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Recreational Cannabis Startup Guide
When starting a recreational marijuana business or seeking help with a cannabis business plan, knowledge is power. We at Masterplans, the leading cannabis business plan company, have put together this comprehensive guide, whether you’re starting a marijuana delivery service, grow operation, nursery, testing lab, or retailer/dispensary. Jump to a section by clicking below, or go straight to our sample cannabis business plan.
Recreational marijuana use is legal for those 21 and over in 9 states plus Washington, D.C., as of July 2018. Canada also legalized recreational marijuana use in 2018. Which states have legalized recreational cannabis? In alphabetical order, they are Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont, Washington D.C., and Washington state. Here’s a quick overview of what’s allowed in each state:
Alaska: People can possess up to 1 ounce of flower, 7 grams of concentrate, or 5,600 milligrams of THC. People can grow marijuana at home. Businesses can grow and sell recreational marijuana and products, as long as they don't look like candy.
California: People can possess up to 1 ounce of flower or 8 grams of concentrate. People can grow marijuana at home. Businesses can grow and sell any type of recreational marijuana and products.
Colorado: People can possess up to 1 ounce of flower or 8 grams of concentrate. People can grow marijuana at home. Businesses can grow and sell recreational marijuana and products, as long as edibles don't look like a fruit, animal, or human.
Maine: People can possess up to 2.5 ounces of flower. People can grow up to three marijuana plants at home. The state has been plagued by political disagreement over cannabis, but dispensaries will hopefully open in 2019, with preference given to Maine residents.
Massachusetts: People can possess up to 10 ounces at home and up to 1 ounce in public. People can grow up to six marijuana plants at home, with a max of 12 plants per household. Businesses can grow and sell recreational marijuana and products, as long as they are under a certain THC concentration and aren’t shaped like a human, fruit, or animal.
Nevada: People can possess up to up to 1 ounce of flower or 1/8 of an ounce of concentrate, as long as it has 1,750 mg of THC or less. As long as there isn’t a state-licensed dispensary within 25 miles, people can grow up to six marijuana plants at home, with a max of 12 plants per household. Businesses can grow and sell recreational marijuana and products, as long as they don’t look like candy or appeal to kids.
Oregon: People can possess up to 8 ounces at home and up to 1 ounce in public, up to 16 ounces of solid product, up to 72 ounces of liquid product, up to 5 grams of extracts or concentrates, and up to 10 seeds. People can grow up to four marijuana plants per household. Businesses can grow and sell recreational marijuana and products, as long as edibles are under a certain THC concentration.
Vermont: People can possess up to 1 ounce of flower. People can grow marijuana at home. But businesses cannot grow or sell recreational marijuana or products.
Washington D.C.: People can possess up to 2 ounces of flower. People can grow up to six marijuana plants at home, with a max of 12 plants per household. But businesses cannot grow or sell recreational marijuana or products.
Washington state: People can possess up to 1 ounce of flower, 7 grams of concentrate, 16 ounces of solid infused product, or 72 ounces of infused liquid product. But people cannot grow marijuana at home. Businesses can grow and sell recreational marijuana and products.
More states may follow suit in the near future, such as Michigan, North Dakota, New Jersey, New York, Illinois, and/or Connecticut. In November 2018, Michigan and North Dakota residents will vote on whether to allow the non-medical sale and possession of marijuana. New Jersey Gov. Phil Murphy campaigned on legalizing marijuana, and about half the state’s residents are for it.
And if New Jersey makes recreational cannabis use legal, New York may do so as well--because otherwise New York residents are likely to smuggle it across the border from other states. Connecticut may legalize it in 2019, as momentum built substantially in 2018, with six bills and four hearings about recreational cannabis. Finally, in Illinois, almost two-thirds of Cook County - the second most populous county in the United States after Los Angeles County - voters are for legalizing recreational marijuana use.
Marijuana industry revenue in 2017
Despite being fairly new, the legal cannabis industry is highly lucrative. North America legal marijuana sales were 33% higher in 2017 compared to 2016. (For context, 5% annual growth is considered decent for other industries.) Revenue in 2017 was $9.7 billion, so if 2018 revenue is 33% higher than the previous year, it could approach $13 billion before 2019.
Cannabis startups and investment activity
Mergers and acquisitions in the cannabis industry are nearly double in early 2018 compared to the same period in 2017 (nearly 150 so far in 2018). One high-profile marijuana startup is Weedmaps, the “Yelp for dispensaries,” which had ad revenue of $300,000 within a year of launching in 2007 and now generates an estimated $15 million in annual revenue.
Another successful cannabis startup is Baker, “the leading CRM for the cannabis industry,” which is used by more than 850 dispensaries. Another is NevadaPure, which runs dispensaries under the “Shango” brand in Las Vegas and Portland, and recently had a $28 million cash offer for a single dispensary.
Difference between recreational and medicinal cannabis
Strains of cannabis vary. Types with more THC may be more commonly used recreationally, as they can induce relaxation and psychoactive effects, whereas cannabis strains that are higher in CBD are more commonly used to treat medical conditions. However, there is no official difference between recreational and medical marijuana. The product is the same; the only difference is how it is licensed and who can legally obtain it.
In states that have legalized recreational cannabis use, typically anyone 21 years old or older can use marijuana. Whereas in states where only medical marijuana is legal, patients often must have a physician-issued medical marijuana card to purchase it (specific rules vary by state). Some states have legalized recreational marijuana sale, while others like Vermont and Washington, D.C., have only legalized recreational marijuana consumption, resulting in a “gray market.”
While recreational cannabis use is only legal in nine states plus D.C., medical marijuana use is legal in 31 states plus D.C. But the tide seems to be turning toward legalizing recreational use and skipping the medicinal step altogether. That simplifies access and is how Canada recently legalized cannabis.
Types of cannabis businesses
Interested in launching a recreational cannabis startup, but not sure which kind of company interests you most? Here are a few options (it’s important to note that each state’s rules and license types are different):
Dispensary: This is a retail storefront where anyone 21 and over can purchase marijuana. Typically, dispensaries must follow strict state-mandated protocols for product tracking, security, record-keeping, and hiring. (Each state’s rules are different.)
Marijuana cultivation: These businesses, also called grow operations, grow cannabis plants indoors or outdoors. Marijuana is then either sold through a dispensary or sold to a business that will create products with it, such as edibles or oils. Some cultivators are “vertically integrated,” meaning they grow, process, and sell cannabis to the public. Like dispensaries, grow operations also are required to keep thorough documentation, including water sources, smell abatement procedures, and so forth.
Product manufacturing: Cannabis manufacturers produce items like edibles, capsules, and oils, as well as everything from cannabis-infused soda to lotion. Manufacturers can distribute these products directly online and/or wholesale them to dispensaries and other distributors.
Delivery service: As of early 2018, the only states where marijuana delivery is legal are California, Oregon, and Nevada, although Colorado could be joining their ranks. In those states, cannabis delivery services process online orders from consumers who are of age, then provide convenient at-home delivery once or on a recurring basis.
Testing facility: Consumers and regulators alike demand consistency and quality control in cannabis products, which creates demand for marijuana testing labs. These labs use methods like liquid or gas chromatography to analyze products for CBD and THC content, pesticides, terpenes, bacteria, fungi, and heavy metals, to name a few. States such as Alaska, California, and Delaware mandate that dispensaries must get their products tested to remain in compliance. In California, which requires testing for more than 60 components, there’s a shortage of testing tabs, as millions of pounds of product await testing.
Ancillary business: If you don’t want to grow or sell cannabis, you still have plenty of options. You can create an app, payment processing service, advertising and branding agency, ad network, consulting firm, pest management product, automated plant watering system, security service, packaging and labeling service, or anything else you can think of.
Map of U.S. states for state-specific info
Marijuana Legalization Status
Medical Cannabis Broadly Legalized
Recreational and Medical Use Broadly Legalized
No Broad Laws Legalizing Cannabis Use
How much does it cost to start a dispensary, grow operation, etc.?
Costs to launch a marijuana business vary widely, depending on your state, the type of company, and additional factors. For example, a testing facility or cultivation facility will cost much more than a cannabis consulting firm or security service. And the application fee and licensing fees are much more expensive in some states than others. In Washington, it’s $1,480 to license a recreational cannabis company, whether it’s new or a renewal, whether it’s a dispensary or grow operation. Whereas in Oregon, the fee to license a recreational dispensary is $4,750. And in Massachusetts, it costs anywhere from $625 to $25,000 to license your recreational marijuana cultivation business, because the cost is based on square footage.
Needless to say, research your state’s particular fees and costs! In general, however, here are the costs you should factor in when budgeting for your cannabis company:
Fees: You’ll probably have to pay a licensing and/or application fee, and potentially also fees for permits, and additional fees if you’re a cannabis cultivator. Some states have one fee for any kind of cannabis business, but others charge different fees based on whether you’re cultivating, selling, or testing cannabis.
Start-up expenses: Almost every startup needs to budget for website and logo development, branding, software, and similar expenses. (Expenses are different from assets because you can’t return or resell them.)
Assets: Physical purchases such as equipment, furniture, computers, signage, fixtures, security system, a safe, jars and display cabinets, etc.
Working capital: These are the funds you need to run your startup (as opposed to startup capital, which are the funds that launch it). Working capital is especially important in your first few months, before you get established and when revenue is low. You should have enough working capital to fund operations for six to eight months. (You’ll know how much that is based on the financial projections in your business plan--see below.)
Cannabis-specific expenses and assets: Again, based on which state and cannabis business type, you may have to purchase a high-tech security system, or pay for product testing. Like other fees, research these beforehand so you know what to expect.
Business plan: It’s best to have a cannabis business plan, even if your state doesn’t require one as part of your application package. You can write it yourself, or budget to hire a consultant or a business plan firm like Masterplans.
Legal expenses: An experienced cannabis attorney is so helpful. S/he can help you make sure your recreational marijuana business is fully compliant with state and local regulations--and help you avoid getting sued.
You saved us thousands of dollars and so much time. Because of that, we were able to raise over $2 million.
Jesse Peters, Owner Eco Firma Farms
Here are two examples of real Masterplans clients who launched businesses in the recreational marijuana industry and their startup funds. In 2018, a recreational marijuana dispensary client of ours in Oregon was seeking a total of $171,000 in investment funding. That broke down into $60,000 for expenses (legal, consultants, grand opening party, website development, branding, and deposits for utilities, insurance, and lease); $93,000 for construction, electronics, and inventory; and $18,000 for working capital.
In 2017, one of our clients planned to cultivate cannabis and produce retail products in Las Vegas, Nevada, after recreational marijuana was legalized. They sought $7 million in investor funding: $4 million for a building, $2.3 million for lab and security equipment and build-out, $154,000 for expenses (legal, website development, and licensing), and $524,000 for working capital.
How to start a dispensary, grow operation, or other cannabis business
1. Do some preliminary research and planning
A little research before launching your cannabis company will save you a bunch of time. First, figure out if the market is already crowded with similar marijuana companies. (If you’re starting a brick-and-mortar business, look at local competitors; if you’re creating an app or other nationwide business, look at a regional or national market.)
If you’re launching a cultivation business or dispensary, your local area may have a cap on the maximum number of licenses allowed for that business type. (If your city only allows six dispensaries, and there are already six, you’re out of luck.) However, if there are available licenses, research the geographic areas you’re considering for your business to see if the area is already saturated. Note the locations of schools, as a cannabis business often must be a certain number of feet away from a school.
Even if your ideal area already has recreational cannabis companies similar to yours, that doesn’t mean you have to go elsewhere--read their online reviews or interviews with the founders to determine how your competitors are positioned in the market and whether customers like them. Try to determine their weaknesses so you have an idea of how your company can meet needs that aren’t being met. (For example, do customers complain online that there isn’t enough product variety, or that products are overpriced?)
After that, if you haven’t already, check your state and local fees to open a recreational cannabis company. That will help you determine if you can afford to start--and continue operating--your business. Look at both the initial fees and renewal fees; they should be on the website for your state’s Department of Health or health authority. (These sites typically end in .gov or .us.) In addition to an application fee and licensing fee, you might have to pay other fees like a background check or a fee for a marijuana tracking system. These fees can add up quickly.
Once you know whether you can afford the fees, choose which type of recreational cannabis business to start: grow operation, dispensary, testing lab, app, etc. Use your learnings from your competitor research and available licenses, as well as your professional and personal strengths. Then start brainstorming a long list of possible name ideas (this table can help). Some of them will be taken already, which you can find out with a quick google. (Also find out if the web domain and social media handles are available and whether your ideal name is already trademarked.) Your business name should be easy for potential customers to spell and remember. Decide on a business structure, such as LLC, S-corporation, or sole proprietorship. Finally, talk to an intellectual property lawyer, who will know if anyone has started to file trademark protection for the business name you want. You don’t want to waste money on business signs, a logo, business cards, and so forth if someone beat you to the name!
2. Develop a business plan
Some cities and/or states require a business plan as part of your application for a marijuana business license. But even if not, you still need one. It will give you invaluable insight into your company’s strengths and weaknesses, financial future, potential for success, and whether you need investors. It can help reveal things you weren’t aware of, like the annual disposable income of your target market--and that a slightly different part of town might be more lucrative. It’s a comprehensive deep-dive into not only your potential success but also potential problems that are much easier to correct before you launch!
Here’s what a recreational marijuana business plan should include:
Product/service description: Will you run a dispensary, grow operation, testing lab, cannabis consulting firm, product manufacturer, or something else? What’s unique about your business? Be as specific as you can. If you’ll open a recreational marijuana dispensary, which strains of flower or whose manufactured products will you sell?
Market research: If you’re opening a recreational dispensary, how many people live within five miles? If you’ll wholesale flower or edibles, how many dispensaries will you sell to? If you’re creating an app, who will be the user base, and why would they use your app instead of someone else’s? Use concrete numbers verified by a third party whenever possible (instead of estimates).
Competitors: Who will you compete with, both directly and indirectly? What do they do well and poorly? What is their online reputation? How will you differentiate your company?
Management team: Summarize your qualifications and those of others on your management team. (Think of it as a shorter, “greatest hits” version of your resume.) Obviously include cannabis industry experience, but it’s fine if you don’t have any. Highlight leadership skills, customer service, and business development experience in other industries.
Financials: This part can be tricky. You need a five-year financial forecast, including projected annual revenue, operating expenses, costs, and net profit. Each year’s projected revenue should include not only revenue but also your margin and direct costs. You can forecast revenue by estimating how much product you think you’ll sell (based on market potential), your retail price, your production cost, and how much you’ll spend on payroll, rent, and other expenses. Your cash flow statement will show that you’ll have enough cash to stay operational. You might want to include a sensitivity analysis (best- and worst-case scenarios), which shows 15% higher and 15% lower revenue than your initial forecast. For marijuana cultivators, it’s important to do a sensitivity analysis based on future potentialities of the wholesale price per pound. You can also include a break-even analysis, showing which month you will be profitable.
Requirements specific to your area/business type: Depending on which state you’re in, you may have to also include details about your security system, product tracking, secure product transport, manufacturing waste plan, and other aspects of your business.
Investor proposal: If you are presenting your plan to investors, how are you valuing the shares? There’s a method to this, and it’s important to work with someone who can assess the current industry multiple and build a “realistic and attainable” financial model. You’ll also need to consult with your attorney to make sure you are within state and federal compliance. Sometimes, you’ll need your attorney to draw up an offering memorandum, often called a private placement memorandum (PPM). A PPM informs potential investors on the details of the investment vehicle (your company) and potential risks associated with the investment. Attorneys love it when you can present them a solid business plan to work from.
As you can see, a cannabis business plan should be highly specific to your location and business type, so a business plan template isn’t sufficient.
3. Register your business and apply for permits and licenses
Your secretary of state’s website should have a page where you can register your business. And uspto.gov, the U.S. Patent and Trademark Office’s website, is where you can trademark your company name and logo if you want. (Trademarking a slogan is harder, because it can’t be generic or informational; it must be tied to selling your product.)
Now you need local permission to operate from your state (and possibly city/county). Even if your state has legalized recreational marijuana sales, certain cities might not allow it. Apply for a cannabis business permit on your state’s (and/or city’s) official website.
Finally, you need a business bank account! Using your personal one can get you into trouble and make record-keeping difficult. Thankfully, about 400 financial institutions including banks and credit unions welcome cannabis companies, the largest being Partner Colorado Credit Union at time of writing.
4. Get funding
Unfortunately, small business loans guaranteed by the Small Business Administration (SBA) are not available for cannabis companies yet, because the SBA currently “prohibits banks from issuing SBA-backed loans to any company that has a direct business relationship with a cannabis or hemp business.” But you have plenty of other options:
Bootstrap: self-fund or use donations from friends and family.
Get a loan from a private company that serves the cannabis industry, such as Green Leaf Money, GoKapital, Dynamic Alternative Finance, Diamond Business Loans, or United Capital Source. Watch out for high interest rates, though.
Pitch an investment firm focused on the cannabis industry, such as Snoop Dogg’s Casa Verde Capital, Privateer Holdings, or the network of cannabis angel investors, Canna Angels.
5. Meet employer obligations
If your marijuana business will employ people (it won’t be a sole proprietorship), register with the IRS to get your employer identification number (EIN). You’ll need an EIN to pay employment taxes and other business taxes. You may also need to register with your state’s employment department, in order to pay unemployment insurance.
6. Consider tax obligations and hire an accountant
Your business plan’s financial section should have included taxes, but just in case, consult with an accountant who’s familiar with the recreational cannabis industry to make sure. You’ll have to pay federal taxes, property taxes, income tax, and payroll tax. No one likes paying taxes, but you’ve gotta stay legal!
Need help starting a cannabis company?
Confused or overwhelmed yet? That’s normal. With such a highly regulated industry, and one with different rules in every state, starting a cannabis company can be very complex. Get help with your cannabis business plan from Masterplans, the industry leaders. We’ve worked with hundreds of cannabis entrepreneurs like yourself to create investor-ready documents and presentations so you can not only meet regulations but get the funding you need. Click below for your free, confidential consultation: