Let's Talk Money - What Does It Cost To Enter the Cannabis Industry?
I'm going to tell you this right now, if you want to know if someone has officially made it in the cannabis industry, they will have lost all their money at least once. They'll have completely collapsed and lost all kinds of money in investments and things that didn't work, and they're going to learn the hard way. I just wanted to put that in there because that's kind of an insider joke.
Now let’s talk money. There's a number of levels that vary from state to state, as far as what you need for qualifying funds and also how much the application is going to cost. Then there's also the money that you burn while you wait for everything to happen. What kinds of financial obligations go into entering the cannabis industry, and what's the burn rate while you wait for everything?
First off, every state has an application fee. Most of them are either fully non-refundable or a portion of it is non-refundable. The part that's non-refundable will be the big chunk, of course. For example, it may cost $1,500 for the first part of the application, but then $30,000 for the second part, and these huge fees are non-refundable. If you're not ready to bite that $30k bullet, you are absolutely not ready to get into this industry because you have to apply, and that’s just the first cost.
So first, you pay your non-refundable application fees. Then you have to do the entire build-out - your grow, your manufacturing facility and/or dispensary. You have to build the whole thing out as if you're ready to open tomorrow. Then they come in and inspect you and decide if you're going to get awarded your license or not. If they decide for some reason at the 11th hour that you're not going to get your license, not only did you lose your application fee, but you lost the $300,000 you spent building the thing out. It's a very high risk entry into this industry for sure.
Now about the money and showing your liquidity on applications. Every application that I know of includes a “we need to see your finances” section. They need to see how much liquid capital you have. They need to do a financial audit on all your members to show what kind of money they have and debt they have. All of these definitely tie into you getting approved or not. The more money you have, the more likely you are to get approved because they know you’re more likely to sustain and stay open during the beginning years, which are always more brutal than anyone ever expects.
Each state has different capital requirements for approval. In Pennsylvania you need to show you have $2 million. In other states, you have to have $300,000 for a dispensary, as well as different monetary amounts for different licenses. Some states even say that you can't show the same capital for different licenses if you're applying for more than one license.
So let's say I'm applying for two dispensaries, and I have to show $300,000 capitol to apply for a dispensary. I can't say I have $300,000 and apply for both. I would have to show two separate accounts with a total of $600,000 plus some to even apply for two dispensaries. Again, every state is different, you just have to read the regulations and laws. That kind of information is often available right in the application process now.
The third part is what's the burn rate until you get approved? Your burn rate is your rent, your initial construction costs (I wouldn't really put that on burn rate, but it's definitely a onetime lump sum that you have to pay) and your personnel. Your personnel is going to be your most expensive thing. If you can find really good people that know what they're doing and they can wear many hats, that’s very advantageous. Now you're only paying one person to be your clerk, who is also your accountant and janitor, and another person to be your head budtender, who also does your marketing and social media. In the beginning before you actually open, you want to try to reduce the amount of people you use just so you're not spending money while you're not bringing in income.
It’s important to hire people who can wear multiple hats, but this is another double-edged sword, because one of the things that they ask in the application process is who are you going to hire and how many people? This is a big thing they look for because they want to know how many jobs you’re going to create, both directly and indirectly. Therefore, the more jobs you show that you're creating, the more favorable you'll be on the application process. A lot of times they don’t even tell you that, it's just the way it is. So from the burn rate to opening, it's all about personnel. Try to find people that can do as much as possible for you or have partners or do things for yourself in the beginning.
You're going to need some clerks and lawyers, obviously lots of lawyers, so that's part of the burn rate. Find some good people that know what they're doing. The more experienced people you have, the less money you're really going to spend in the long run. If you're paying people to learn on the job, it’s going to be very expensive, especially when they mess up.
That's why I have my consulting agency, we get pulled in to do just that. It's cheaper to hire us as a consultant for the interim while they're waiting for their approval process. We go in, set everything up and disappear because we're not on salary. We're only being paid for the time where they're doing stuff, and then we bolt, we're no longer billing. Once their license gets approved, we train up all their salary people and then we're gone. Our consulting clients get to save a lot of money while also getting heavy experience at the same time. Find good people, and save yourself a lot of money.
We will be posting more questions, answers, and industry tips regularly, so be sure to sign up for our email list to be notified to your inbox! Also, we will be releasing the full length version of the podcast on these talks at the end of the week as a wrap up for those that prefer to just listen to the full podcast in one sitting.
Cheers!
.: Adam
CEO