The cannabis industry is one of the fastest-growing sectors in Michigan. It’s also an ever-changing industry, leading to myriad challenges for businesses operating within this space. One issue licensees face is a significant gap in vital business intelligence that’s needed to remain relevant in an extremely competitive market.
To help fill this gap, Rehmann partnered with A&K Research, Inc. of Northville, Mich. to survey cannabis operations within the state and to create the 2022 Michigan Cannabis CFO Outlook. As one of the leading professional advisory firms serving the cannabis industry in Michigan, Rehmann spearheaded this project to help cannabis licensees make empowered business decisions based on peer feedback.
The 2022 Michigan Cannabis CFO Outlook shares findings from the survey, including top challenges the cannabis industry faces in Michigan. Top-of-mind concerns: managing the financial side of the business; deciding whether it’s time to sell the business and how best to go about it; staying on top of compliance requirements; navigating federal legislation and resulting tax burdens; and understanding potential changes in lending laws that impact relationships between banking institutions and legitimate cannabis-related businesses.
In addition, this report features industry spotlights highlighting current cannabis businesses facing these issues in real-time. They share how they’re navigating this ever-evolving industry and economic landscape.
Michigan Marijuana Sales
Just how quickly is this industry growing? Michigan saw $21 million in medical cannabis sales and $188 million adult-use marijuana purchases in July 2022 – a total that is about $15 million greater than the previous monthly record set in April 2022. Most of the marijuana sales for both medical and recreational use were for flower products, followed by vape cartridges. Data also shows a continuation of a sales trend in Michigan’s marijuana market, with medical cannabis purchases decreasing and adult-use sales increasing.
Report Takeaways
Here’s a snapshot of report insights and some of our takeaways.
Tax and M&A Activity
- 39% of companies are considering or are in the process of selling their business. This could be due to the current challenges of operating within the Michigan cannabis market or for a variety of other reasons. Many licensees are entrepreneurs who enjoyed starting and growing the business from the ground up and are ready to move on.
- Half of the companies are paying an effective tax rate between 20% and 30%. One in five currently show a loss from operations. This was surprisingly much lower than we expected. It’s not uncommon to see tax rates of over 50% within the industry depending on where the business falls in the vertical chain and how aggressive you can be with your structure or costing model.
Cannabis Business Operations
- Just over one-quarter (28%) of businesses have been subject to some level of federal, state, or reporting audits. The industry is still young, and as we continue to look at this data year over year, we expect this number to drastically increase. It’s important to have your finances in order to be prepared for that time to come.
- Almost two-thirds (65%) use QuickBooks for their accounting system, with the remainder being dispersed between Sage, SAP, Dynamics, and Xero. Accounting for the cannabis industry can be extremely complex. Many cannabis businesses started with QuickBooks and are now outgrowing that system and ready for more powerful systems to meet their unique needs.
Perceptions of the Current Michigan Cannabis Industry
- The majority (56%) expect retail pricing needing another 1-3 years to stabilize. One of the biggest concerns within the industry is pricing of cannabis. We’ve seen a significant drop in retail pricing over the past several years and there is concern that it may drop even more.
- Nearly half (42%) think that between 26% and 50% of wholesalers are losing money at current retail prices. Given the struggles with pricing, growers who are selling wholesale are facing a lot of challenges at this point. As more and more operations start up within Michigan (a state without a license cap), the market continues to move toward oversaturation.
What some of the survey respondents had to say about the state of the industry:
“As a small-sized grower focusing on high-end quality, we are impacted greatly by falling retail prices. The rampant increase in licenses/grows caused a glut in the market that has yet to subside. We are focusing all our efforts on lowering costs to keep up with falling prices.” [Grower]
“The industry is currently in a very fragile state. The testing numbers are overinflated for potency, customers are going back to the black market and the current pricing is not sustainable. In addition, new businesses for all areas are opening and believe there is enough capacity for everyone to make money.” [Testing Facility]
“If 280E would go away, things would be much better. Limited licensing for cultivation and processing would also help.” [Grower, Processor & Provisioning Center / Retailer]
Article orginally written for the National Cannabis Industry Association.