How much does it cost to start a cannabis business?
This article is the third in a series entitled: “So do you want to start a canna business?” created in partnership with Good Tree Capital. Here’s how much it costs to start a cannabis business, including fees, applications, and other specifics of the cannabiz.
At the beginning of our Canna-Biz series, we introduced future cannabis business owners to an important formula for making profit. While the equation for running a successful business is fairly simple, optimizing cost inputs is not.
Savvy business owners keep costs down while maximizing revenue. And since every cannabis company incurs costs before revenue is generated, it is important to delve deeply into the biggest cost drivers and develop tools to contain them.
To get to the bottom of the cost of doing business in cannabis, Good Tree Capital surveyed real borrowers – and the internet – to get a feel for how much cannabis operators paid for some of the big-ticket items.
With so many unique variables, the following table was created to provide general, directional guidance on the cost of starting a cannabis business. However, keep in mind that these will vary based on the type of business and location.
The cost of starting a cannabis business
|Registration fee (non-refundable)||$ 2,500||$ 30,000||$ 100,000|
|License fee||$ 25,000||$ 200,000||$ 500,000|
|Annual registration / renewal fee||$ 5,000||$ 60,000||$ 100,000|
|property||$ 128 / sq ft||$ 240 / sq ft||$ 393 / sq ft|
|Utilities||1.75 USD / m²||$ 2.10 / sq ft||$ 2.50 / sq ft|
|Renovations||$ 57 / sq ft||$ 60 / sq ft||$ 77 / sq ft|
|Security installation||$ 75,000||$ 100,000||$ 135,000|
|marketing||3% of sales||5% of sales||9% of sales|
|staff||$ 13 / hr||15 USD / hr||$ 20 / hr|
|Inventory ($ / lb)||$ 400 / lb.||$ 2,200 / lb.||$ 4,000 / lb.|
Virtually every business has to pay for utilities, marketing, and inventory, but cannabis companies have special considerations for startup costs, real estate, and taxes.
You have to spend money to make money
What sets the cost of starting a cannabis business apart from that of a typical new business is that those costs do not guarantee that your business can open.
Not only is applying for a cannabis license a very expensive process, but these costs must be incurred before you know if you will be granted a license to operate and sell products. The state application fees alone can be in the six-digit range, which are not only non-refundable, but also do not take into account the other costs required to prepare a convincing application.
Creating a cannabis application
Cannabis license applications require business plans that include detailed floor plans, security systems, financial projections, and founding documents, to name a few. For example, a strong application will need a security plan that will give the state confidence that there are measures in place to prevent minors from obtaining cannabis products and protect the company and the wider community from criminal actors who see an easy target. You may be able to install some cameras and an alarm system yourself, but this may not work if you want your application to be successful.
Don’t forget about safety
You have a higher chance of success if you work with a security professional who makes sure all the boxes are checked: controlled entry and exit, multiple camera feeds and footage storage, cash and product safes, break-and-enter alarm systems, and a number of other elements that need to be planned and eventually installed. To create a well-designed business plan, you will also need support from other professional service providers, including lawyers, general contractors, and accountants.
10 questions you need to ask before starting a cannabis business
This may feel like a gamble, but it highlights the importance of planning these costs and developing strategies to minimize and delay the costs.
It goes without saying that you cannot submit security systems and floor plans for an imaginary room. Most states require you to provide your proposed location as part of the license application.
Finding the right property for your cannabiz comes at a cost
The dynamism of the application process – coupled with increasing demand in newly legalized states – results in a dramatic increase in the price per square foot billed to a cannabis business owner compared to the price billed to the beauty salon owner for the same property. If you want to open a beauty salon, you can locate your salon anywhere with available commercial space. This is true for most customer-centric businesses, but certainly not for cannabis.
States put restrictions on the operation of licensed cannabis businesses, resulting in a shortage of eligible commercial real estate.
The city of Lynwood, California provides a good example of this. In the first few months of 2016 before California legalized adult cannabis, the cost of an industrial building (perfect for growing or manufacturing) was around $ 106 to $ 120 per square foot. After legalization, the price of the same Lynwood-based industrial properties rose to over $ 300 per square foot, a three-fold increase. Cannabis companies will face these fundamental dynamics in cities across the country.
One solution to this problem is to buy the property right away. The advantage of this approach is that you avoid the hassle of landlords who may have problems leasing to cannabis operators.
You may also be able to avoid the price drops tenants face and, as a new owner of the property, benefit from the massive increase in property value. The disadvantage of this approach is that it requires a large amount of up-front cash outlay to finance the purchase, which ties up the cash in a critical and uncertain phase of the business.
How Seun Adedeji turned $ 50,000 into a multi-million dollar pharmacy empire
If leasing the property is your only option, you need to be transparent about your business when negotiating with the owner. Assuming the owner has no problem with your business model, then your best bet is to negotiate a conditional contract that starts making payments as soon as you get a license from the state or when your business is up and running. You may even want to get creative with possible revenue-sharing arrangements to reduce the upfront cost of leasing the property.
Cannabis is one of the most heavily taxed industries in the country
All businesses must meet their federal, state, and local tax obligations to maintain a good reputation. However, the tax requirements for cannabis companies are different and have a significant impact on costs.
Marijuana Tax Rates: A State-to-State Guide
Business owners need to consider and understand the implications of Section 280E of the IRS Tax Code, which prohibits marijuana companies from making traditional corporate deductions as the plant is listed as a List 1 Medicinal Product under Federal Controlled Substances Act.
What does that mean exactly? Take a look at the comparison table below:
Taxes for cannabis companies compared to other industries
|Cannabis business||Traditional business|
|revenue||$ 1,000,000||$ 1,000,000|
|Cost of goods sold||$ 650,000||$ 650,000|
|Gross income||$ 350,000||$ 350,000|
|Deductible business expenses||$ 0||$ 200,000|
|Taxable Income||$ 350,000||$ 150,000|
In this illustrative example, a cannabis business owner cannot write off deductible business expenses such as rent, utilities, or marketing. Cannabis companies are taxed on their gross income, while traditional companies are taxed on their gross income minus those deductible business expenses.
The Cannabiz example pays more than twice the taxes of the traditional business, making cannabis one of the highest taxed industries in the country.
Hire help if you can
Our advice is to hire a smart CPA who has extensive experience with cannabis accounting standards and cannabis tax law. Their knowledge provides you with the tools to structure your company in such a way that your tax expenses are minimized.
Not exactly a “green rush”
As you can see, running a profitable cannabis business is not something you can take for granted. Some massive multi-state operators still haven’t figured out how to crack this nut. A strategic plan to reduce startup costs and long-term costs is therefore one of the most important factors in getting your business on the path to profitability and growth.