Nothing saps busiiness profitability like theft. Whether it takes the form of shoplifting or employee theft, the loss comes straight off the bottom line. Most dispensaries I have seen are set up to minimize losses to customers. Product is generally kept behind the counter in sealed containers and only taken out and weighed by the salesman. Video cameras required by the CMMC monitor activities in the MMC for the benefit of the MMED and the business owner.

Theft by employees can be more problematic. In theory, the same video surveillance of MMC’s will deter or catch employee pilfering product. Of course the videos must actually be watched by the business owner to do any good. Growers may also take product. As they are working so closely with the plants (watering, testing, pruning, trimming and drying), there are many opportunities for product to end up in their pockets. In large facilities, it may be impossible to watch all of the employees all the time. To minimize the risk, a few businesses require their growers to change clothing before tending the plants or to be checked before they leave the facility. Most do not like the gestapo atmosphere that this creates, and just take their chances.

In MMC’s, employees have other opportunities to steal from the business. Money from customers that doesn’t make it into the till is a problem. Money that pays inflated invoices or bills for product or services that the business never receives is lost forever. Describing the problem suggests the solution: good controls over the cash and good bookkeeping systems are a must. There should always be at least two people involved in any aspect of the business’s money. The person who writes checks should not be the only one signing them. The bank statements should be reconciled by somebody other than the person who wrote the checks. Money should be counted with two people present.

I suggest vigilance by the owner to see if there is a theft problem. If a problem is detected or suspected, management consultants or CPA’s can be brought in to review procedures and make recommendations to reduce it.

Nearly two years ago, when the Colorado Medical Marijuana Code (CMMC) went into effect requiring dispensaries to grow 70% of their own product, “arranged marriages” of growers and dispensary owners mushroomed—with their “offspring” being the plants.

However, just as arranged marriages often pair ill-suited couples, so have many medical marijuana partners “gotten married” for convenience—later discovering that the arrangement was a bad idea.

Without much discussion, many dispensaries agreed to pay the grower a per pound wholesale price for each crop, with the MMC making its money by selling the product at retail prices. Treating the MMC and the OPC as separate businesses, each paid its own operational costs. As long as goodwill and a healthy marketplace prevailed, the partnership worked. In many cases, this arrangement broke down quickly.

Some growers took or destroyed plants when they left the business. Some dispensaries locked out growers, claiming the plants belonged to them.

As anyone knows, it’s much harder to negotiate a mutually agreeable resolution after parties are in conflict. The best course of action would be to negotiate a partnership “pre-nup” that clearly defines who gets the plants or owns the DNA.

While developing this agreement can get complicated, start with common-sense “scenario setting.” Think about any potential development that alters or ends the relationship, and what happens to plants in the event one of these scenarios occurs. Among the questions to address and then capture in a written document are:

1. What happens if a government or regulatory agency shuts down the operation?
2. How do you handle financial insolvency occurring on either or both sides of the partnership?
3. What buy-sell provisions kick in if either party wants out of the partnership?
4. What happens in the event of disability or death of either partner?
5. What monetary formula will be used to determine value of the crops in the event something happens that might alter their ownership?
6. Will there be thresholds that cause ownership provisions to change in any way (e.g., length of time in partnership, financial benchmarks, other operational growth metrics)?
7. What occurs if there is a catastrophic loss such as fire, flood, or storm damage?
8. What legal process should be used in the event of a disagreement that cannot be resolved between the parties—arbitration, mediation, use of/payment for attorneys?

As in the early stages of romantic courtship, MMJ businesses often believe everything will go smoothly, and that disagreements will be resolved amicably. Still, it’s better to have an agreement and not need it than not to have one and wind up in emotional and economic turmoil.

The other shoe has finally dropped. It has been rumored for weeks that Colorado U.S. Attorney John Walsh would be sending another round of letters demanding the closure of MMC’s located too close to schools. Last week it happened.

This follows a letter from Walsh to Boulder D.A. Stan Garnett, in which Walsh explains that he intends to close all MMC’s in Colorado located within 1000 feet of a school. Never mind that the Colorado Medical Marijuana Code (CMMC) allows municipalities and counties to make a final determination on whether to change or even enforce the distance requirement in the CMMC. Mr. Walsh states, “To be clear, this program is not at the direction of Washington, D.C., but at my direction as U.S. Attorney and as a Coloradan, exercising the discretion that the Department of Justice has left local U.S. Attorneys to take local circumstances into account in determining how best to address the enforcement of federal laws against marijuana trafficking.”

Although it is clear that the Feds have the authority to enforce federal criminal law regarding marijuana, without regard to state law, the only rationale offered by Walsh is that there have been reports of increased marijuana usage by “children and young people” since the CMMC was passed. The link between the proximity of MMC’s to schools and the increased usage is not explained and is not immediately apparent.

I haven’t been able to find out which dispensaries closed after the February letters went out or which ones received letters this time. If anybody knows, please post it on this blog.

A threatening letter from the U.S. Attorney gets attention. Twenty-three letters get the attention of an entire industry. The U.S. Attorney recently wrote to 23 medical marijuana facilities in Colorado, threatening to shut them down for being too close to schools. The Colorado Medical Marijuana Code sets a default minimum distance of 1000 feet from schools, child care facilities and drug and alcohol treatment facilities. However, by allowing cities to alter or eliminate both the distance restriction and the type of facilities it applies to, the CMMC anticipates that enforcement be left to municipalities.

The U.S. Justice Department has always had authority to threaten, close, and prosecute MMJ facility owners. It has stated it would give facilities operating within the laws of their state the lowest priority on their to-do lists and up until now, the Feds had let local authorities determine who was or was not operating within the law. Now it appears that the U.S. Attorney has taken it upon himself to examine each facility’s compliance with Colorado law. It is hard to escape the conclusion that Colorado’s U.S. Attorney either doesn’t like medical marijuana, or is trying to create uncertainty and confusion in the industry. Stay tuned.

It is hard to imagine any organization of more than one person operating well without clearly-defined positions and lines of authority. People do not magically know what they should be doing and how it jibes with the efforts of others. Somebody needs to be in control, or nobody is in control. I have one corporate MMJ client with several owners. Two have business experience, three are growers, and another two just like anything to do with marijuana. The growers don’t pay much attention to how the dispensary (MMC) is run, and the MMC managers don’t communicate well with the growers as to how much the MMC can sell, and which strains are in the most demand.

And this is the least of it. Who figures out staffing hours, priority and timing for payment of bills? Who drafts the marketing plan and decides how much to spend on marketing? Who picks the accounting system? Who should be hired (if anybody) to help with the matters that require outside expertise? Should an MMJ grower be able to buy the most expensive equipment when the dispensary has minimal sales? Who decides what species to plant? How will the decisions be made as to ultimate size of the enterprise, location of retail shops, whether a proposed lease is a good deal or a bad deal?

Who decides whether to sell the entire business? Can any single owner veto a proposed sale, even if everybody else wants the deal?

There are many people involved in MMJ businesses who probably never planned to be at the helm of a legitimate business with tens of thousands of dollars in monthly cash flow, who now find themselves in exactly that position. Without a well thought-out organizational structure, they look a lot like a chicken with its head cut off.

A client with a manufacturing/sales business recently told me he was thinking of getting into the MMJ industry because he was looking for a change, his family has a farming background, and it wouldn’t cost much. While I can’t argue with the first two reasons, I begged him to sit down with me to talk about the third reason before he did anything else. I haven’t seen a single client in this industry who has come close to estimating the cost of opening their MMJ business.

Colorado’s climate means that virtually all of the grow centers (OPC’s) must be indoors, whether as a greenhouse operation or with grow lights. The costs of setting up temperature and humidity control, together with the increased electrical requirements, are huge. Disease and pest control measures add to the cost, as does the paying of growers who have the specialized knowledge to grow the strains of marijuana that have become the industry norm. And that doesn’t include the cost of regulatory compliance and licensing fees. Dispensaries (MMC’s) face many of the same costs.

Money was easy to come by in 2010, as everybody thought they could get rich quick by throwing money at the industry. As the costs mounted, some kept feeding the beast, while others had to radically rethink and pare down their business plans. Some desperately sought additional funds, while others gave up and closed their doors.

Failure to accurately project the costs and cash flow of a start-up business is a problem that has plagued owners in industries having nothing to do with MMJ. Given the virtual impossibility of tapping into traditional lending sources, owners of MMJ businesses must get this down if they want to have a chance at success, and there are business professionals who can help with this. This should be top priority, both in time and importance, for all businesses.

When everybody’s in charge, nobody’s in charge.

After the Colorado Medical Marijuana Code (HB-1284) passed, growers and dispensary owners enthusiastically joined hands and jumped into the new Colorado Medical Marijuana industry together, many believing that the spirit of the industry called upon them to run the business like a commune. Everybody would pitch in with his/her particular skills whenever a need was spotted. Everything would work out beautifully because everybody wanted the business to succeed.

That initial high didn’t take long to fade. One person arriving late and leaving early every day would leave the others feeling used and under-appreciated. One who asked another to do something for the good of the business would just come off as bossy. Strongly held beliefs could make compromise impossible, leaving challenges unresolved and progress stalemated.

Some of these marriages are already in “divorce court” battling for custody of the plants and DNA. In some cases, the grower just took the plants or destroyed them when leaving the business. In other cases, the dispensary locked out the grower, taking control of the plants that the grower had planted and tended, claiming they belong to the business.

Conflict cannot be completely avoided, but setting out expectations clearly and specifically can help your business deal with inevitable human conflicts. Authority must be coupled with responsibility. Consequences must be spelled out. Any business has a greater chance of succeeding when expectations are set from the beginning. A “pre-nup,” setting forth who owns the plants or the DNA, may have prevented these divorces from turning so ugly and expensive. It is hard to overstress the importance of discussing business matters in the beginning of a relationship, and putting the agreement in writing.

Limited liability companies (the form of entity adopted by most MMJ businesses) are governed by operating agreements. You can get an operating agreement form online, but doing so misses the point entirely. The operating agreement should reflect the business structure that works best for the parties involved and their specific situation. If you haven’t had these discussions already, do it ASAP. Once you get at odds over an issue, only the lawyers win.