A Complete Step-By-Step Guide To Successfully Starting A Cannabis Business
Cannabis is steadily becoming a mainstream industry. Entrepreneurs and investors are placing vast amounts of money into this newly legal, multi-billion-dollar portion of the market because of its massive growth potential and outstanding ROI.
It was only in 2012 when recreational marijuana, also known as adult-use marijuana, became legalized. Washington and Colorado were the first two states to legalize cannabis for recreational use. It was regulated in a similar way to alcohol, allowing possession for adults above 21-years of age but only to a limited amount. Almost a decade later, 35 states have already permitted marijuana for medical use, while 11 states have made it legal for recreational purposes.
A Multi-Billion Dollar Industry
What the industry has to offer is divided into major components: Medical Marijuana, Recreational Marijuana, CBD Oil, and Hemp. The two components that have seen the most massive growth are medical and recreational marijuana. Sales of both US medical and recreational marijuana are expected to exceed $25 billion by 2025, and the industry shows no signs of slowing down.
Since it has become a significant industry in the United States, many entrepreneurs may want to jump-in on this booming enterprise.
The business side of the industry is divided essentially into four main sectors: Cultivation, Testing and Extraction, Sales, and Ancillary Businesses (other cannabis-related businesses). In this guide, we will focus on how to start a cannabis business from scratch.
We will make sure that before you start diving into this industry, you’ll have a greater understanding of:
- Potential Business Models for the Four Distinct Sectors
- The Legal Landscape
- The Market and Consumer Base
- Potential Product Offerings
- Finding the Right People for your Business
10 Steps To Starting Your Own Successful Cannabis Business
Step 1: Narrow your Focus
The cannabis industry offers a vast array of opportunities for someone with an entrepreneurial spirit. Marijuana’s medical and recreational potential, as well as the many complex operations involved in its production and distribution, offer a variety of business models that fulfill a vast selection of niches.
The first step for succeeding in your startup requires narrowing down your focus into a particular sector of the industry. Your industry chosen will determine your cannabis business model and its licensing requirements.
We will cover the three main avenues where you could invest your money and be part of this multi-billion-dollar growing enterprise.
- Cannabis Retail Sales Through Dispensaries
- Grow Operations (Cultivation, Testing, and Extraction)
- Ancillary Businesses (other cannabis-related businesses)
Cannabis dispensaries are regulated and licensed physical stores that legally sell marijuana either for medical or recreational use. It is a place where you could buy as well as learn about cannabis products.
The first licensed public dispensary was built in 1992 in San Francisco, California, where it served medical patients that needed marijuana for therapeutic consumption. Today, there are over 2,000 marijuana dispensaries in the United States. When people think about getting into the cannabis business, starting a dispensary is usually the first that comes to mind.
Depending on which state you are in, dispensaries often fall into two categories: medical and recreational. Medical dispensaries sell cannabis products to patients who require it as medication, so long as a physician’s prescription is provided. On the other hand, recreational dispensaries offer cannabis products for personal use that are not health-related but for recreational enjoyment.
Cannabis cultivation is a crucial sector of the booming industry. It employs many processes and procedures that one needs to learn when setting up a grow operation, from building your professional grow facility, to providing the right staff and security, to your infrastructure.
Grow operations can either be done indoors or outdoors.
This is usually employed in locations where the climate allows sufficient sunlight. Marijuana plants heavily rely on sunlight for healthy growth. Outdoor growing produces better-quality buds because of the right combination of natural sunlight, water, and air. Outdoor operations are also considered eco-friendly, as they require less power for lighting and ventilation.
Indoor growing is done in enclosed spaces where it requires artificial lighting and ventilation. This setup is more expensive to build and uses up more electricity. However, indoor cultivation’s main benefit is advanced technologies; this allows you to create a perfect environment for your plants artificially. Growers tend to have more flexibility in controlling the lighting and humidity. Also, since it is an indoor production, there will be less trouble with pests.
Medical vs. Recreational Cannabis
Dispensaries for both medical and recreational marijuana can be found throughout the United States. The purpose and intended market for each category is pretty evident and straightforward. However, many people may still not be familiar with their differences regarding demand, quality, and licensing costs.
Consumer Demand and Taxation
When it comes to consumer demand, medical marijuana is still on top as it continues to maintain its yearly 70% average revenue share compared to 30% for the recreational variant. The two categories are both subject to sales tax, but recreational marijuana may incur excise tax as well, depending on which state you are in.
Product Potency and Quality
Both recreational and medical are equal when it comes to quality and product potency. Recreational growers have increased the potency of their products in the last few years to serve growing demand.
When it comes to licensing costs, recreational marijuana startups enjoy more flexibility as it does not have any capitalization requirements to get an industry license. Medical marijuana applicants must have at least a minimum of $150,000 in assets to qualify for a license. Depending on the license type, both categories vary in application fees ranging from $1,000 to more than $60,000.
Other Cannabis Businesses
There are various lucrative ancillary businesses in the cannabis industry. Most of these businesses provide support to the industry as a whole so that each cannabis product is successfully delivered to the right customer. Here are some of the most profitable business opportunities in the industry:
In a time where almost any product can be delivered to your doorstep, cannabis delivery startups have been gaining in popularity. These companies allow a qualified individual to conveniently create an order via phone call or an online app and have their cannabis purchases delivered directly to their home. Medical marijuana delivery is now permitted in 15 states, while recreational marijuana is allowed in five states. This number will likely increase as the industry is set to grow exponentially in the future.
Since the industry has been showing potential growth, many consulting companies have offered their services to a range of industry players, from dispensary owners to growers and cannabis business startups. Consulting firms can provide marketing, legal, business planning, and security services.
Manufacturers that specialize in cannabis packaging have been experiencing an increase in sales each year. All marijuana companies need packaging for their products, and as the industry further grows in the future, this particular niche will see balanced growth.
The production and sale of hemp can be considered an industry of its own. Hemp has thousands of product applications, including food, medicine, clothing, plastic, paper, and construction materials. It is a plant that comes from the same family as marijuana but has a lower THC level. Cannabidiol (CBD) Oil is becoming increasingly popular in the wellness industry, particularly as a dietary supplement. It is a compound that is extracted from the hemp plant.
Step 2: Review the Cannabis Regulatory and Legal Landscape
Selling cannabis in the United States requires certain licenses and certifications, which differ depending on the state you wish to operate. Due to being a newly-legalized industry in the country, laws and regulations are still fragmented and confusing. Different states have varying laws that regulate cannabis businesses and require varied licensing depending on the business type. All of which, of course, sits on top of a federal-level prohibition that has been in effect since the 1970s.
Cannabis Federal and State Laws
On a federal level, cannabis is considered a Schedule 1 narcotic drug, making it illegal as ‘a drug with high-potential for abuse’. On the state level, however, acceptance of the product has increased rapidly over the years. Despite the overall federal restriction, many states have passed their own laws that are highly-favorable to the production and use of cannabis products. As of this writing, there are already dozens of states that have legalized the use of marijuana either for medical or recreational purposes.
Regulations, Requirements, and Zoning
All cannabis business startups, regardless of sector or type of business, are strictly required to comply with local state laws and regulations. Even if you have the best branding strategy or business plan, not playing by the rules may result in your business being shut down before it even gets off the ground. As a startup, you must acquire an industry license in your state before you can operate. The difficulty of getting a license varies for each state, as some have many restrictions while others can give licenses without too much difficulty. Some licenses, such as the one needed to operate a medical marijuana dispensary, may ask for a hefty capital proof as a requirement for application. Researching your unique local state laws and regulations is the best way to stay on top of the rules. This guide can help you when researching state-by-state licensing and regulations.
When it comes to understanding the unique legal landscape of your state or county, your best bet would be to talk to an attorney specializing in cannabis. Hiring a good attorney lets you navigate the legal landscape with the right expertise at your side and keeps you updated for any legal changes that may arise. Remember that having a past criminal record may make it difficult for you to get approved for a license.
Step 3: Do Your Market Research
Whether you’ll want to set up a dispensary, growing operation, packaging or delivery, or any other ancillary business, it is crucial to analyze and understand this growing industry, especially when the legalities are still quite tricky and confusing.
In 2020, the cannabis industry was worth $22.9 billion and is projected to grow at a rate of 18.1% from 2021-2026. If you want to have a piece of that pie, you need to do your homework in understanding your consumer base and their needs, the industry trends, competition, and regulations.
Licensing requirements vary for each state. It is best to do your research before applying to understand the state’s unique requirements where you would operate. You must be approved for both a state and local license in many cases before you can start selling. You might also want to check out your state’s licensing authorities. Each state has its own regulating agency or licensing body responsible for setting out the requirements and approving your license. For instance, California has three licensing authorities: the Bureau of Cannabis Control, the Manufactured Cannabis Safety Branch, and CalCannabis Cultivation Licensing. The type of license you will need (i.e., retailer, grower, ancillary) will determine which of these agencies will issue the license. Check out this handy guide to find out the licensing laws for each state along with each licensing agency.
Know Your Competition
The market has grown significantly over the past few years as more and more states are starting to legalize its use. This has encouraged many entrepreneurs and investors to jump-in on this industry because of its great promise for future returns. Many have started dispensary brands, growing and testing facilities, and ancillary businesses such as online delivery services.
While that might sound great, keep in mind that the cannabis industry will only get more competitive as time goes on, given its annual growth rate. Whatever the type of business you wish to conduct, knowing about your competition pays dividends over time. It allows you a better insight into the market so that you can sell better products or services and drive shares away from your competition.
Before even starting your business, getting to know the market players will help you decide if your intended business model and target niche market will work.
Opportunities and Risks
As an industry projected for exponential growth in the future, many opportunities exist for those who are ambitious and prepared to dedicate a considerable amount of their time to their cannabis business. With dispensaries for medical and recreational marijuana, growing facilities for production, and even support businesses such as packaging, consulting, and software development to enhance operations, this field has endless opportunities. Unfortunately, there are always associated risks in almost every opportunity.
Due to the industry’s strictly regulated nature, it is not uncommon for budding entrepreneurs to fall to reckless practices. When starting a cannabis business, it is always recommended to hire professional consultants, especially regarding staffing and security. An attorney experienced in the cannabis industry would also be helpful to navigate the legal landscape.
Costs and Expenses
The cost of your startup will depend on many factors. These factors are the type of business, location, size of the premises, number of staff and equipment, and business goals and objectives.
For instance, a cannabis dispensary startup would have to cover the costs for:
- Licensing fees
- Legal fees
- Consulting fees
- Website development
- Establishment and office remodeling
- Equipment and furniture (i.e., computers, cash registers, refrigerators)
- Initial inventory and packaging
- Initial payroll & rent
- Security expenses
The cost for starting a dispensary ranges from $600,000 to more than $1 million in the United States, while the cost for a grow operation starts from $20,000. How much you should raise will ultimately depend on the factors that we have mentioned. If you are new to the industry, it would be best to work with a professional planner so you can make the most out of your capital and even reduce your initial investment.
Step 4: Identify a Unique Selling Proposition
After doing your research on the rules and what the market has to offer, the next step would be to clearly define what will make your business stand out from the rest of the competition.
This is particularly useful when you are planning to start a cannabis dispensary. Building your unique brand and image requires you to have a good understanding of your purpose and goals. After all, your brand success is determined by how you stand out in the market.
Find Out How Your Products Can be Unique
This is usually done after researching your competitors to learn about industry benchmarks and find out about any unfilled needs.
Brainstorm and write down all the ways that your brand can be unique. Will your premises offer a unique vibe or atmosphere? Does your company have a distinct voice that positively affects marketing promotions and product packaging? Is there a way that you can source higher-quality products? It always helps to put yourself in your customers’ soles to find out what they are looking for and why they should choose your product over the competition.
Step 5: Write a Cannabis Business Plan
Just like with any other startup, you will need to write a business plan. All your goals, financing, sales opportunities, projected return on investment, and pretty much every aspect of your startup must be perfectly outlined in a plan. Due to the strict regulations governing the cannabis industry, you will need to write a more detailed business plan than you would in any other industry.
Your plan should always include:
- Who you are and your unique selling proposition
- Your costs and expenses and how you plan to cover them
- How much will your profit be, and when will it turn up
- Where you will run your business, and how you would acquire the necessary licenses and permits
- Where will you get your products
The cannabis market, along with its laws and regulations, is constantly changing. You will likely continue to write and modify your plan to fit any particular situation. Writing a plan also makes it easier to apply for a license and pitch to potential investors.
Step 6: Obtain Funding
Even sound market research and the most solid business plan would be useless without the all-important business capital. Starting a marijuana business may even cost more than your typical brick-and-mortar startup. If you are short on money, you may want to consider outside funding for your business. It is crucial to raise enough capital when starting a business, especially in this industry, so you won’t have to scrape along the way when times get tough.
You may want to be wary when engaging potential investors. Not everyone has the same perception about the industry, especially since cannabis is still illegal under federal law. Many may still shy away from it even when presented with a solid plan; most banks also tend to keep away from it. Finding business loans can be troublesome, even if you have a good credit standing. Many of the big banks operate on a federal level which makes them subject to federal banking laws. This makes securing a loan for a marijuana business almost impossible.
Even though getting funded may seem challenging, there is still a good number of private investors out there willing to get in on the rapidly-growing marijuana industry. Millions of dollars in investor capital are raised each year due to the fact many are enthusiastic about getting a slice of the multi-billion dollar pie. Your best bet would be to take the time to find these individuals and present them your well-thought-out plan, focusing particularly on what sets you apart from the competition. Another great way to raise funding is to look for alternative lenders that also have a track record in financing cannabis businesses.
Step 7: Pick the Perfect Location
The next step would be to pick the perfect location for your business. Choosing the right spot is one of the most important decisions you’ll make for your business. A business’s location allows it to attract the right customers as well as the right talent. Even if you are starting a grow operation, choosing the right environment for your facility could position your yields into the industry’s best products.
The perfect location depends on the type of cannabis business you will create. Most states only allow the production and sale of medical cannabis, whereas others allow both medical and adult-use. If you are planning to start a dispensary, keep in mind that the best locations are ones that adhere to the laws and regulations of your state or county. States such as California, Colorado, Nevada, Washington, and Oregon have the most lenient laws for cannabis growing, distribution, and sale. The surrounding areas also need to be considered. For instance, in the state of Colorado, there is a law that states that a cannabis dispensary can’t be within 1,000 feet of a school. There are similar laws in many states where a dispensary is prohibited from being near not only schools but also parks, churches, libraries, or residential areas.
If you want to skip the part of figuring out the right location, you can always consider buying an existing cannabis business. That means you’ll have an existing customer base in the right spot before you even start.
Step 8: Register your Business and Acquire the Necessary Permits and Licenses
This is one of the most crucial steps as you need to register your business before it can be considered anything legal. Each state has its own unique laws and regulations regarding registration and acquiring the necessary licenses.
Registering your Business
When registering for your business, it is essential to learn about your state’s unique set of requirements. Depending on the variables, you can choose to either incorporate your business or form an LLC. However, no matter the type of your cannabis business or where you are, you should always apply for a Federal Tax Identification Number, also known as Employer Identification Number (EIN). You can do this online and get approved immediately. You also want to obtain a General Business License in your state and a sales tax permit.
Obtain the Necessary Licenses and Permits
Each state has its own specific licenses and permits and its own cannabis regulating agency where you would go to get a license. It is imperative to do your own research to get to the specifics. However, here are the typical things to prepare for when applying for a license:
Cannabis Business Plan
Writing a business plan is often considered the first step in starting a business. A business plan always helps in getting approved for a license, especially if it considers all the laws and regulations in the state where you would operate.
Standard Operating Procedure
This can be incorporated into your business plan. SOPs are particularly useful for cultivation and testing operations but can also be applied to dispensary retail sales. A written SOP includes all the procedures of your business operations. If it proves to be daunting, you can outsource this task to professional consultants who have extensive experience in the industry. When applying for a license, many states require you to submit an SOP with your application documents.
Acquiring the necessary funding ensures that your business can cover all the required costs (including licensing). For those planning to dive into medical marijuana cultivation and dispensary retail, a hefty amount of asset proof is required to qualify for a license. $300,000 is required for dispensary operations, and $150,000 is required for growers. While the average licensing fee is $5,000, depending on the circumstance, it could get as high as $200,000. Many states also require businesses to pay annual fees for license renewal.
When applying for a license, many states require startups to have already secured a property where they can operate. Whether you own the real estate or are leasing, you must ensure that the property meets the licensing requirements in your state.
Going Through the Cannabis License Application Process
Due to the complexity of acquiring a license, many startups spend thousands in consulting and legal fees just to complete this process. Every state has different criteria for licensing approval, but the most common are:
- The soundness of the SOP
- Applicant’s capital, tax status, and financial standing
- Property, equipment, and their technological advancement
- Staff competence and reputation
- Flow of operations (i.e., transportation, distribution, sales)
- Affiliations to other experts (i.e., doctors, cannabis attorneys)
- Economic impact and diversity
- Benefits to the local community
The state’s applicant reviewers would like to be sure that they can trust you given the business’s delicate nature. They also would like to be confident that your business will not pose any problems that can threaten or tarnish the state’s marijuana programs. When writing your cannabis application, it is important to be honest, and straightforward when explaining your plan’s every detail to ensure that everything will go smoothly and conveniently.
Step 9: Find the Right Staff
Finding the right people is critical for the success of any business, and cannabis is no different. Whatever type of cannabis business you are in, you will need people who are qualified and enjoy being a part of your company.
It is not uncommon for startups to encounter difficulties when finding the perfect talent for their workforce. Still, marijuana businesses often find this a more challenging task due to the lack of qualified staff coupled with their increasing demand. Many companies have opted to engage cannabis business recruitment agencies for their staffing concerns. These agencies have the necessary knowledge and expertise to find qualified people for your startup. They can provide you with information and know-how about the exact skills and qualities that your workforce will need and can help you to comply with numerous staffing regulations.
Always keep in mind that hiring the right staff is essential for your cannabis business to grow. Your staff members will represent your company in many ways, and how they’ll do that can make or break your business. When sourcing on your own, take the time to do your homework to understand every skill set and qualification necessary for each position so that you can write detailed and precise job descriptions for potential applicants. Since your staff will handle sensitive tasks and information in a delicate legal landscape, it is crucial to make sure that they are trustworthy and have no prior criminal record. Checking for valid and reputable references for every applicant is always a must.
Step 10: Promote and Market your Cannabis Business
Once you have all the legal and procedural stuff in place, it is now time to market your cannabis business and start building your customer base. Brand identity can differentiate you from your competition. It is vital in conveying your personality and establishing trust between you and your customers. Finding the proper branding can make your marketing efforts a lot easier.
When it comes to retail dispensaries, having a place that offers a unique feel and vibe is a plus when attracting and impressing customers, but having a professional website goes a long way in building a massive audience. When creating your website, make sure to make it attractive and user-friendly to be easily optimized for search engines. Search Engine Optimization (SEO) is a great way to drive traffic and conversions for your business. While SEO is your best bet for long-term exposure, you can also opt for paid advertisements to position your startup in front of online audiences from the get-go.
Social media and online communities are also great ways to expose your brand. While some platforms may not allow cannabis advertisements, you can still build a strong presence on these platforms. Affiliate marketers and influencers are also a great way to promote your products and drive traffic to your physical and online store.
Start Operating Your Cannabis Business
The cannabis industry offers many exhilarating ways to satisfy your entrepreneurial drive and ambitions. Whether you’re into growing, retail sales, or ancillary, the industry has boundless opportunities for raking in significant returns if you are willing to put the right amount of time and effort into it.
By now, you probably have a deeper understanding of the processes and what it takes to make your start-up successful in this ever-expanding market. Your chances of success only increase if you are willing to play by the rules consistently.
If you have any more questions about starting or running your own cannabis dispensary or cultivation facility, do not hesitate to contact us. We are always here to help.