The rapidly growing marijuana industry has been described by financial experts as a “once-in-a-generation” investment opportunity. Christopher Carey, an analyst for the Bank of America, believes the weed industry could one day hit peak annual sales of $166 billion globally, with America accounting for approximately one-third of the revenue.
Marijuana Business Daily put 2018 sales in the U.S. at $10 billion. It projects that the industry will grow to over $30 billion by 2024. When you consider that only two nations have fully legalized weed, and around 40 have legalized it medicinally around the world; it is clear that the market has a LOT of growth potential. It is growing at a lightning pace in America even though it isn’t (yet) federally legal.
As is always the case with growth industries, would-be entrepreneurs wade in; hoping to become part of something special. By the end of 2018, an estimated 250,000 people were employed by the marijuana industry. This figure alone suggests that it is becoming a competitive marketplace, but there is far more data to consider.
The number of active licenses for distribution, cultivation, testing, and processing grew from just under 10,000 in January 2018 to over 17,000 by December of that year! Here is a breakdown of the number of licenses in each area by December 2018:
- Testing: 160
- Delivery: 524
- Distributor: 824
- Manufacturer: 2,899
- Dispensary or Retailer: 4,042
- Cultivator: 8,781
The level of competition grows exponentially depending on where you live. For instance, by February 2018, there were over 68,000 cannabis growers in California. As at the end of 2018, there were 167 dispensaries in Portland, Oregon, a city with a population of 650,000 or thereabouts. In other words, there is a dispensary for every 4,000 residents!
Now that you’re aware of the level of competition involved, the next step is to look at the potential difficulties you will face.
Challenges Faced by Marijuana Businesses
There are start-up costs associated with any new business, but they are especially excessive in the marijuana industry. As you saw in the introduction, it is necessary to have a license for every aspect of the niche. Whether you are growing special herbs or selling it to stoners, you must pay for the privilege.
The cost depends on the type of license you seek, along with your state of residence. For instance, anyone looking to open a dispensary in New Jersey must pay $20,000 for a license! Of this huge sum, $2,000 is non-refundable, so if your application is rejected, you only get $18,000 back. In Louisiana, the licensing fee is just $150! In states where medical marijuana is legal, there is usually a non-refundable application fee of $5,000+ just to start a business.
This is only the beginning of your costs. A majority of prospective cannapreneurs don’t make it past the first application step. Their applications are typically rejected because of a lack of start-up capital. If you do make it this far, you have costs such as marketing and equipment. In general, you may need six figures just to get past the first year!
In some states, you must provide proof that you have $1 million+ in cash just to get your dispensary license!
Unfortunately, the 280E clause in the tax code stings marijuana businesses badly. It applies to law-abiding illegal drug traffickers, and weed is a Schedule I drug. As a result, you have to pay an enormous amount of money in tax.
Let’s say your gross revenue is $1 million in a year with $650,000 in goods sold and $350,000 as your gross income. You benefit from no deductible business expenses while your non-cannabis business counterpart gets $200,000 in deductible expenses. Therefore, you are taxed on all of your gross income, whereas the non-weed business is taxed on just $150,000.
In the end, you pay $105,000 in tax at an effective tax rate of 70%. The non-weed business has an effective tax rate of 30% and pays just $45,000.
That’s not all. Back in 2014, a report on the issues faced by recreational marijuana businesses in Washington State was a real eye-opener. All weed products were taxed at a ‘multiple compound rate.’ As a result, there was a 25% tax rate on what a grower sells to a processor, a 25% tax on what a processor sells to a retailer, and another 25% tax on what a retailer sells to a customer!
Once an added 10% sales tax was tacked on, along with city tax and a federal tax of 25%, retailers alone faced 60% tax on the product, and another 30% went to the cost of goods. In the end, the retailer got no more than 5% to run the business!
As marijuana businesses are federally illegal in the United States, there is a severe lack of small business financing available. Federal banking laws ensure that practically no bank will risk dealing with a weed-based business. As well as not being able to get loans, marijuana businesses have to find ways to store their cash since they can’t deposit it in the bank like a typical company!
Making It Past the Maelstrom – What You Need to do to Develop a Successful Marijuana Business
Get a Lawyer
It is wise for any business to have a good lawyer on retainer; this becomes a necessity in the weed industry. Even in legal states, the list of regulations, laws, and statutes is incredibly confusing and needlessly complex.
For instance, all small businesses must keep up with regulations, but they are insane when it comes to the marijuana industry. Federal jurisdiction defers to state jurisdiction when it comes to weed, but as businesses are legal on a state by state basis, the documentation and licensing requirements vary.
Aside from the fees, taxes, licensing and permits necessary, you also face the usual small business issues such as tax paperwork, looking at copyrights and trademarks, and all the other associated headaches. Find yourself an attorney that specializes in marijuana and make your life easier!
Find Your Niche – Unique is Good
If you don’t want to compete with established retailers, dispensaries, and growers, you’ll need to think outside the box. Joel Schneider is from Colorado but worked as a lawyer in Wall Street for decades. Rather than trying to go up against the litany of well-known marijuana businesses in the state, he did something very different.
Schneider opened a marijuana-friendly hotel called Bud and Breakfast. It is a high-class establishment regularly frequented by celebrities. His initial foray into the market was so successful that he has expanded to create two new hotels. His annual revenue is well over $1 million and growing each year.
The sad reality is that you’ll need a LOT of capital if you want to enter the industry as a retailer. It is easy to look at huge dispensaries in Colorado and California and be envious at their enormous revenue. What you don’t consider is the level of taxation they pay, along with the difficulties in finding a banking partner, and the substantial start-up costs.
Instead, it is best to follow the lead of Schneider, who is not alone in developing a chain of weed-friendly hotels and bed & breakfasts. Ancillary marijuana businesses don’t have the same issues with high taxation and legal red tape.
Therefore, ideas for getting involved in the marijuana industry can include selling products for growing weed, educating consumers and cultivators, or creating a brand-new technology with a marijuana focus. Think about those sophisticated new vaporizers as an example.
Who is Your Customer Base?
After coming up with your idea, the next step is to focus on who is likely to benefit. Aside from knowing and understanding the challenges faced by those in the industry, you must also fulfill the needs of your customer base. What kind of people want your marijuana-themed clothing? Can you fill enough rooms in your bud and breakfast to make a serious profit?
This is where marketing comes in. Your goal should be to perform a detailed analysis of future customers to ensure you will provide them with a product/service that keeps them happy. Without establishing an authentic relationship with your local marijuana community, the chances of creating a successful enterprise are slim.
By now, you should realize that banks will slam the door in your face. As a result, you can forget about going down the traditional business loan. Venture capitalists could be your ‘angels’ but convincing them to part with their cash is another story entirely. There are specific websites dedicated to informing readers about likely investors who are passionate about marijuana.
In the early days, it was entirely possible to ‘bootstrap’ a start-up in the marijuana industry. Today, you need to be smarter by raising money from investors who offer expertise from other industries. Look at the most successful marijuana brands out there. If they weren’t experts when they formed their respective firms, they most certainly are now.
Finding capital involves developing a sound business plan. It should outline your market strategy, take a look at the competition, financial goals, challenges, and include a development plan of sorts. Also, don’t be afraid to get in touch with leaders in your specific niche. Some of them may be willing to offer advice about your plan.
Final Thoughts on Starting a Marijuana Business
Regardless of the niche you choose, starting a marijuana business is hard work. Whether you are paying exorbitant taxes, trying to gather enough start-up capital, understanding the different regulations, or competing against well-established enterprises, the road to becoming a marijuana millionaire is long and paved with obstacles.
For those who have navigated these hurdles, it is often a labor of love, and this love of weed is what helps them get through. Successful cannapreneurs work incredibly hard and refuse to take ‘no’ for an answer. The key, and arguably the biggest challenge, to forming a successful marijuana business, is finding ample start-up capital. If you can succeed in this formidable task, the path to success becomes a little clearer; just make sure you hire an attorney who is knowledgeable about the industry!
If all of the above seems like too much to accomplish, you can still earn money in the marijuana industry. There are hundreds of thousands of jobs with many more sure to be created. You can become a store manager, edibles chef, budtender, harvester, delivery person, or website manager.
For the record, the role of Cannabis Extraction Technician is one of the most lucrative at $125,000 per annum. This individual separates the cannabinoid-rich trichomes from cannabis flowers. Failing that, you can create your own role as Joel Schneider did. Perhaps the future lies not in retailing or growing, but in marijuana businesses that are free from the twin yolks of high taxation and enough red tape to fill the Grand Canyon?