Top 5 Things for Owners/Investors to Consider Before Getting into the Cannabis Industry
Have you been considering investing in the cannabis industry? It is a challenging industry that is regulated differently depending on the location. Regulations vary state to state, and these regulations are a direct impact on the bottom line. The cannabis industry has its own set of specific challenges. If you have been thinking of getting into the industry, here are 5 things you need to consider before making this decision.
1) Money. Do you have 1 million dollars to burn and access to another 2 to 4 million to keep your business going through the first year or two before the business becomes profitable? You’ll need that initial investment of at least 1 million or more just to secure a facility and apply for a business license. Once you have secured the license, you have to set up the facility, stock it, staff it and ensure all aspects of regulatory compliance are met, to pass inspections. Costs vary from state to state, and city to city. States with established markets are just as challenging as states that are new to the market. If you are considering pulling together a group of investors, each individual will be subject to a federal background check, and all their investments will be scrutinized.
2) Location. New markets like Michigan and Ohio have had challenges establishing their Medical Cannabis Programs, which has led to long delays in business being able to open and distribute their product. This is very costly for the business owners, and frustrating for investors. Established markets like Colorado and Oregon have limited availability. For example, new licenses for cannabis dispensary business are not available in Denver, and surrounding cities are not as profitable. In order to have a dispensary facility in Denver, you have to purchase an existing license (and all the issues that come along with it). Oregon’s market has tanked due to an oversupply of product causing wholesale and retail prices to fall far below average prices.
3) 280 E Tax Code. Section 280E of the Internal Revenue Code prohibits businesses associated with “trafficking” of Schedule I or II substances, from deducting otherwise ordinary business expenses from gross income. Because cannabis is defined by the Controlled Substances Act as a scheduled substance, the IRS has applied Section 280E to state-legal cannabis businesses. Here is a simplified example of what this looks like for Cannabis vs Non Cannabis business.
|Non-Cannabis Business||Cannabis Business|
|Cost of Goods Sold||$650,000||$650,000|
|Deductible Business Expenses||$200,000||$0|
|Effective Tax Rate||30%||70%|
4) The Team. What makes your team and your goals different from your competitors? Access to the best and the brightest cannabis industry employees will be a challenge. If you do not have any experience in cannabis cultivation, manufacturing or dispensing, you are going to need a crew of people around you who does. If you do have experience, how are you going to make your team stand out to the regulators who approve the business license? You’ll need a team comprised of cannabis experts and business professionals with experience in business management, financial planning, agriculture, marketing, highly regulated industries, and one hell of an administrative/recordkeeping team. You’ll also need a fantastic legal team.
5) The Product. Generally, and depending on where you decide to set up shop, you will have access to a variety of product to put on the shelves. Markets that have the most variety of products have been the most successful. For example, medical marijuana markets like New York, which has limited products, limited access and do not allow flower form, are not as lucrative as Nevada or Colorado. When recreational markets are introduced, the variety of products increases. Most states with medical and recreational cannabis have different types or strengths of product available to patients and adults over 21. The greater the variety of product, the more potential for revenue. If you are a completely integrated facility that cultivates, processes and sells your own product, that will increase your bottom line, but your customer’s wants may be different from your offerings. Be sure to listen to your consumers, and find out what they want access to in your dispensary.
These are just a few things to consider before you decide to enter into the cannabis industry. Additionally, you may want to discuss your plans with a cannabis business consultant to help you assess the market and determine your best point of entry. There are several groups available and costs and services vary. If you are not familiar with the industry, you’ll need someone on your team with industry experience to help you navigate the dark waters.