So you want to start a marijuana business? I get it. It’s a booming industry, and it’s only growing.
This guide will walk you through how to start a marijuana business. But first, let’s look at why there’s such a big opportunity here.
These days, it seems like everyone and their sister wants to start a marijuana business. And no wonder: Legal cannabis sales in North America areexpected to top $20 billion by 2021, andexceed $47 billion by 2027.
Today, recreational marijuana islegal in 11 states, and medical marijuana is available in 33. The majority of Americans now live in states where cannabis is legal in some form.
Canada, meanwhile, has legalized recreational marijuana across the country. Many wonder when the United States will follow suit.
As mainstream attitudes shift,some experts predict that cannabis could soon displace alcohol — especially among millennials. The potential windfall has attracted investors and entrepreneurs from nearly every sector of the economy.
Plus, cannabis entrepreneurs are helping to shape a new industry — one that actually helps people. Who wouldn’t want to be part of that?
With all these heady predictions, you might be tempted to dive right in. But first, let’s cover the basics, so you can avoid unrealistic expectations.
In fact, in most states, it’s illegal to consume marijuana at licensed cannabis facilities. And even if youare growing wholesale marijuana, that requires licenses, fees, taxes, financing, and a great deal of paperwork — all of which is probably best left to people who are not stoned.
Operating a successful cannabis business also requires up-to-date legal expertise. Many companies don’t just retain expert legal counsel; they also employ full-time “compliance officers” to keep up with the ever-changing laws.
If regulatory compliance isn’t something you want to think about on a daily basis, starting a marijuana business may not be right for you. Marijuana is regulated more strictly than alcohol, tobacco, and even firearms. (In some states, cannabis isregulated more strictly than fissile plutonium.)
In the cannabis industry, one regulatory infraction can shutter an entire company for good. Sting operations are not uncommon.
If all of this sounds like a turn-off, but you still dream of working in cannabis, don’t worry: you could start anancillary business. These companies, which don’t “touch” the marijuana plant, encounter far fewer compliance-related headaches. (We’ll break down the different types of marijuana businesses later in this article.)
Also, if you expect to be rolling in profits the second you open your doors, you may want to think again. Thanks to high tax rates and fierce competition, cannabis can be less profitable than you might expect. (Longtime cannabis growers often curse legalization, recalling their glory days on the black market.)
Today, many would-be entrepreneurs face tough barriers, including access to capital and adequate real estate. Increasingly, successful founders are those with more experience in the corporate boardroom than the grow room.
In an increasingly crowded industry, those best poised to weather these storms are often those with the deepest pockets — or those who can afford to lose money the longest.
First, you’ll need to decide what sort of marijuana business to start.
Let’s break these into two major categories:
The licensed marijuana businesses are those that “touch” the marijuana plant, at some point on its journey to the consumer. These types of businesses include cultivation facilities, facilities that manufacture infused products, and dispensaries.
(Some states also include a fourth license category for companies that distribute or deliver cannabis products.)
As we explained above, starting one of these licensed marijuana businesses involves significant regulatory hurdles.
It also involves significant start-up costs.
For example, depending on where you’re applying for a business license, the application fee alone can cost tens of thousands of dollars. (This application fee is non-refundable, and will be forfeited regardless of whether your application is approved.)
An important question to ask yourself in deciding whether (and where) to start a marijuana business is:How much money am I willing to lose immediately?
It’s not just the non-refundable application fee.
If you want to submit an application that has a decent shot at winning state approval, you may need to hire a consultant — or even a team of consultants — to assist you with the application process. These consultants aren’t cheap. They, too, can cost tens of thousands of dollars. (They may even try to negotiate an equity stake in your new company.)
These consulting groups are usually founded by successful cannabis entrepreneurs from early-adopter states (like Colorado, California, Washington, or Oregon) who are happy to share their expertise with less-experienced cannabis entrepreneurs. Those with successful track records of winning business licenses can charge a premium, especially in states like Connecticut and Illinois, where licenses are limited to a predetermined cap — and competition for licenses is fierce.
Tips on Hiring Cannabis Industry Consultants
If you’re hiring a consulting group, make sure you research them carefully.
The unregulated world of self-appointed “consultants” does include many successful, thoughtful experts who can be indispensable to your venture.
But it also includes failed entrepreneurs and hustlers taking a shot in the dark. Make sure you do your due diligence, and ask questions about their background, before hiring any consultants.
The consultants are part of the broad world of “ancillary services.”
Ancillary companies are those that provide goods or services to the industry.
In addition to consulting, ancillary services can include security detail (helpful in a cash-heavy industry), cannabis inventory tracking software (required and monitored by law enforcement in most states), electrical and HVAC installation, and cannabis-specific job recruiters and temp agencies. Ancillary companies could also provide goods like packaging supplies,grow tents,grow lights,nutrients, extraction equipment, or surveillance cameras (which are required in licensed cannabis facilities).
Ancillary companies, which don’t “touch” the marijuana directly, are not bound to the strict compliance measures of licensed cannabis companies. They don’t have to apply for state or local licences.
So if you don’t have access to hundreds of thousands of dollars in start-up capital, you may want to start an ancillary business.
But if you’ve read this far, and you still want to start a licensed cannabis company, you’ll need to choose which type of cannabis business license to pursue.
There are three main types of cannabis business licenses:
Some states also offer additional licenses for transport companies — while other states don’t allow cannabis delivery companies at all. Other states offer licenses for testing laboratories, which test cannabis for potency and potential contaminants like pesticides and heavy metals.
The application requirements for these types of businesses — and the likelihood of actually getting one of these licenses — varies widely by state. In some states, the window for accepting applications has closed, and it’s unclear when (or if) more licenses will become available.
(But determined entrepreneurs, take note: That doesn’t necessarily mean those states are off-limits. In some cases, these licenses can be bought and sold, and transferred to new licensees, pending state approval.)
Your decision about which type of marijuana business to start — and where — will likely depend on which types of licenses are available to you. This, in turn, depends on your access to capital. Different states and different types of licenses have different requirements.
Want to start a cannabis cultivation facility in Pennsylvania? Those applicants had to shell out a $10,000 initial fee and a $200,000 permit fee. They also had to provide proof of $2 million in capital, of which a half million dollars had to be readily available in their financial institution.
Real Estate is an Issue for Marijuana Businesses
If you’ve found a way to meet the capital requirements, you’ll need to see what kind of real estate is available.
Most states will not approve licenses until the business location had met all the requirements for that type of business, and, after all necessary construction and modification, been granted a Certificate of Occupancy. This isn’t always feasible for the kind of business you have in mind.
For example, if you’re trying to start a dispensary, but you can’t find any retail-zoned properties that aren’t too close to a school or daycare, you’re out of luck. (This radius between schools and marijuana businesses is usually determined by local regulations.) You won’t even get past the application phase — and you should probably fire your consultants.
If your real estate landscape is brimming with possibilities, it’s time to consider the profitability — and desirability — of different cannabis businesses. Would you rather grow cannabis, or sell it to consumers?
You should give this question some thought.
Unless you’re in Arizona, where the correct answer is “both.” (In Arizona, the law of “vertical integration” still governs cannabis companies: To own a grow facility, you must also own a dispensary. Vertical integration is allowed in other states, like California, and prohibited in other states, like Washington.)
All these different business models have different profit potentials, and it can be hard to get a straight answer on their profitability. According to the2016 Marijuana Business Factbook, compiled by leading industry publication theMarijuana Business Daily, nearly 90% of marijuana businesses are profitable “or at least breaking even.”
But their analysis relies on self-reported data. And marijuana business owners tend to “self-report” pretty generously. (Also, their weed is the best weed ever grown in the history of the world.)
Also, the Marijuana Business Factbook admittedly did not include data from the marijuana businesses that had already folded.
The analysis by theMarijuana Business Dailystaff notes that cultivation facilities and infused products manufacturers report more profitability than the stores.
But thisMarijuana Business Dailyanalysis doesn’t quite tell the whole story. There’s another reason dispensaries may appear less profitable than their counterparts in production facilities:Dispensaries are often taxed at higher rates than other kinds of licensed cannabis businesses.
Thanks to an obscure section of the U.S. Tax Code, dispensaries can’t write off expenses. Section 280E stipulates that you can’t deduct any expenses related to distributing a federally controlled substance — and marijuana is still federally prohibited, according to the Controlled Substances Act.
That means dispensary owners can’t deduct normal business expenses, like rent, wages, and upkeep.
However, marijuana businessesareallowed to write off the cost of goods sold. The costs of growing marijuana — which are not directly tied to “distributing” a controlled substance — can be deducted normally. That means grow facilities can deduct expenses, while dispensaries cannot. So cultivation and processing facilities face a much lower tax burden than dispensaries.
Of course, that doesn’t necessarily mean that cultivation facilities are raking it in, either. They pay different taxes, often referred to as “excise taxes,” on any product that leaves their facility. These rates vary by state and municipality.
And companies that grow wholesale cannabis are subject to another challenge that may affect their profitability: price volatility.
If you decide you want to start a cannabis cultivation facility, keep in mind that writing a realistic business plan will be difficult — particularly if you’re entering a newer market, where medical or recreational cannabis has been legalized only recently.
Because cannabis harvests can’t legally cross state lines, each state’s cannabis supply is determined by how many cultivation licenses were awarded, and how many plants each facility is permitted to grow.
In states where barriers to entry are low (like Oregon, which has some of the lowest capital requirements and license fees), the market has been flooded with wholesale product.
Oregon’s oversupply problem has made national headlines. With more pounds of cannabis than its residents could even consume in years, wholesale prices have plummeted. Cultivators, unable to recoup their investment, have folded — or turned to the black market.
These wholesale price wars are less common in states with higher barriers to entry. When a state only awards a few grow licenses (like in Connecticut), the market is less likely to be flooded with an oversupply of product. Wholesale prices in these states tend to remain more stable in these states, and grow facilities can generate more profits.
When writing your business plan, you’ll want to explore how your business could fit into — and differentiate itself from — the existing cannabusiness landscape.
First, you’ll need to make sure your intended product or service is legal. For example, delivery services are only allowed in certain states, like California.
You’ll also need to make sure your intended business venture is feasible. Are any licenses available? Can you afford the license application fee in this state? Can you meet the proof-of-capital requirements in this state?
Once you’ve got these basics covered, you’ll want to make sure your product — or your store’s inventory — appeals to your customer base.
Knowing your customer is crucial. For example, if your dispensary is located in a lower-income neighborhood, you may want to carry more budget-friendly options.
You can also try to differentiate yourself with innovativebranding.
For example, some cultivators try to build a brand story that establishes them as a “boutique” cannabis brand. If you have health-conscious customers, for example, it can be helpful to highlight that your cannabis is organic, or “pesticide-free,” or soil-grown, or “sun-grown.”
Your branding could be even more specific. You could follow the lead of some CBD companies, and sell “glyphosate-free” cannabis. (Glyphosate is a toxic pesticide found on most agricultural products.)
Try to learn aboutwhat your customers want.
If your customers are interested inregenerative agriculture, for example, they’ll probably pay a premium forbiodynamic cannabis. (Of course, you’ll need to check the regulations to find out whether you can call your product organic or biodynamic, without running afoul of any laws.)
Other marijuana producers try to build a cult following around certain cannabis strains, which they provide exclusively to select dispensary partners. (They often advertise to their social media followers which dispensaries are carrying their sought-after strains.)
If you discover that cannabis branding is where you can excel, you may want to find a cannabis company that offers “white labeling.” Some cannabis companies will produce infused products and cannabis to be sold under another brand name. If you want to focus more on your branding, and less on production and compliance, this kind of “white labeling” partnership could be perfect for you.
On the other hand, if you know branding isnotyour thing, don’t worry: Cannabis marketing firms abound. You can easily outsource the branding to experts, and focus on growing or manufacturing your product.
But branding has its limitations.
For cultivators, branding is only effective if you sell your cannabis to dispensaries already pre-packaged, or if the dispensaries agree to display your branding alongside your product. (If the dispensary staff simply dumps your product into a glass jar and sticks it on the shelf, your social media presence isn’t going to drive any sales: Nobody will know who grew that strain.)
Manufacturers of infused products, meanwhile, have been able to leverage branding and marketing campaigns more effectively than growers. Edibles and concentrates are swaddled in layers of child-proof packaging, as required by state and local regulations.
All this packaging provides more built-in branding opportunities.
As we’ve explained, marijuana businesses require significant start-up costs.
These costs can vary widely depending on the state where your business will be located, but you can expect to spend at least $5,000 on your non-refundable application fees.
But you might have to spend $100,000. Every year. (That’s theannual cultivation license fees in Arkansas and Illinois. In Connecticut and Hawaii, that annual fee is $75,000.) For more information, check outthis guide provided by theCannabis Business Times,which breaks down the license fees state-by-state.
Many states require proof of at least $1 million in liquid funds. Some states require you to prove you have upwards of $2 million.
Does this sound exclusive?
Historically, requiring people to have a million dollars has been an exclusive practice. And in the marijuana industry, this practice (combined with other policies) has led to an industry that is almost exclusively white,according to a Buzzfeed investigation. In recent years, some activists have pointed out this irony: the communities most hurt by marijuana prohibitionaren’t the ones benefiting from its legalization.
Recognizing this, states like Massachusetts and cities like Oakland, California have experimented with ways to prioritize business applications from minorities and groups hurt by marijuana prohibition. (Activists point out that more could be done in every state.) For more information, check out the resources at the bottom of the page.
Don’t have a million dollars in the bank?
You may be out of luck. Institutional investors remain wary of investing in what they still see as a turbulent industry. And you can’t exactly apply for a traditional business loan at a bank. (Since cannabis is still federally illegal, most banks won’t work with marijuana companies. That’s another thing to consider in your business plan: non-traditional banking services, and cash management and transport.)
If you can’t afford your state’s license fees or capital requirements, you have a couple options. You could pivot to an ancillary business, which does not require a license. (Start that cannabis marketing agency!)
It’s much easier for ancillary businesses to secure funding. Because they don’t “touch” the plant, investors see these ventures as inherently less risky. You can even apply to cannabis-specific business incubators, which provide funding to ancillary start-ups in exchange for equity in their fledgling business.
Or you could choose to start a marijuana business in states with lower application fees (like Oregon). But in these states, with lower barriers to entry, you’ll be entering a crowded market, and will face more price competition. Your profit margins may be lower.
Despite all these obstacles, many marijuana businesses do succeed. Why not yours?
You’ll need smart people, adequate funding, and an unrelenting focus on regulatory compliance.
Here are some helpful resources:
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