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How to legally start a cannabis business

Legal cannabis is a budding industry with room for innovation – but make sure you follow state laws.

The cannabis industry scored $9 billion in sales in 2017, and could become a $30 billion industry by 2022. Starting a cannabis business isn't a cut-and-dried process. Laws are always changing, and you'll need to keep up with them to stay out of trouble. But if you're willing to start a venture in the industry, you may be rewarded handsomely.

Cannabis is still illegal under federal law, and in many states. However, more and more places are legalizing it for medical use. And in a handful of states, it's even legal to use recreationally.

What types of cannabis businesses can I start?

You have many paths to pursue in the cannabis industry. Here are three main categories to start with.

Grow it

You can start a marijuana cultivation business, meaning you're growing cannabis for mass consumption. To do this, you'll need knowledge of cannabis horticulture. If you don't have that expertise, hire someone who does.

For a wholesale cannabis operation, you'll pay an average of $42 per square foot in startup expenses. This money goes toward lights, air circulation, electricity, seeds and other costs.

The median startup costs and annual operating expenses for a wholesale cultivation business is $400,000.

How do I start a cannabis grow operation?

What you need to start a grow operation or farm varies depending on where you live and what type of facility you want. Generally, you may need to buy real estate for your grow space, and put together a business plan before applying for any permits your state requires.

Permits and licenses will differ across states. For example, in California — where both medical and recreational cannabis use is legal — this means applying for a cannabis cultivation license with the Department of Food and Agriculture. Also, there are several different types of licenses, depending on where and how you plan on growing your bud.

Then, you'll need to arrange the funds to buy grow equipment and supplies you'll need to grow cannabis in your space. This can include security, seeds, lighting and more. Once you're all set up, you can start growing your plants.

Create infused products

Infused products are products combined with marijuana oils, such as edibles, botanicals, lotions, ointments, beverages and tinctures.

This could be a big market. In 2016, businesses selling cannabis-infused food, beverages and cosmetics cashed in to the tune of $180 million — and that's just in California.

With a median startup cost and annual operating expenses of $250,000, infused-product manufacturing businesses are typically less expensive than cultivation operations.

Start a store

In the cannabis industry, retail locations are known as collectives or dispensaries. They're places where consumers can access cannabis safely and legally — most notably for medical reasons.

You may need to jump through regulatory hoops to start a dispensary, such as submitting an application and paying a licensing fee. However, a retail business can pay off big, especially as more consumers look for legitimate places to get cannabis.

The median startup costs and annual operating expenses for medical dispensaries and recreational stores is around $193,000.

5 steps to start a cannabis business

Ready to start your cannabis business? Follow these steps to get up and running.

1. Conduct preliminary research

The legal arena is a good place to start your research:

  • Familiarize yourself with federal cannabis laws.
  • Research your state's laws for marijuana consumption and starting a business.
  • Find out which licenses and permits you need.

Learn about your financing options and consider how your business will manage its finances. It's all but impossible to get a loan from an FDIC-insured bank, as financial institutions are rightfully wary of violating federal law.

Many banks even refuse deposits from cannabis businesses. That's a big reason an estimated 70% of cannabis businesses don't have bank accounts.

Restrictions like these make it difficult to start a cannabis business. Before pouring resources into your venture, understand what you're getting into. You could save a lot of time and energy you'd otherwise lose by diving in headfirst.

2. Create a business plan

Writing a business plan will help you gauge the feasibility of your venture. Its contents might include:

  • A company description. Clarify what your business does and who it serves. Consider which competitive advantages your business will have.
  • Market analysis. Is there a great market need for your business? Who will be your competitors? Are there trends that your business is looking to capitalize on?
  • Organization and management. Choose a legal structure for your business. Create an organizational chart to show who will lead your business.
  • Marketing and sales. How will you find customers, and what defines a sale — or the point at which you make money — in your business?
  • Financial projections. What will your revenue and expenses look like? Make financial forecasts for at least the next three years, and explain why they make sense.

If you're writing a business plan to seek funding, include a funding request section. Here, you'll describe how much funding you'll need, what you need it for and how you'll deploy the capital.

3. Choose a location

Location is especially important if you're opening a dispensary, as you want a place that's easily accessible by your target market.

Even if foot traffic isn't your primary concern, pay attention to your city and county's zoning laws. They can greatly affect where you can locate your business.

Rent may be a factor as well, as it'll eat into your revenue. Picking the right location may help you keep expenses low.

After you've decided on the legal structure for your business, file the appropriate paperwork with your state's government and pay any required fees. Apply for permits and licenses relevant to your state.

After you've received permission from your state government to pursue a cannabis operation, check that your business will comply with your state's regulations.

With so much at stake, it may be worth getting advice from a lawyer.

5. Build your business

After completing the four previous steps, you'll have created a legal business. Now, it's time to start making money.

Decide where to focus your efforts to build out your business. This could include:

  • Developing your operating space. Activate utilities, sign a lease for retail space or a warehouse, buy merchandising equipment and invest in technology.
  • Forming partnerships.Your business will need the help of vendors, contractors and other partners. If you run a retail shop, you may want to pursue relationships with product wholesalers and cultivators.
  • Marketing. Get the word out about your business. A few avenues you can start with include online advertising, social media and print advertising. Look for cannabis publications and local hotspots where your target market frequents. If you run a business-to-business operation, develop relationships through mailers, cold email and even LinkedIn.
  • Hiring employees. Make job postings on websites like Indeed, Craigslist, Monster, LinkedIn, CareerBuilder and ZipRecruiter. Create a page on your website that explains the type of employees you're looking for, and include a contact form. Ask your network for referrals.

Find employees, network and build up brand recognition on LinkedIn.

  • Reach a large audience
  • Recruit top talent in your industry
  • Set a daily budget starting at $5/day

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  • Find a payment processor. For a business in the cannabis industry, standard credit card processing companies likely won't work. Look into merchants that accept high-risk businesses, such as CBD payment processors.

It can be challenging to start a business from the ground up. Stay patient and keep up with federal and state laws. In time, you could have a thriving cannabis business to be proud of.

Need funding? Consider a cannabis business loan

Although it's uncommon, some business lenders will finance companies in the cannabis industry. You could also look into cannabis crowdfunding platforms like Fundanna.

1 – 5 of 5

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Fundbox lines of credit
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What to consider before starting a cannabis-based business

The fact is, cannabis still operates in a legal gray area, and you should prepare for the risk before you begin any operation in this market.

Prepare for legal uncertainty, but also be eager to invest significant resources to get your operation off the ground.

Cannabis is technically illegal

According to the Controlled Substances Act, cannabis is still illegal under federal law. The federal government tolerates marijuana businesses in states where it's legal but could potentially shut down shops and any other businesses at any time until marijuana is no longer classified as a federal Schedule I drug. Furthermore, the Supreme Court has ruled that a business can be convicted for federal offenses — even if it operates within state law.

Prior to this writing, former Attorney General Jeff Sessions had canceled an Obama-era policy that federal prosecutors shouldn't charge operators who abide by their state's cannabis laws.

Did you know?

Many cannabis cultivators choose to grow fewer than 100 plants in their facilities. When you hit the 100-plant mark, you qualify for a five-year minimum sentence if you’re convicted under federal law.

That’s just one example of the nuances of cannabis law. Consider the risks and whether you’re willing to accept them. Before starting your business, consult a legal adviser who’s experienced in marijuana law.

Your state has specific regulations

With almost no exceptions, you must be a resident of a state to start a cannabis business there. You may need to meet additional residency requirements that include showing proof of residency for a stated period of time.

If you have a criminal record — like a drug or crime conviction — your state may bar you from starting a cannabis business.

Research your startup costs

Costs vary by the type of business you want to start, where you intend to start it, your state's laws and other factors. Do your research to learn how much you'll need lined up before starting your business.

Here are some costs to budget for:

  • Business license
  • Application fee
  • Tax/seller's permit
  • Marketing
  • Security
  • Rent
  • Supplies
  • Utilities
  • Equipment
  • Interior decorations
  • Employee wages

Consider your ability to raise funds, if necessary. Some potential investors won't want to contribute to a cannabis business due to the industry's legal limbo. It's typically difficult to obtain funding from traditional banks for a cannabis operation.

Getting started might take a while

Navigating your state's bureaucracy can be tricky, often requiring patience to untangle and get through the red tape.

In Washington, for example, you may have to wait up to 18 months to get a marijuana business license.

Bottom line

Starting a cannabis business is no easy feat. You may need significant capital, and you'll likely jump through many regulatory hoops. On top of it all, you need to prepare to live in a legal gray area, as cannabis is still illegal under federal law.

But a cannabis operation may be a highly lucrative endeavor, as the legal cannabis industry is growing fast. You can carve out your own slice of a market already worth billions — and one that's likely to be worth billions more in the years to come.

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