Financial Considerations for Entering New Cannabis Markets

Author: Aaron Stolz, Senior Accountant, BGM 

As the cannabis industry continues to grow across the United States, new markets present opportunities for entrepreneurs and businesses looking to capitalize on this burgeoning field. However, entering a new cannabis market involves significant financial considerations that must be understood and addressed to ensure a successful venture.

1. Capital Requirements: Understanding Upfront Costs of a Cannabis Business

Entering the cannabis market requires substantial financial resources, with costs varying significantly by state. Entrepreneurs should be prepared to navigate a range of expenses:

• Banking: Access to banking services remains challenging for cannabis businesses. Monthly fees for commercial accounts can start at $1,200, assuming a bank accepts your application. Waiting lists are common and can delay operations.
• Legal and Regulatory Compliance: Attorneys are essential for navigating leases, applications, labor disputes, and regulatory filings. Some states, such as New York, require labor peace agreements, which can add complexity.
• Application and Licensing Fees: Costs can range widely. In Colorado, for example, annual license fees are $2,500 for medical use and $6,500 for adult recreational use.  In Illinois, a full authority Adult Use Dispensing Organization license costs $60,000 for a two-year license; $30,000 if you’re a Social Equity applicant.
• Escrow and Security Deposits: Most states require that you place a deposit in escrow to operate. Surety Bonds may cost $50,000 or more, to simply be held in escrow.
• Construction and Setup: Establishing a grow operation or dispensary is a significant investment. Small grow operations often start at $300,000, and retail spaces require robust HVAC systems and security features to meet regulatory requirements.
• Security: Comprehensive security measures, such as high-definition cameras, walk-in safes, and sometimes armed guards, are non-negotiable. Handling cash securely can also be a costly endeavor.

2. Regulatory Challenges and State-Specific Considerations for Cannabis Businesses

Each state’s regulatory landscape significantly impacts operations. Understanding local rules including zoning laws, licensing caps, and taxes, is crucial. For example:

• Zoning Restrictions: Municipalities often impose buffer zones between dispensaries and schools, parks, or other public facilities. These restrictions drastically limit available retail locations, driving up lease costs.
• Tax Burdens: Excise taxes, such as Colorado’s grower excise tax, add significant financial pressure. Businesses must remit these taxes before generating revenue from the product.
• Social Equity Programs: Many newer markets prioritize social equity applicants, which can slow the rollout of licenses but aim to correct past injustices in communities disproportionately affected by the war on drugs.

3. Strategic Budgeting for Cannabis Business Success

Cannabis businesses must adopt dynamic and flexible financial planning to adapt to industry challenges. Key budgeting considerations include:

• Inventory Management: Maintaining sufficient inventory is critical, with an initial outlay of $30,000–$60,000 common per retail location. Grow operations require a minimum of four to six months of overhead before generating revenue.
• Labor Costs: Skilled labor is essential but expensive. Businesses face a trade-off between hiring experienced professionals and incurring costly mistakes during a learning curve.
• Tax Implications of 280E: Due to IRS Section 280E, many standard business expenses, such as marketing, retail space rent, and sales staff wages, are not tax-deductible. Businesses must carefully allocate costs to inventory production to minimize taxable income.

4. Financing and Growth Strategies for Cannabis Businesses

Access to capital remains a challenge in the cannabis industry. Traditional financing options are limited, and available lenders often charge premium rates. Businesses planning for multi-state expansion should:

• Partner with Experienced Advisors: Engaging financial experts familiar with the nuances of the cannabis industry is crucial to navigating complex reporting and financing requirements.
• Focus on Efficiency and Volume: Given the price pressures from the legal and black markets, efficiency and scale are vital. Businesses must operate with slim margins and aim to capture market share through competitive pricing and high-volume sales.

5. Timing and Bureaucratic Delays in the Cannabis Industry

Regulatory approval processes are often slow and unpredictable. States setting up new cannabis markets frequently face bureaucratic hurdles, leading to delays in licensing and operational start times. Entrepreneurs should factor in extended timelines when planning their market entry.

Entering a new cannabis market is a high-risk, high-reward endeavor that demands thorough financial planning and a deep understanding of the regulatory landscape. By accounting for capital requirements, navigating state-specific challenges, and employing strategic budgeting, cannabis businesses can position themselves for long-term success in this dynamic and competitive industry. Contact BGM today for guidance and support in navigating the complexities of entering new cannabis markets.