The challenges associated with attracting investment in the cannabis industry mean that many new businesses, especially those touching the plant, launch with financing from family and friends. There are real advantages to this model, and a growing body of research has shown that family-owned businesses outperform peers in many financial and operational metrics. For the cannabis industry, some of these advantages are particularly attractive: strong relationships with local communities and regulators, an ability to react quickly to changes, and the patience to ride out turbulence.
For outside investors into family businesses, however, there are hazards to be avoided. A recent cannabis industry case in Michigan illustrates the risks of assuming that a family-run business means good family values.
Bribery and Two Hypothetical Scenarios
In August 2017, brothers Mike and Ali Baydoun and their nephew, Jalal Baydoun were indicted on federal bribery charges in Garden City, Michigan. They allegedly offered $15,000 in cash to local politicians to secure approval for a license to open a dispensary. Prosecutors say they planned to offer town council-members 25% of their future profits, as well as funds to hire a new police officer and vehicle for the city. An additional $150,000 was allegedly set aside for future bribes as needed.
Scenario I: In this case, the Baydouns do not appear to have had any outside investors (yet). But what if they had? Right now, those outside investors would be experiencing the severe legal and reputational consequences of the Baydouns’ alleged corruption. Even if the family is cleared of the charges, it is hard to imagine that anyone implicated in their scheme would be able to win approval for a cannabis dispensary in Michigan, given the state’s political environment. And the reputational consequences wouldn't be limited to Michigan for investors.
Scenario II: The Baydouns’ alleged scheme was caught fairly early, but what if it hadn’t been? In the long-term, it’s unlikely that the Baydouns could have gotten away with such an expensive bribery scheme forever, and the consequences for outside investors would have grown alongside the business. Possible legal liability aside, there would be loss of revenues from an otherwise-successful business, damaged reputations, and loss of respect from regulators. It would be difficult for an investor to shake the appearance of approval of or even collusion in the scheme.
In the cannabis industry, one bad actor can do disproportionate damage to the whole industry: investors have both moral and financial incentives to maintain the integrity of the industry.
Family businesses’ advantages don’t exempt them from the need for good due diligence. When pursuing an investment into a family-owned business, savvy investors need to understand their future partners’ backgrounds and, more importantly their values. Real due diligence should go beyond a basic background check to include insight on topics like business judgment, reputation with regulators, and social media activity. Knowing that your partners’ values match your own is the key to protecting your investment, your reputation, and the cannabis industry.