Bankruptcy Alternatives for Struggling Michigan Cannabis Businesses

Since the Michigan Regulation and Taxation of Marihuana Act legalized the adult recreational use of cannabis, the industry has expanded exponentially. In 2022, Michigan recorded $2.3 billion in cannabis sales, making the state’s cannabis industry second only to California. However, the price of cannabis has fallen dramatically, which has reduced profits for many growers and dispensaries.

Why Are Some Michigan Cannabis Businesses Failing?

The success of any business depends on many factors. Failure to correctly file required records, financial statements, and other documentation can lead to significant fines. Navigating constantly evolving local and state cannabis regulations is costly and time-consuming. Inadequate startup capital, poor management, bad business decisions, lawsuits, and other circumstances can derail even the largest cannabis organizations.

A recent example is Skymint, with over 600 employees at 24 retail dispensaries and three indoor grow operations around Michigan. The company grew quickly and took on significant debt; when the value of cannabis plunged, so did Skymint’s profits. Two of its largest investors have filed suit against the business to collect debts the company has been unable to pay.

Options for Struggling Cannabis Businesses

Because cannabis remains illegal under federal law, cannabis businesses face the additional burdens of being unable to use traditional banks and financial institutions. If their finances take a turn for the worse, obtaining a business loan or other infusion of capital can be challenging. Also, they can’t file for a Chapter 7 liquidation or Chapter 11 reorganization under federal bankruptcy laws.

One alternative for Michigan cannabis businesses that are in financial trouble is a court-appointed receiver. This process is similar to how a trustee operates in bankruptcy proceedings. A Michigan state court appoints an unbiased third party to take control of a company’s operations and finances; the receiver then recommends to the court the best way for the business to satisfy its outstanding creditors. This process can involve a reorganization, in which debts are negotiated or restructured, or a total liquidation and distribution of assets to creditors.

Because Michigan’s local licensing laws and regulations vary so much, it can be difficult to reorganize cannabis-related companies like Skymint with multiple locations effectively. However, a receiver may be able to pull a smaller cannabis business out of a financial slump and help it restructure for future success.

Preventing Financial Hardships

One of the best ways to avoid financial difficulty is to ensure your business is well-organized, efficient, and compliant with all licensing and reporting requirements. The Michigan Cannabis Regulatory Agency (CRA) maintains a Business Resource Directory that includes financial advisors, mentors, and consultants specializing in cannabis businesses. The CRA also has resources to help struggling companies connect with cannabis-friendly lenders and alternate funding sources. Cannabis-related charity organizations like Detroit’s Clean Smoke Community Investment Project can also help small business owners find needed capital.

Creating a well-organized, comprehensive business plan can help improve the chances of success for your Michigan cannabis business. A business consultant can help you create a business plan at the outset; they can also provide valuable insight into ongoing business operations and ways you can improve.

A knowledgeable cannabis business attorney is another valuable resource. They can ensure you understand and comply with state and local regulations, maintain the correct documentation, and comply with all legal formalities. They can help advise you on workplace safety, wage and hour, and other employment issues to avoid lawsuits and complaints.

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