According to Forbes, legal marijuana was the best start-up opportunity of 2015, with entrepreneurs making big bucks on the cannabis trade and small businesses cropping up in states that have legalized pot. This begs the question of whether or not the market is big enough for everyone who wants a piece of the action.
So, how hard is it to get into the pot business?
Capitalizing on a brand new industry has its challenges
A report by Arcview Market Research notes, “In 2014, the legal cannabis industry expanded 74% to reach $2.7 billion in combined retail and wholesale sales, and firmly established itself as the fastest growing industry in America.” Colorado and Washington led the way by legalizing recreational marijuana sales in 2014; today, recreational marijuana is legal in four states plus Washington, D.C., and medicinal use is legal in 23 states. It’s a brand-new market, and eager business-minded folks are ready to get involved.
“Ganjapreneur” Anthony Franciosi, founder of The Honest Marijuana Company, explains that entering the cannabis industry is not as easy as some entrepreneurs may think.
“Many who try to enter the cannabis industry do not understand the scope of the legal and licensing process, not to mention the sheer amount of work necessary to operate a pot facility,” he says. “To find people to invest money in the cannabis industry is not the issue—it’s happening every day. Finding working partners who understand the true task ahead, appreciate cannabis, and are willing to put in the hours to be successful is a different and more difficult proposition.”
Franciosi says he can dedicate months of research, lawyer fees, and property acquisition just to have folks walk away when they get a better understanding of the scope of the project, the amount of start-up capital involved, and the time investment that goes into functioning at a high level within the industry. “I have been extremely fortunate to find people to work with me who are very hands-on and have the ability to put the best tools available in front of me,” he says.
Marijuana taxes: good for the state, bad for business
States where marijuana is legal have positioned themselves for a healthy new source of tax dollars. “Tax income from marijuana tourism is a huge bonus, as it is being used to directly impact the legalized states in a positive fashion through education funding and infrastructure improvements,” says Franciosi. “People are also obtaining good-paying jobs in grow facilities and dispensaries, entrepreneurial tourism start-ups, and ancillary companies that produce lighting, air-conditioning units, and other needed instruments for the industry.”
But taxation can prove, well, quite taxing for young businesses trying to make a go of it. Federal taxes are particularly burdensome. Tax rule 280E says, dispensary owners cannot claim business-related deductions because of a provision that prohibits deductions from the illegal trafficking of drugs.
Furthermore, because pot is not legal at the federal level, many national banks hesitate to serve the marijuana industry. Businesses are left to seek funding from willing state banks to account for taxes, or pay their taxes in cash.
So, where do you begin?
“To get started and have a successful go at it, I recommend dovetailing it with something you know,” says Norris Monson of Cultivated Industries and the Rolling Joint Ventures cannabis consulting firm.
“If you’ve been an alcohol distributor, consider cannabis wholesale distribution. If you’ve been a farmer of cherries, be a grower. If you’ve worked in hospitality, look into cannabis event planning,” says Monson. “Whatever the case, be prepared for intense competition. This industry is tough, and it is in a constant state of evolution.”
Ask for help
Luckily, as the industry grows, so do the related support services. In 2014, MedBox, “the dispensing solution,” started providing consulting for cannabis dispensaries. The company helps entrepreneurs wade through the bureaucracy that is associated with running a marijuana-related business, including acquiring licenses, reviewing legal matters, and setting up points of sale. MedBox has recently started to provide consulting for cultivators as well.
Marijuana Business Daily, founded by Chris Walsh, “one of America’s foremost cannabusiness experts,” is a trusted source of information for entrepreneurs and investors in the legalized pot industry. The Daily offers unbiased business analysis, cutting-edge research, industry statistics, and breaking stories for both seasoned and start-up pot businesses.
Where do you get pot to distribute or sell?
“To open a dispensary and obtain product, I suggest reaching out to vendors and companies who produce or cultivate products you enjoy or know are popular,” says Monson. “You could also consider joining a trade organization for networking opportunities. Vendors want an outlet to sell their products, so if you are opening up a dispensary and can prove that you are licensed and operating in a legal manner, you likely won’t have a problem stocking your shelves.”
But keep your marketing close to home—no interstate or international sales are allowed…yet. “Cannabis is still a federally illegal Schedule 1 controlled substance,” explains Monson. “Interstate commerce is highly illegal, international transactions even more so.”
Monson encourages entrepreneurs to read The Cole Memo 2.0. This is the federal memo that outlines what cannabis growers and businesses can and cannot do. “Essentially, if you stay within the guidelines of the memo, the federal government will not intervene in your business,” he adds. “Keep in mind that you must be compliant with your state’s medical or adult-use cannabis laws first.”
The bottom line
It’s exciting to have the opportunity to get in at the ground level and grow with the business as more and more states legalize marijuana. But starting a marijuana business is not much different for an entrepreneur than starting a business in a “regular” industry. Make sure you do your homework, learn all you can about the industry, and reach out to the pros for help.
Related articles on AvvoStories: