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You’ve heard the old joke: if you need to ask how much something costs—you can’t afford it. Starting a cannabis business is sort of like that. Whether you’re opening a new dispensary, becoming a cultivator, or launching an online delivery service—there’s a lot of upfront investment. Some estimates put the cost of starting a cannabis business as high as $2 million. Still, with the current “green rush” expected to continue growing steadily to reach $57 billion by 2030, there’s a lot of money to be made, too. If you can secure funding, surround yourself with a good team, and closely follow your state and local regulations, you have a pretty good chance of sharing in the wealth. But that’s a big “if.”
How Does Regulation Impact Cannabis Companies?
Despite some progress in legalization efforts, including Congressional bills proposing amnesty to businesses like banks and insurance companies that work with cannabis companies, there are many sticky issues to contend with when starting a cannabis business. A lot of these stem from the fact that cannabis is still illegal under federal law, and therefore all attendant business is conducted with cash. Credit cards, traditional business loans, business tax advantages—all of these common conveniences which make companies stable, safe, and predictable are unavailable to cannabis companies.
This extra layer of challenge makes dealing with government regulations and other bureaucratic line items, such as obtaining loans, securing a license, and even getting approval for a physical space, feel more like a gamble than a perfectly legal (in most states) enterprise. And it all adds to the total cost of opening a cannabis business.
For example, you may be limited to working with pricey private banks or lenders since most traditional banks refuse to work with cannabis companies for fear of government retaliation. And you won’t enjoy the usual tax benefits of owning a business, such as writing off business expenses when filing your taxes. But the biggest source of frustration to many budding cannabis business owners is that entrepreneurs take on the risks independently and with little protection for their investment. And even if you follow all the steps and fork over big bucks, there’s no guarantee of being awarded a cannabis business license—especially if the area you’re working in has a lot of competition (most states and local jurisdictions put a cap on the total number of cannabis businesses they can legally license at one time). These barriers make the cannabis business tough to enter, risky, and very pricey. So how much does it cost to start a dispensary or cannabis-related business? Read on to find out.
On the other hand, because cannabis has been legal in some states since the early 2000s, an effective general framework for cannabis business success has emerged. Enough businesses have successfully launched and you can learn from their experiences. From creating a risk assessment plan to buying cannabis business insurance, the real costs of starting a cannabis business can be outlined fairly accurately so as to reduce surprises and boost the possibility of gaining a foothold in this lucrative—but expensive and challenging—industry.
Cannabis Business Risk Assessment
Any entrepreneur starting a business in a young industry will quickly learn the phrase “risk assessment”—but cannabis pioneers will live, eat, and breathe this concept even after the company is up and running. A risk assessment is the process of identifying, quantifying, and managing any risks that are specific to a particular company. Risk assessment is very closely tied to all of your startup costs–perhaps most especially to the type and amount of insurance your company will need– because cannabis business insurance coverage helps mitigate the costs of risk when and if it strikes. A risk assessment will help you wrap your arms around the entire scope of your cash outlay.
Using PESTLE to Assess Cannabis Business Risk
While there are different tools business owners can use to perform a risk assessment, including this one, one of the most applicable to cannabis companies is a method outlined by a team of researchers at UCLA called PESTLE. PESTLE stands for Political, Economic, Social, Technology, Legal, and Environmental and it allows you to evaluate all of the potential threats—and associated costs—of threats in each of these six realms. Given the relative newness of the cannabis industry and all of the consequent uncertainties related to banking, lending, and borrowing money, PESTLE offers a cannabis-focused framework in which to assess your unique challenges and the cost of managing them.
Cannabis & Dispensary Startup Costs
At an average of $2 million to start a cannabis business, it costs nearly $1.99 million more than starting other types of small businesses. And unlike opening a franchise or other traditional business with fixed costs, cannabis business startup costs vary wildly from state to state. For example, Oregon has the lowest cannabis business application fee ($250) in the nation (however, the state is currently saturated and no longer accepting new cannabis business applications). Florida, on the other hand, only grants Medical Marijuana Treatment Center licenses—not dispensary licenses. As such, it costs around $60,000 to open a new cannabis business in the Sunshine State.
Another area where cannabis business startups differ from traditional businesses is the initial upfront costs. Some of the startup fees common in the cannabis industry are a big departure from the types of fees related to the traditional business world. Here are a few examples of the unique costs cannabis business startups have to pay—and remember, these costs must be paid in cash.
- Capital requirements. In the banking world, where capital requirements are federally regulated, these are funds that the institution has on hand and can quickly access when necessary to cover large withdrawals. In the cash-based cannabis industry, capital requirements are typically requested by lenders or funders to ensure that you have enough cash on hand to cover large “withdrawals,” from a creditor, for example. Capital requirements can top $500,000. In cash.
- State application fee. There’s no rhyme or reason to the variability in state cannabis business application fees. It can range from a few hundred bucks to over five figures.
- Local permits and licensing. Cannabis business permits are regulated down to the street level in any given community. Everyone wants to get a piece of the revenue these businesses bring so you’ll need to factor in multiple fees. Here’s a cost rundown of licensing and application fees in California. Depending on the type of cannabis business you’re starting, these fees can range from a few hundred bucks for a small grow to $300,000 for a big cannabis event.
- Private bank or credit union costs. Since you can’t use regular banks, lenders, or credit cards your cannabis business may need to rely on private banks with high fees or credit unions with limited funding.
- Training. You and your employees will need to be trained on the specialized regulations, procedures, and best practices for cannabis businesses. You yourself may want to get an advanced certification in areas such as cannabis law and policy or healthcare.
- Retail lease. Renting or buying retail space is a big expense, partly because you’ll need to design it so it conforms to local rules and regulations. And cannabis retail spaces are expanding, which makes them harder to find and more expensive to rent. The cost of a retail dispensary space ranges from $300,000 to $3 million,
- Security system. While you definitely want a security system in place (especially with a cash business), you may be legally required to have specific elements installed in the area where your business is located. Count on at least $65,000 for cannabis business security.
- Seed to sale software. Software that tracks the cannabis plant from cultivation to consumption is a legal requirement. Seed to sale software can run you a few hundred bucks per month.
- Cannabis business insurance. You may have noticed that you’re taking on a lot of risk when starting a cannabis business. When you work with an experienced, knowledgeable, licensed cannabis business insurance broker, you’ll have protection against current and future risks, which make your business safer, more secure, and more stable. Adequate coverage also protects you against financial burdens. Depending on the type of cannabis business you’re starting and where you’re located, some of the necessary policies you’ll want include: Commercial General Liability; Product Liability; Property; Workers Compensation; Technology E&O incl. Cyber; Directors & Officers; Employment Practices Liability; Crime; Commercial Auto; and Builders Risk.
If you’re ready to start a dispensary or cannabis business, then you obviously possess the fortitude you’ll need to make it. Yes, it will cost you. But if you’re doing your research and boning up on all of the legal ins and outs, you’re equipping yourself with the right information to stake your claim in this new Wild West.
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Anyone starting a cannabis business knows they need to manage their numerous risks with a solid cannabis risk management plan. For starters, cannabis remains illegal in several states and at the Federal level. It has a complex supply chain that needs sophisticated seed-to-sale tracking software. It takes a lot of personnel – from growers, to […]