Cannabis is one of the hottest, and fastest growing industries in the world. It’s estimated to hit $150B by 2025. 32 states have legalized cannabis in some capacity, with 10 states legalizing it for recreational use. That means the US has a hyper-scale ecosystem of growers, processors, distributors, retailers, infrastructure, and supply chain dedicated purely to cannabis. It’s an exciting time to have a business in this field, which is why so many entrepreneurs and investors are jumping into this blue ocean.
If you’re thinking about dipping your toe in the cannabis water, or maybe you’ve already started, pause for a hot minute to consider some of the “sticky” challenges you might face. I’ve been working with cannabis companies for many years, in every facet of the industry, and in multiple states. There are some inherent difficulties in getting off the ground. That doesn’t mean you shouldn’t do it, it just means you need to do a little more groundwork than your average entrepreneur.
Here are the top 4 challenges you’ll likely face when starting a cannabis business, and how to work through them.
Federally, cannabis is still illegal. Which means states (and municipalities) have been largely left alone to set up their own systems for regulating the cannabis industry in their own domains. And you better believe every single state has different laws, procedures, and controls. Some states have more hoops to jump through than others, and most states adjust and tweak the laws often as the industry matures.
You’d be very wise to thoroughly research the regulatory systems for cannabis in your home state. Your business will need to be in compliance with your state in order to operate, and you’ll need to understand these protocols in order to establish a banking relationship. You simply can’t achieve these two things unless you have the right regulatory system in place, per your state laws.
Sound daunting? It kind of is. That’s why so many cannabis companies rely on specialists who have done the research and are on top of changes and emerging trends in local laws. It’s an upfront expense that can save you from the cost of your entire business if you do it incorrectly.
De-Risking The Workforce
Before you even open up for business, you’re going to need to hire a team of employees to get your products or services to market. Your workforce is one of your most important assets to becoming successful, and also perhaps your single greatest risk.
It is imperative that you make sure your employees understand the nuances of handling and selling controlled substances, so that one of them doesn’t inadvertently land your business in hot water.
Create a thorough employee training process, and a documented handbook. Test them on the most critical laws regularly, and every time the laws change, updates that handbook and the team.
Establishing a cannabis business isn’t the same as setting up an LLC and checking it off the list. This goes back to that nuance of every state having different laws and regulations for cannabis. Having the right entity structure will mitigate a potentially large tax liability. Having the wrong structure will cost you an agonizing sum, not to mention the accounting costs needed to handle your business filings.
Because of its status as a federally illegal controlled substance, the IRS treats cannabis-based businesses differently. You could pay up to 3X more taxes if you don’t set up your entity the right way, right from the get go. Every state has different licenses — for instance, CA has 10 tiers of licenses while AZ has just 1 — know yours, or know someone who does.
You might not realize how much intellectual property you have in your business. Protecting your IP could mean protecting the control of your genetics, your brand, and your processes pertaining to cultivation, extraction, processing, and retail branding. You’re playing in a super hot industry, the last thing you want is another company to swipe your IP and go to market (it happens all the time).
Controlled substances companies produce different quality of product. If you have a premium product, it’s important you protect it fiercely. Again, this is one of those things that means a bigger cost upfront than what you may have planned, but it could save you the cost of your entire business down the line.
Cannabis is a good bet right now, so long as you do it right. That means more than getting your product to market. In this industry, it means foreseeing known hurdles and doing the work to overcome them. Much of this you can do on your own. When you feel overwhelmed, call in for reinforcements.
Andrejs Bunkse is an attorney and entrepreneur with decades of experience guiding companies in heavily regulated industries, Andrejs acts as chief legal officer, senior advisor and board member for a variety of enterprises, with an emphasis on the cannabis industry and high tech. Since 2013, his primary focus has been on supporting transactions, licensing support, business development and providing overall guidance in the complex and evolving cannabis industry.
He is either general counsel, board member or advisory board advisor for enterprises in California, Ohio, Arizona, Massachusetts, Pennsylvania, Canada and Mexico.