So You Want To Start a Cannabis Business? Ten Points To Consider
[This post is part of a series related to recent client inquiries. It changes frequently so check back again soon. For a broad description of the kind of work I do and representative work, see Services.]
When I was in college, no one would have dreamed that marijuana would become mainstream. Dispensaries are almost everywhere and soon non-medical marijuana use will be legal in California. Washington, Nevada, Colorado, to name a few, are already there.
So how do you cash in?
Build a Business Plan
Nearly every week, I get a phone call from someone “starting” a cannabis business. A few weeks ago, I spoke to a 20 something who already had a pen manufactured and for sale. I was impressed by how much they had done and yet surprised by some of the risks they were willing to take. I thought I’d give you a top ten list of points to consider.
- How Much Will It Cost You To Generate The Revenue Number Of Your Reasonable Dreams.
You read that right. What will it COST you to generate your Revenue projection?
For example, say you envision selling an oil or wax product by the gram to dispensaries. You sell at $14 and they sell for $30. And you dream up a revenue number of $1million. That is 66,666 units sold.
Wow, right?
What will it cost you to make that kind of coin?
Presumably you will purchase the flower, cost?
and have it refined right? Cost?
Add up all of your costs including: raw product, third party services, packaging, Labor, salaries, taxes, insurance, delivery, rent, cash management. If you want to be even smarter, separate your costs of goods sold from your costs to sell and run the business.
Well, what does it cost you to generate $1mil in revenue? Still probably a good number right
2. How Does Your Product Offering Differ From Competitors? (other than yours is the best)
Today you can compare your products on websites like weedify and leafly. Come January, that competition is going to triple for a while. Prices will fall.
If you have to start selling your product to dispensaries at $10 per unit or $5 per unit, are you still making money?
3. Partnership? How Will You Break A Deadlock If You And Your Best Friend Own 50/50
When you go into business with another, even if you do not have a written agreement, you are treated as partners. If you do not have an agreement, you run some significant risks. Partnerships can be formed under either an S corp, LLC or even general partnership. Picking the right entity is something I’ve covered elsewhere and if you’ve already formed an entity and aren’t sure if it is done right, that is covered elsewhere too.
Most marriages end in divorces. Business marriage divorce rates are even higher. I won’t go into the details of it but you must have a way to break a deadlock if two owners have equal voting rights. What is your plan for that?
For example, let’s say Al and Bert start off great and then Bert decides he wants to take the business in a different direction. Or, what if Al gets sick of Bert not working as hard as Al, but Bert takes an equal amount of net income. What if Bert decides that he is going to offer a slice of the business to his nephew? What if Al shows up with a new expensive piece of equipment and says “I wrote the check from the company check book because I think this equipment will really be fun to have here.”
How will two equal partners break that disagreement? Without having a serious discussion and taking steps in a written agreement, you’ve bought trouble.
4. Competition: How Will You Adjust When Price Per Gram Is 90 cents or $400 per lb?
I have had several conversations after reviewing a business plan that puts price per lb at $2000 USD. Sure, that happens but in the new world, the price for flower is coming waay down. How will the reality of a $400 lb if sold in a four lb lot effect your business plan?
5. Who Will Pay If Your Pen or Vapor Device Explodes Like an E-Cigarette (and You Have No Insurance)?
I am so impressed by these pen/vape pen companies in getting their products onto the market. I am not impressed by the fact that they all use the same Chinese factories and few if any have product liability insurance. When they blow up in someone’s mouth or pocket like e-cigs did – same technology – you can be sure that a plaintiff’s lawyer will sue you, the dispensary and everyone up the chain to the manufacturer. The manufacturer in China will be insulated from liability because no one will litigate this there.
So what have you done to safeguard IP infringement risk, packing/child proof liability, product liability risk?
6. If You Convert From a Mutual Benefit Corp to a For Profit, Was It Done Right?
Do who did your conversion? Was it done right?
Did it follow the statute?
Generally, a nonprofit public benefit corporation without assets can convert to a for-profit corporation by amending its articles of incorporation and providing a copy of the amendment to the Attorney General at least 20 days prior to its filing. See Calif. Corp. Code § 5813.5(a), (b). However, a nonprofit public benefit corporation with any assets cannot convert into a for-profit corporation through an amendment to its articles unless the amendment has received prior written consent of the Attorney General. Calif. Corp. Code § 5813.5(b). According to the California Attorney General’s publication, “Nonprofit Transactions Requiring Notice or Attorney General Approval,” certification that all charitable assets of the nonprofit will be transferred to another charity is required for consent. Furthermore, the publication states that applications should include:
- A letter signed by an attorney or a director of the corporation setting forth a description of the proposed action and the material facts concerning the proposed action; authorizing the proposed action, and board meeting minutes reflecting discussion of the proposed action;
- A copy of the corporation’s current financial statement;
- A copy of the corporation’s articles of incorporation (if not already on file with the Registry of Charitable Trusts) and the articles of incorporation of any other corporation that is a party to the proposed action;
- Any independent appraisals of the value of the public benefit corporation that are available. (In complex transactions involving conversion of a large public benefit corporation, the Attorney General usually requires independent valuation appraisals or other evidence that the transaction is fair and reasonable to the public benefit corporation.);
- A statement of the plan for distribution of the assets of the public benefit corporation to a qualified charitable organization, or for payment by the directors or purchasers of the public benefit corporation of the fair market value of the corporation to a qualified charitable organization.
