By Matthew VanDerbeck, Partner at UHY
According to the Bureau of Labor Statistics, around 70 percent of small businesses fail in the first 10 years. When that small business is in the cannabis sector, the chances of failure are even higher.
As more and more states legalize cannabis for medical and recreational use, more and more entrepreneurs are looking to enter the market. Like all new businesses, though, they face tough challenges. But the nature of the product adds extra levels of complexity, not least because the regulatory landscape is incredibly variable and cannabis is still illegal at the Federal level.
What looks like an appealing opportunity-rich sector at first glance can quickly turn into a tricky area of business. It is not for everyone. But if you wish to establish or invest in a cannabis business, the following key steps will improve your chances of success.
1: Choose your state wisely. Eighteen states plus D.C. have legalized recreational cannabis use. More are in the process of formalizing detailed regulations. But that does not mean that each of these states is the right place for your business.
For most start-ups, state taxes will be a dominant factor in choosing location. While that is still true for cannabis businesses, the really key consideration is licensing. Some states like California have no limits to the number they make available – but that means intense competition and low prices. New York, however, is looking to limit the number of licenses issued, which will ensure better control over production and market volumes and allow for more competitive pricing. But it also means licenses are harder to obtain and makes it almost impossible to vertically integrate production, distribution and sales.
Elsewhere, some states limit what products can be sold in-store; others require applicants to have a specified level of liquid, land or building assets; still others require licenses to be renewed annually. In Maine, license applicants must be residents for four years. In New York, green and social equity initiatives are being integrated into cannabis business regulations.
Whatever the licensing requirements, they will inevitably affect your prices, competition and business growth prospects.
2: Understand the geographical nitty-gritty. Regulations are not just a state-level issue. Cannabis businesses are subject to local zoning and environmental impact plans, and the requirements of individual municipalities. Like it or not, some towns simply do not want cannabis retail in their neighborhood – and have voted it down. In New York, the Office of Cannabis Management is expected to consider both geographical and census information when determining who gets a license, as well as the number of licenses to be issued.
Like state governments, local authorities are walking a very fine line. In Massachusetts, cannabis clusters have developed in certain neighborhoods as they are squeezed out of others. What’s more, communities that are too restrictive run the risk of the illicit market filling the gap. All these considerations will have a very real impact on the future success of your business.
3. Weigh risks and rewards. This is something every entrepreneur has to do, but operating within a highly regulated industry like this comes with above-average cost burdens. You need to be sure that this is something you really want to get into as an entrepreneur. Just because the opportunity is there doesn’t mean that sustainable profits and long-term success will inevitably follow.
You will naturally need sound knowledge of the cannabis business, whether in retail or cultivation, but you will also need the acumen and the know-how to run a business. As an entrepreneur you have to master all these components and make a fully informed decision as to whether the advantages outweigh the disadvantages.
4. Identify success factors. Why are some businesses more successful than others? The evidence is out there, but it may not be on your doorstep and so you will need to leverage the knowledge and experience that exists elsewhere. The growing side of cannabis is incredibly technical, and that knowledge isn’t acquired overnight.
You will need to understand the nuances of the product itself and what will make your offering stand out. You’ll also need to educate yourself about the nuances of the cannabis industry itself.
5. Get connected. States that are currently rolling out recreational licenses are learning from states with a longer history of legalized cannabis who have experienced the challenges of an evolving, maturing market. You can do the same, by learning from business owners in more established cannabis markets like Massachusetts, California, or Colorado.
There is a trend among smart-thinking cannabis entrepreneurs of visiting states with similar regulatory landscapes. There they take tours, speak with successful owners and find out how things like dispensary set-up, size, security and bud stations for showcasing the product actually work in practice.
Find a state that is similar to your chosen location in terms of licensing, demographics, and social equity proposals – in New York that is likely to be Connecticut, Vermont, or New Jersey – and then visit business owners and ask them to walk you through their experience.
6. Get structured. Are you going into cultivation or retail? These are important considerations as there will be hard assets involved – and those business assets, including property, will need to be separate from your personal assets. You’ll also need to connect with the right insurance people to help understand what is and isn’t insurable to make sure you’re protecting yourself against a full range of business and liability risks.
Aside from that, you’ll need substantial cash reserves to secure your license, and a robust credit line to cover early expenses – traditional financial institutions are typically reluctant to make credit lines and working capital available to cannabis businesses, and the industry can attract high interest rates and fees.
You’ll also need business acumen and accounting skills, the capacity to manage compliance and audit requirements – and the ability to identify who you need to hire, when you need to hire them, and how to attract and keep them.
7. Get the right professional support. All of the above means you will need the support of professionals in the field. However, despite the myriad inter and intra-state differences, many banks and other professionals still view the cannabis business through a federal lens. That will almost certainly affect any conversation you have with the professionals who support your business needs. Insurance companies in particular tend to be very hesitant when it comes to the cannabis business. There are some that specialize and are helping entrepreneurs get through the challenges, but finding them can be difficult.
There are also legal professionals with the right experience to help you navigate the regulatory minefield of cannabis retail. There are even attorneys with out-of-state experience who can help you identify the challenges from a legal perspective – starting at licensing and moving on from there.
The good news is that once you find one professional to support your business, they will almost certainly be able to introduce you to others. It’s still a relatively young industry, and participants are learning from each other all the time. That means once you’re in, you are likely to find the network of support that you need.
