to bail on goods and services agreements, make sure you know what you’re doing in those respective areas. Missteps or breaches will be undoubtedly costly.

Consider outsourcing what you can

Cannabis ancillary companies are a dime a dozen these days. Many operators are outsourcing a chunk of their businesses, and that’s OK so long as it doesn’t amount to trafficking without a license (big no no). Cannabis management companies need to be mindful of IRC 280E, and owners, financial interest holders, and true parties of interest still face a myriad of disclosure requirements. But downsizing and outsourcing is an efficient way to save some cash in hard times.

Ditch your bad, expensive agreements (or try to change them)

Times like now are why it’s so very important to consider “no cause” termination in your agreements with third parties. You may otherwise be locked into a very costly, unproductive agreement for a lengthy term.

If you can’t get out of a contract, maybe at least go to the other party to re-negotiate some more economically sensitive terms. I can tell you now that I’m working on a number of contract “re-do’s” where parties are heavily negotiating the absorption of costs and guaranteed minimum production metrics (especially with cannabis distribution agreements). Now’s the time to examine these things.

Start whipping on collections

Margins in cannabis are not amazing unless you can really scale and engage in high volume production. And even if you can do those things, in most states, getting paid B2B is increasingly difficult. Yes, we’re all in this democratic experiment together, but to prevent complete failure, businesses will have to get tougher on engaging in collections and getting paid.

Long gone are the days of sweet net payment deals for distributors and retailers. Discount pricing is also taking a hit because wholesale production costs have gone up considerably (in addition to the general high expense of running these operations). It’s not pretty and no one wants to do it, but if you’ve been late on your payments to your cannabis vendors, you should probably expect to receive some demand letters around payment or even collection efforts to boot. A cannabis recession will certainly bring out people’s teeth.

Pay your taxes or get on a payment plan ASAP

The cannabis industry needs to understand that no revenue collector feels bad for it. Their job is to wrench out of you every dollar owed to the government. And pointing to a cannabis recession for an inability to pay is not going to be persuasive.

If you’re headed for dire straits on payment of your taxes as the cannabis economy slows, do not wait to do something about it with the tax collector. Get on a payment plan in your state and work with the government to stay on top of it and out of liens and levies.

Adjust products and services

Cannabis is an industry that embraces innovation. In times of economic downturn, all businesses are going to be looking at their products and services to determine if they’re worth the cost and in demand.

Consumer behavior gets wonky in a recession, but cannabis businesses would be wise to pay attention to what’s selling and what’s not, and to focus on producing those products in demand and diversify accordingly (or creating the demand with various innovations, so long as they comply with prohibited products lists and packaging and labeling requirements, which vary across states).

Other things to consider now are things like subscription programs, discount clubs, and personalized products (like monthly boxes, etc.). Just make sure any recession-friendly product turn-outs comply with the many, many cannabis marketing and sales regulations in your state.

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It’s been said that a recession is an opportunity in wolf’s clothing. And that can be true for a cannabis recession too, but companies should prepare themselves now so they can successfully weather the storm.

The post Prepping for a Cannabis Recession appeared first on Harris Bricken Sliwoski LLP.


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