Risk management is simply the process of anticipating losses and developing a plan to survive them. It is an important part of any successful cannabis business, and an important part of that process is assembling your risk management advisory team. I call them your “dream team” because they can help you make your business dreams come true — and they can help you avoid business nightmares.
The dream team consists of the three A’s: attorney, accountant and agent. If you do not have these people on your team, you are not running your business correctly from a risk-management perspective.
Your attorney helps you with a variety of things, from contracts to legal compliance to hiring and firing. They can help you identify risks of lawsuits, minimize those risks and handle the losses that do occur.
Your accountant can advise you on the status of your cashflow and profits and can ensure that you are in compliance with the very complicated IRS rules and regulations. Do NOT try to do your tax returns yourself. You also need an objective third party reconciling your accounting records. This minimizes embezzlement risk and ensures that a professional job is done. And again, it can help with the identification and management of risks.
Finally, your agent — your insurance agent — can provide you with insurance coverage to pay for the unfortunate losses that do occur. They should also be able to help you with your entire risk-management plan. That agent should be ready, willing and able to help you identify risks of loss.
So you don’t have these people on your team yet? That’s okay. I’m going to give you some practical advice on choosing your dream team members.
Choosing An Attorney
Your attorney is a key player in the success of your business. Open communication is extremely important, says attorney Melissa Roeder, of counsel with Foley & Mansfield in Seattle.
“In selecting a lawyer, you are looking for a partnership. Having someone listen to your goals, understand your business needs, and who will make you a priority are all key to finding the right partner,” Roeder says. “The attorney you select should be more concerned about your bottom line than their own.”
Before choosing your attorney, you should have a consultation to make sure you are comfortable. Most attorneys will offer a complimentary meet-and-greet consultation so you can get to know them.
“Red flags should be waving within the first 10 minutes of an initial meeting if you know more about the attorney than the attorney has taken time to learn about you,” Roeder says.
In other words, a good attorney will have taken the time to learn about your business, at least as much as is publicly available, before they even meet you.
“Trust and rapport are essential,” Roeder says.
Remember, this is the only relationship you will have that is truly confidential. The law guarantees attorney-client confidentiality, so it’s important to feel like you can tell your attorney anything — even the embarrassing stuff.
And last but certainly not least, it is also critical to find an attorney who actually works in and understands the cannabis space.
“You would not see a foot doctor for a heart problem,” Roeder says. So, do not choose a general practice attorney who has no experience working with cannabis businesses.
Be aware that attorneys charge by the hour. Even a quick phone call or answering an email is a billable service. So know what the hourly rates are and make sure you don’t drag out phone conversations and email dialogues. At the same time, be willing to spend the money to get the legal advice you need. Your attorney is critical to keeping your business running smoothly and avoiding legal trouble.
According to Roeder, the bottom line is pretty simple: “A competent and caring attorney who you are comfortable and compatible with will save you money and eliminate problems in the long run.”
Choosing An Accountant
You absolutely need a certified public accountant (CPA). There are, to begin with, thousands of rules in the Infernal — er — Internal Revenue Code. Some rules pertain specifically to cannabis businesses, and someone at a retail tax preparation service probably won’t know those. An amateur bookkeeper certainly won’t know them, either.
A CPA has to know those rules and know them well, and of course, also know ways to minimize your tax liability. So, look for a CPA and do not settle for less.
You should also choose one who is known to have expertise in the cannabis industry. By virtue of operating in the cannabis space, I guarantee you are already an audit target. You want your tax returns to be impeccable and beyond question in terms of thoroughness and accuracy. You also have to realize that there are tax laws that pertain specifically to cannabis businesses, most notably Section 280E, which keeps you from deducting most of your cannabis business expenses. Although this provision is infuriating, it must be diligently followed. Adherence to 280E makes it a lot less likely the IRS will find something wrong with your return. A good CPA will help minimize your tax liability and help you comply with this provision of the law.
CPAs vary in how they charge. I’ve used some before that did not charge to answer questions over the phone and by email. I’ve heard of others that charge by the hour for every communication. Be sure to get clarification from your CPA about their billing practices at the start of the relationship so you understand exactly what your financial responsibility will be.
Choosing an Agent/Broker
Don’t even think about picking an insurance agent off the internet or using the one who insures your personal vehicles. Instead, it is imperative that you find one who specializes in insuring cannabis businesses.
The reason, according to Doug Banfelder, senior producer with the Stratton Agency in Redwood City, California, is that “industry-specific knowledge is vital.”
From the laws governing state programs to flower production cycles to the various extraction methods and the ever-expanding array of finished products, one has to know what the greatest exposures are in order to appropriately manage the client’s risk, Banfelder says.
“There are important differences among the policies being provided in the marijuana industry,” Banfelder says. “Some provide solid coverage, while others contain troubling exclusions.”
As a result, it is important to find someone who really understands the cannabis insurance coverage market.
Most agents will also review leases, a critical, complimentary service. Most leases have insurance requirements in them. It is important to make sure you meet those requirements so have your agent or broker review all lease agreements.
Additionally, it is a good idea to find an agent who takes continuing professional education seriously. This will be denoted by letters after the agent’s name. For instance, you might run across agents with the letters CPCU or AAI after their name. This indicates that they have completed the Chartered Property Casualty Underwriter (CPCU) designation and/or the Accredited Advisor in Insurance (AAI) designation. There are dozens of these designations available, and some are more prestigious than others. The “big ones” for insurance agents include CPCU, AAI and CIC, which stands for Certified Insurance Counselor.
One final note about your insurance agent is that they usually don’t charge by the hour. Their compensation is normally based on the insurance you purchase in the form of a commission. Unless you have them performing extra services, in which case they will be upfront with you about additional charges outside of the insurance premiums paid, picking up the phone and calling them or shooting over an email is typically a no-cost service.
I hope that after reading this you realize the importance of assembling your risk-management dream team. Make sure you get the very best team members you can afford, and then be sure to utilize their expertise.
Brenda Wells, Ph.D. is the Robert F. Bird Distinguished Professor of Risk and Insurance at East Carolina University and the owner of Risk Education Strategies. She has published numerous articles on the risk management implications of cannabis legalization and is a sought-after expert in the risk management and insurance field. She has received the Chartered Property Casualty Underwriter (CPCU) and Accredited Advisor in Insurance (AAI) designations. She can be contacted at email@example.com.