MICHIGAN MARIJUANA MICROBUSINESS OWNERS

Five Hurdles for Michigan Marijuana Microbusiness Owners and How to Overcome Them

The Michigan Marijuana Microbusiness license, sometimes incorrectly referred to as the “microgrow license”, presents an unique opportunity to caregivers and other Michigan residents looking to enter the state’s recreational marijuana market. A Microbusiness license allows the licensee to grow up to 150 marijuana plants, process them on-site, and sell direct to the recreational marijuana consumer. This means that the Microbusiness license allows Michigan residents to run a fully vertically integrated adult-use facility without the need to spend millions of dollars, as they otherwise would if they sought a provisioning center / marijuana retailer, processor, and grow license under the recently passed Michigan Regulation and Taxation of Marihuana Act (MRTMA) and Medical Marijuana Facility Licensing Act (MMFLA).

While the Michigan Microbusiness license presents small business owners with a unique opportunity to enter the recreational marijuana market, there are certain risks that come with operating a small, vertically integrated cannabis business. Before you decide to take the plunge and open up a microbusiness here in Michigan, you should carefully consider the following risks. By being aware of these risks and implementing contingencies to address them, you will be in the best position to overcome them if they should arise. We have outlined five hurdles each microbusiness owner will likely face when operating their vertically integrated cannabis company.

Bottlenecks

One restriction on the Michigan microbusiness license is that you cannot buy or sell excess product to a dispensary, fellow microbusiness owner, or other licensed facility. Because a microbusiness license is fully self-contained, that means that a problem with one aspect of the business will likely cause problems with the other aspects of your business.

For example, if a microbusiness owner has a batch of 20 plants that they were counting on to sustain sales over the next few months, and the batch cannot meet safety testing requirements or otherwise fails, your whole business will suffer. You cannot simply buy from another licensee or caregiver to make up the difference. This issue will necessarily effect the rest of your business as you won’t have product to produce extracts or flower to sell to the end customer. In other words, an issue with just one step of your operation can bottleneck your entire Microbusiness operation.

In order to prevent such an issue from grinding your entire microbusiness to a halt, it will be important to mitigate these risks wherever possible. For cultivation, this means having multiple self-contained cultivation rooms so that contamination in one room doesn’t ruin your entire crop. Similarly, this also means growing in smaller batches so that a failure of one batch doesn’t destroy your entire business.

Expert on Everything

In order to effectively run a vertically integrated facility, microbusiness owners will need to be an expert on every step of the process, or at the very least hire an expert with respect to every step. For example, let’s say that you are a caregiver who has been cultivating for close to a decade. Even if you grow the best marijuana in the entire State of Michigan, if you are unable to sell it to the end consumer, your cultivation expertise simply won’t matter and your microbusiness will inevitably fail.

This doesn’t mean you cannot establish and operate a successful microbusiness, it just means you will need to identify staff with the expertise that you lack. If retail and direct to consumer sales aren’t your thing, then you will need to find someone who has that expertise to help your company sell to the end consumer. Conversely, if you have tons of experience in retail but have no idea what you are doing when it comes to cannabis cultivation, you will need to find a cultivation expert to help your microbusiness succeed. In short, while you don’t need to be an expert on everything, you do need to identify and hire staff who can fill in the gaps of your knowledge.

Municipalities

As mentioned in our previous article, one of the biggest hurdles to overcome is finding the right municipality to operate in, and identifying the right property in that municipality. Similar to the MMFLA, the municipalities will serve as the gatekeeper for microbusinesses. They will likely first need to pass an ordinance to allow microbusinesses to operate in their municipality before you will be able to set up shop. Even if they allow microbusinesses, they will also be able to regulate their activities in a way that could creates issues for your specific business model.

For microbusinesses more so than other license types, the rules of the road will likely be determined at the municipal level instead of the state level. To illustrate this concept, one of the business models that is getting the most attention here in Michigan as well as other states such as California that has similar microbusiness laws is the Cannabis Lounge. This business model relies on a municipality allowing public consumption on the premises. While there may be a “private member” work around to this, the municipality could nonetheless pass an ordinance that restricts Cannabis sales on property where private consumption is allowed.

As a result, an unfriendly municipality has the ability to essentially regulate your microbusiness to death. While there are restrictions in the MRTMA that prevent municipalities from enacting “unreasonably impractical” regulations that restrict microbusinesses or other license types, we simply don’t know what will be considered “unreasonably impractical.” This will be something Michigan courts will have to decide, and as previous court decisions illustrate, many state judges simply don’t understand the marijuana industry.

Competing with the Big Boys (and Girls)

As a Michigan microbusiness licensee selling into the recreational market, you will be competing directly with large, vertically integrated cannabis companies with multiple dispensary locations and thousands if not tens of thousands of plants under cultivation. This is the equivalent of a small boutique grocery store competing against Walmart.

In other words, big cannabis companies will have economies of scale that microbusiness owners are simply unable to achieve since they are limited to growing only 150 plants. In order to survive, we recommend that Microbusiness owners don’t try to compete directly with these larger, vertically integrated operations on a one-to-one basis. Chances are that they will be able to cultivate cannabis at a lower price point then most microbusinesses will be able to, though microbusinesses may be able to bridge this gap through lower to non-existent transportation costs, or more efficient greenhouse grows. So what is a Michigan microbusiness owner to do? Well, don’t try to compete with dispensaries directly. In other words, find a niche you can compete in and focus on that. This means you could compete on quality, compete on customer service, compete on consumer experience, compete on ease of access, or even compete on price if you have your cultivation operation well set up or you are in a rural area where dispensaries and licensed grow operations are few and far between.

You could also focus on a particular type of cannabis product—e.g. high CBD marijuana, particularly sleepy indicas or active sativas, or wherever you feel like there is a good market opportunity. The key is to simply not try to do it all as most dispensaries do, because they will be able to do that better than you can.

Capitalization and Costs

While some wily microbusiness owners may be able to set up operations on a shoestring budget by finding leased space not requiring much in the way of build out, purchasing used equipment, and bootstrapping their advertising and marketing, most microbusinesses will need a good amount of upfront capital to set up their operations. This is especially true with certain business models such as a Cannabis lounge, which will require either prime property and / or an intensive marketing and advertising strategy to help drive customers to their microbusiness.

This doesn’t necessarily mean you will need millions of dollars to start a microbusiness, but it may mean you need a six-figure amount. If you have a great idea but not enough money to pull it off, you will need to find an investor—banks simply won’t loan money to microbusinesses at the moment due to current federal banking laws.

You will also want to ensure that you have sufficient operating capital to cover a few months of operating costs. Most retail businesses are not profitable in their first few months of operations. It takes time for consumers to become aware of a retail business and for word of mouth to spread. Microbusiness owners will need to prepare for the fact that they likely won’t be profitable in their first few months, or else their microbusiness will fall flat on its face before it has enough time to gain traction and start producing a profit. A good rule of thumb in business is to have 90 days of operating costs to sustain your business after opening.

Keeping costs contained may also pose challenges for microbusiness owners, as the amount of revenue they can generate off of marijuana will necessarily be limited. While a microbusiness could easily generate more than a million in revenue from marijuana sales, microbusiness owners will need to keep their costs contained to ensure there is enough profit left over at the end of the day for the business to be worth their while. There are many different strategies for doing this, one of which is to share costs with other microbusinesses. For example, let’s say you want to hire a top cultivation expert, which could easily run you $100,000.00 or more, as well as one or two cultivation assistants costing $40,000.00 each. You may not be able to justify spending this much money on cultivation employees, so what do you do? Do you hire a less experienced cultivator and hope for the best?

One option is to split the costs with another microbusiness. Top growing experts can easily oversee thousands if not tens of thousands of plants under cultivation, which would make your 150 plants a drop in the bucket. If you were to share the services of this expert with 10 other microbusinesses, you would be able to retain a top cultivation expert to oversee your operation without having to pay top dollar.

While not every person working at your facility needs to be an expert, you do need an expert there to oversee your operation. Again, that doesn’t necessarily need to be a full-time employee though. You could also hire an expert consultant who would be able to set up a cultivation program, train your less experienced staff, and step in if there are any problems, which would allow you to run an efficient operation without the cost of a full-time master grower.

Conclusion

As Michigan cannabis business attorneys who have worked with dozens of cannabis businesses and understand the Michigan market, we see the Michigan microbusiness or “microgrow” license as presenting an incredible opportunity for caregivers and aspiring small business owners to enter the Michigan recreational market and build a sustainable long-term business. Like any business, however, there will be hurdles that will need to be overcome in order to achieve this success. This article was meant to outline the major hurdle we believe Michigan microbusinesses will face and how best to overcome these hurdles.

Our Marijuana Microbusiness Attorneys are ready to assist your Michigan microbusiness project. Our attorneys have practiced business, municipal and real estate law their entire careers. Unlike other “cannabis attorneys”, representing local businesses and start-ups is our specialty. We assist microbusiness clients in drafting business plans, running pro forma numbers, obtaining state and municipal licensure, regulatory compliance, and working with individual municipalities to draft microbusiness ordinances. If you would like to talk to an experienced Michigan Cannabis business attorney, contact us today.