There are tons of articles out there detailing the cannabis licensing processes, the high valuations of cannabis companies, and the astronomical costs associated with getting started in this industry. As an entrepreneur new to this space, you may read blog posts and see videos about how licenses are probably one of the most expensive costs of the business. 

Some even call cannabis business licenses the golden ticket to the industry. But in most cases, it couldn’t be further from the truth.  

Our experts field plenty of phone calls from clients and prospective clients who are very uninformed about the value of their license – and sometimes, even about the value of their business. The key issue is that most people don’t know the difference between owning a license and owning an actual cannabis business operating with positive cash flow. The difference between these two assets could not be bigger. 

The failure rate of new cannabis companies is high, even in a country where 20% of all small businesses fail in their first year. We’ve seen an ongoing trend of entrepreneurs shelling out a ton of money to get started in this space, only to bleed cash and ultimately close their doors. 

In this post, we’ll cover some considerations you should make before you spend big on a cannabis license or a cannabis business, and explain what the difference is between buying a license and buying an actual business.

Consider this post a healthy dose of reality: by the end, you may want to buy into a laundromat business instead of diving headfirst into cannabis.

The first question you must ask before investing in either a cannabis license or a cannabis business is whether or not the market is ready. Consider the maturity of the medical cannabis market that you are getting into. That will weigh heavily into whether or not you even want to try to compete for a license or buy a business.

The oldest medical cannabis market in the country is California. Despite the fact that this market has been around for 20 years, there are still plenty of quirks that can make doing business difficult. For instance, a long-existing medical cannabis market usually means an equally thriving black market exists. This means that the local cannabis businesses, both legal and illegal, have been building relationships with their customers and cementing their place in the market for years. The longer that a medical cannabis market has been around, the smaller the incremental bump will in sales be when your state allows recreational cannabis.  

Case-in-point: when California opened up the market for recreational cannabis, there was no flood of new customers flocking to licensed shops. There was a relatively small new group of consumers (an incremental bump in demand), and the black market still is thriving nearly three years later.

Bottom line: the younger the medical cannabis market, the better the business opportunity.

If you believe the market is ready for your investment, then the next step is to decide whether you will pay for a cannabis business license, or buy an existing business. We want to preface this with one thing...there is no answer to this question.  It depends on many factors including your risk tolerance, your experience, growth/exit plans and much more!

A license, in most cases, is just a checkbox; a green light by the powers that be, authorizing you to open a business. A license says you can go ahead with the next steps to starting a cannabis business, but it doesn’t ensure that you win customers or make a profit. 

The process of getting a license is incredibly costly and there is no guarantee that you will actually get it. Once you do, the clock starts ticking for you to build a valuable business.

There are two good reasons to buy a cannabis license: 

1. As an asset: cannabis licenses are valuable when they’re scarce and hard to get in cities with high tourist populations. For instance, in Pasadena, there are only six retail licenses and a ton of tourists, meaning your sales potential is high. In the City of Commerce, there are limited licenses but not much foot traffic, given that the city is an industrial center with relatively low income.
2. As a tax strategy: having certain licenses opens your business to new tax deductions. You’ve probably heard that taxes are egregiously high for cannabis ventures. When you can invest $30k into a license to save $100k/year in taxes, it makes sense to buy that license. For instance, if you’re a cannabis retailer and want to get into manufacturing, getting a license to take advantage of tax laws may be smarter than buying an entire business, especially if you have space in your current facility.

When looking for licenses to purchase, especially retail licenses, make sure that the market makes sense and you’re not just getting overzealous about having a cannabis license. Make sure this license will unlock some type of financial benefit for your current business. Cannabis cultivators, manufacturers, and distributors can be more flexible because you can drive to get to your clients, so you need to make sure you look at the financials behind operating the business and find the cheapest cost of doing business.

On the other hand, businesses are sets of processes, people, and property that create value.  If you’re looking to buy a business, the most valuable ones are obviously those that are already profitable. Look for cannabis companies that have strong SOPs, amazing staff and repeatable success built-in. This goes for retail businesses and all other cannabis verticals. If you don’t look beyond profit, you risk taking on tons of liability with a company that doesn’t have the right compliance measures and documentation procedures in place.

And one last point on buying a business is that you MUST have self-awareness as to whether or not you can actually operate a business.  There is a significant difference between being an owner and an operator. Just because you own a business doesn’t mean that you will be able to run it well.  Operators have a multi-disciplinary skill set that allows them to handle the many facets of running a business from HR, to finance, to supply chain and everything else that comes with it.  This is where the power of having a team is important. If you know you are not an operator then you have two options:

1. Find an operator within your network to bring onto your team.  Consider giving this person equity and make sure that they have experience running a business that is similar to the one you are purchasing.  For example, a general manager at a big box retailer may be a solid candidate to be the GM at your dispensary. 
2. When you buy the business, offer stay-on bonuses to key employees such as general managers, manufacturing managers, head growers, and support staff.  You can keep them on for a certain period of time and have them earn-out that bonus wage or keep them on permanently. Use your time with them wisely so that you can document all of their processes (if not done already) and see what true value they offer within the business.  If you don’t know who to keep on, then consider running functional interviews.​

The media loves to write headlines about the so-called “green rush.” The green rush refers to the spread of legal recreational cannabis across the US, alluding to the Gold Rush of the 1800s and the money-making potential of this industry. 

In reality, the green rush is mostly hype. It’s a storyline pushed by the media that’s become ingrained in cannabis lore, only to be proven wrong at every turn. From our experience, don’t let these news stories or crazy high valuations of public cannabis companies trick you into thinking that cannabis is going to make you rich. Most of the time, it won’t. Once you look at real numbers and the amount of added complexity from working in this highly-regulated industry, you’ll see that making it in cannabis isn’t as simple as digging for gold.

If you’re still considering investing in the cannabis market, then we strongly recommend making your decision as rationally as possible. Do your research, think about the cash expenditure required, and calculate how much you stand to earn on that cash. This is above all a financial decision, not an emotional one. 

Before you buy a cannabis business, do a very thorough analysis of the financials and the opportunity that you’re buying into. Don’t let the green rush narrative cloud your judgment.  You are making a financial decision. Ask yourself, what will this investment yield?

In most instances, businesses are a more valuable investment opportunity than licenses, especially if they are break-even or profitable, have an aggressive tax strategy and have a stable set of clients.

Now that you know the difference between the value of a license and an operating business, think about your budget.  

If you have less than $100,000 in cash, you’re going to have an extremely hard time getting directly into the licensed cannabis business as a sole owner.  The only market that you could reasonably get into with a budget of that size is in Oklahoma. At this time, this state has a much lower cost for licensing. The cost of doing business in Oklahoma is also lower. However, you need to be an Oklahoman resident for two years to get approved.  

If you’re not an OK resident, you may want to find partners to pool funds together. Buy into part of a business or create an ancillary business that helps cannabis businesses succeed. For example, can you get into the waste removal business, set up security cameras, or start an electrical or construction firm that specializes in cannabis cultivation operations.

If your budget is around $200,000-500,000, you’re in the range of being able to take over and turnaround a struggling cannabis business. Recognize that just because someone owns a cannabis business now, doesn’t mean that they are good at running it. There are many great opportunities out there to take a business and run it profitably. Early cannabis operators were excited, got into the industry and really have no idea how to build a business to profitability. Their inexperience is now your opportunity to get into the market.

At this level of investment, we don’t recommend starting from zero and going through the entire licensing process, paying rent that entire time. If you do get approved, you will need to build out a business facility, stock it and then have enough operating capital to run it – and that’s a big IF. 

If your budget is in the $500k-$1.5MM range, then you have many more options. Consider buying an existing business and using that cash flow to finance the rest of your enterprise. It may need a bit of a turnaround, but that cash can float the rest of your business. 

When buying a business (and sellers, pay attention) you need to make sure that the valuation that you’re buying the business at is reasonable. Many operators think that their business is worth more than five times their existing revenue. The green rush causes some owners to over-value their business at a multi-million dollar price tag, but if there isn’t any bite to back up that bark, then the business isn’t worth much. Check out our M&A videos/posts for more info on how to value a business. 

If you need help with evaluating your deals and bringing financial sense to your next M&A prospect, then please reach out to us today.

An employee handbook, like any standard operating procedure (SOP), is useful for a variety of reasons. It can help you onboard new employees and train them on your company culture; it can create a common bond for cannabis dispensaries with multiple locations; and, worst-case scenario, it covers you in legal matters in the event you need to fire someone. 
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What few cannabis operators know is that there are actually some tax advantages to having a well-thought-out employee handbook. Here are some ways that having a great employee handbook at your cannabis business can save you money.

The 280E tax code makes it impossible for cannabis operators to claim certain expenses other businesses would otherwise be able to deduct from their tax return. 

Because cannabis remains a Schedule I classified substance, the only thing that cannabis operators are able to deduct from their taxes is CoGS – the cost of goods sold.  CoGS refers to all costs involved in creating a product: for example, packaging, labeling, and raw materials.

The IRS doesn’t define the way to allocate CoGS. As a result, cannabis operators must come up with their own system. Very sophisticated companies adopt technology and filing systems. They implement job codes for each task, tracked hours and even have a check-in and check out function for each room that employees are in.

For a startup cannabis company, the employee handbook and job description serves as sufficient for developing a reasonable methodology for allocating employee time to CoGS. 

In the employee handbook or job description, list out all of the different expectations for each employee’s role. One of those requirements will delineate how an employee will be spending their time. For instance: 

• 15% of time spent on packaging bulk products into smaller unit pack sizes
• 25% of time spent greeting customers and fulfilling orders
• 10% of time spent cleaning up the work area
• 35% of time spent tracking inventory age and levels
• 15% of time spent reordering products and doing QA testing

If you ever experience an audit, which is likely in cannabis, then you will have these documents, which we call audit additives. Triangulate your employee handbook with your CoGS allocations with respect to payroll expenses to justify your tax deductions.

Cannabis businesses are cash-heavy. It’s imperative that you set and follow a large amount of SOPs around the movement of money and what you’re reporting to your accounting department and the government. 

As we witnessed in the Alterman Case, a cannabis operator was given an accuracy-related penalty because they showed gross negligence in not keeping accurate records of cash movement within the company.  In Alterman v. Commissioner, T.C. Memo 2018-83 a cannabis operator attempted to argue for a higher CoGS, but didn’t have a system in place to justify those claims. Instead, the court sided with the  IRS’s narrow description of CoGS as “purchase costs plus production costs, and leaves out beginning inventory and ending inventory.” 

These same gross negligence problems can arise with investors: most operating agreements detail expectations on how accounting and reporting must happen within the company. Failing to follow the agreed-upon guidelines could end up with you being kicked out of a company. Do you want to really be kicked out for something that you can easily prevent?

This is where your employee handbook plays a role. In the handbook, lay out the procedures that an employee will follow for various tasks that the IRS and investors will be looking at, including: 

• Handling cash: counting tills in and out. Help protect against cash being diverted or stolen from the business
• Filing Form 8300: typically used by the IRS to kick off audits. They know you operate in a lot of cash, so when they see $750k in revenue and only one or two form 8300 filings, they know that they can find some type of gross negligence compliance issues within your business.
• Cash logs maintenance: If you aren’t making accurate entries into the cash log, as we saw with Alterman, then you will likely have some holes in your accounting which the IRS will not be happy about – and neither will investors. 

Of course, accidents happen, and something will come up because no organization is perfect. If you get audited, use the employee handbook and any relevant checks and balances you’ve installed. This shows that you have established policies and procedures and that employees knew what those policies and procedures were.

This is the best you can do. In addition, make sure you’re conducting regular internal audits so these critical cash handling and accounting procedures are actually being followed.

Hiring and firing employees are part of the job when you own a business. Having an employee handbook and job description can help make this part a bit more cut and dry. It sets a clear expectation and performance standard. 

An employee handbook is more than just a reference manual for managers. “It explains expectations for everyone and mentions the consequences of violating these rules. By explaining workplace ethics and expected behavior with colleagues and the management, an employee handbook minimizes workplace disputes,” writes one HR expert.

There are plenty of federal and state regulations around hiring and firing practices and avoiding discrimination. An employee handbook is a useful tool to consolidate those regulations in one place and lay them out in clear terms to protect your business. Have set guidelines for the steps to take if an employee is underperforming: are they placed on leave? Do they get a probationary period? Do they get put on a performance plan, and if so, what does that look like? 

Not only that, but it can save your HR team (if you have one) time from answering questions and onboarding new employees. Include information like: 

• Work Schedules
• Workplace Safety and Security
• Employee Benefits
• Leave Policies
• Complaints

Make sure your handbook is thorough and also easy to use. Once you have it in good shape, it can be used to guide your business for many years. 

If you need help with creating a cannabis business employee handbook, then please reach out to our team today!

Cannabis operators have been known to be incredibly creative in their quest to protect their cash and reduce their tax liability. From management company structures, packaging markup deals, and even multi-entity setups, we’ve seen it all.  But, there are instances where setting up a multi-entity structure can alleviate some of the tax burden caused by the 280E regulation. And let’s be honest, you want to be able to take some money out of your company and not get hammered on taxes at a personal level too.

In this article, we’ll walk you through an example of how a cannabis cultivation company has their business set up under one entity and their premises is owned by a secondary entity, and illustrate why this type of arrangement can be beneficial and what you need to consider.

In this illustrative scenario, a cannabis cultivator leases the building in which their grow operation is based. The building is owned by a separate property business entity to protect the asset in case anything happens to or on the property. 

So the first question we will answer is how do you set that building entity up, and who should own it?

In most cases, you would establish an LLC as the property management company. An LLC is an appealing option because it creates a simple tax relationship: it is a pass-through entity with pass-through income. Compare this to an S-Corp election, which complicates things with respect to tax filings. Speak to a legal expert for your particular situation: there are some limitations to your liability as an LLC, and each operator has different needs. 

For this scenario, we’ll stick with an LLC structure for the property management company. 

The Property LLC offers a long-term lease to the cannabis cultivation business. Since it’s a rental property, and the income is considered passive, there will be no payroll tax on the property entity. 

Now, the more that you increase the rent, the more money you can take out of the cannabis cultivation operation to lessen your tax burden. Here’s how that works.

For this set-up to work, there has to be “reasonable rent.” Reasonable rent is indicated by the market rate for a similar building and an arm’s length transaction. This essentially means that the property company and the cannabis cultivation business will act in their own self-interest to try to get the best deal they can and be reasonable at the same time. For instance, if the property charges $100/sq ft per month, that’s not considered “reasonable” – no cultivator would pay that rate. 

Now here is a nuance that you need to consider.  In the cannabis industry, due to green zoning regulations, there’s some wiggle room in what is considered “reasonable”; typically, cannabis businesses are forced to pay a markup due to high competition for relatively few compliantly zoned properties. That can equate to 1.5-3.5x normal market rents.

The arrangement of one business paying the other is key for lowering your tax responsibility. Cash is taxed differently between the two businesses.

LLCs are taxed differently than S-Corps or C-Corps, which is the typical entity structure chosen for cultivators. But, as a processing or cultivation business, you can take advantage of IRC 1-471. This regulation allows the cannabis business to write off that reasonable rent if it’s used for the production of the product. This rent cost goes right into your COGS. As a cultivator, this would likely be 90-95% of your rent that can be written off on your tax return. That rental income is then pass-through income to the property business ‘owners’ and tax is only paid on a personal level.

Aside from only having to pay personal tax on the passive rental income, another tax strategy that the property business can take advantage of is bonus depreciation or a cost segregation study. 

A cost segregation study classifies certain leasehold improvements as equipment which allows you to use a shorter useful life to calculate depreciation. This means you can take bigger deductions faster as a property company. This can’t be done haphazardly; a cost segregation study must be conducted by a specialized team of engineers and CPAs. The result of this study helps limit the amount of tax that is assessed on the pass-through income. For example, if you have $500,000 in bonus depreciation for this year from the cost segregation study and $800,000 in rental income for this year, you will only be taxed on the $300,000 difference.

Finally, as an added bonus for breaking costs into separate entities, M&A transactions become much easier. In the event that you wish to sell the building, you no longer have to worry about causing complications with your cannabis license.

​A critical question to this whole arrangement is what type of business entity you should select for your cannabis cultivation business. There are a few different aspects you need to consider, including things like income levels, other streams of revenue, exit plans, risk tolerance, and more. We suggest that you speak to one of our CPAs for a complete analysis of your situation and the best way forward. 

For illustrative purposes, let’s just talk about a few considerations you should keep in mind. 

First and foremost, remember that as a cannabis-touching company you are bound by the 280E tax code. This makes it difficult to create a good tax strategy and take money out of any cannabis business.

S-Corps and C-Corps are two of the most common business entities so let’s look at considerations for each.

In a C-Corps, you are taxed at a flat 21% thanks to the Tax Cuts and Jobs Act.  Also, you can take money out of the business in two ways: 

1. Wages: through W-2 income for the owner and the cannabis entity may be able to deduct some of that cost if they are contributing to the product. The owner will pay taxes on that wage at a personal level.
2. Qualified dividends: Entities do not deduct dividends and the owner only pays the dividend tax rate.​

An S-Corp is a pass-through entity so there are no corporate taxes, but it does require a reasonable wage for each owner. If you choose to set up an S-Corps, then your goal is to keep this reasonable wage as low as possible to help mitigate self-employment tax on that wage at a personal level. Self-employment tax is a little over 15%; you could consider this as an additional tax.

Here is a quick example: imagine your $100 in reasonable wage is first taxed at self-employment rate which is 15.3%, and THEN the remaining money ($84.70) is then taxed at a federal income tax bracket level. The cannabis business could potentially write off some of this reasonable wage if it qualifies as COGS, but the self-employment tax could eat away at a personal level. The good news? The pass-through income of an S-Corp is not subject to self-employment tax.

And lastly, you want to make sure that there is some clear delineation between the two or more entities.  As we witnessed in the case of Alternative Health Care Advocates vs. the Commissioner of Internal Revenue, courts are not lenient in letting cannabis operators use “management companies” to mitigate their tax burden when they so closely intertwined with each other. Operators are trying to employ a multi-entity strategy to include certain business expenses on their tax return, and getting penalized for their efforts. Consider having different owners or managers for each business.

In short, there is no one-size-fits-all answer to creating a multi-entity tax structure. There are many considerations that you need to account for, and you should work with your CPA and a lawyer to figure out the best entity structure that will work for your business set up.  

If you need help with this type of situation, we can run a financial model for you to help understand the implications of each strategy and choose the one that fits best for your situation. And, as circumstances change, your business may need to collaborate with us again to work out if any adjustments to the entity structure needs to be changed.

Contact us today to get started.

The cannabis market is kind of like the Wild West. As more states approve adult-use cannabis, companies are scrambling to adhere to regulations, be the first to reach new customers, and stake their claim in the market. In the process, many cannabis operators enter into vendor agreements or partnerships that may not serve them in the long-term. 

Our experts frequently work with cannabis operators who are seeking to remedy – and, more likely, exit –  contracts that have gone sour. Here are your options if you’re stuck in a bad contract that doesn’t work for your cannabis business.

There are a few scenarios in which a contract goes bad. The most common instance is when you aren’t being compensated fairly. Your effort, energy, and resources are not being compensated for their actual relative worth to finishing a project or deal successfully. This can happen when a new cannabis operator doesn’t know their value. 

Other common scenarios are when the other party is not performing their agreed-upon responsibilities; they fail to hold up their end of the contract. Or, some cannabis operators enter into contracts and end up not being able to perform their assigned duties. Many distributors find themselves in bad contracts due to vague terms with the supplier, or a non-exclusivity agreement with a certain product line. 

No matter what your bad contract scenario, the goal is to find a win-win between all the parties in the contract. Work toward aligning incentives as much as possible so everyone rallies around the same end result. And, if you can, try to mitigate a contract that’s going south before it gets worse. 

When you notice a contractual relationship heading south, document the instances of non-compliance. Often, in the scenario of a partner’s performance not being to the standard set forth in the contract, the other party can’t substantiate the issues they’re having. Document each and every instance of insufficient performance. You must have concrete examples to demonstrate your case if you wish to withdraw from an agreement early – especially if the disagreement becomes litigious. 

Whether it’s a supply agreement, a lease, or any other contract, make sure you document everything and consult your lawyer or an outside attorney. Get situation-specific guidance from an expert before making any definitive moves to exit a contract early. They can help you minimize the litigation risk you face in getting out of a bad contract.

Follow the agreement terms
It’s common that an agreement will have a termination provision, so that those in the agreement can exit so long as they follow the guidelines. Check your contract to see if there’s anything that gives you instructions as to how to quit the contract, such as by providing written notice to the other party within a certain window of time. Follow these instructions carefully: for example, providing verbal notice that you intend to exit the contract is not the same as written confirmation. These details make the difference between an organized, amicable procedure and a lawsuit. 

Ask for a renegotiation
In many, if not most cases, a few simple uncomfortable conversations can lead to better, more equitable deal terms. Experts suggest that you start by pointing out that the deal is inequitable for your company. “Because most people have an innate desire to be fair, the other party may be willing to reopen a discussion before the end of your contract period, especially if you back up your request with convincing evidence,” write the experts at Harvard. Show that the economics make no sense for your company and that you’re seeking to remedy an unfair deal. 

Here’s an example. Imagine a scenario in which you’re a distribution company that sells and distributes products for brands. Your payment terms to the brand are on units delivered to a retailer – and not on units collected.  Essentially, you are paying the brand before you get paid. Now, what if the retailers start getting a lot of refunds from clients, or maybe they pay their bills late or not at all? Then you’re left floating payments, and could quickly run out of cash.

Show your brand partners that this is not financially responsible and that you want to pay them out on units collected on, and not by units delivered to the dispensary. Point out to the retailer that you’ll be unable to distribute their product if you go bankrupt. Essentially, if the economics don’t work, then the contract means nothing because you will not be able to perform. It’s important to show your reasoning for each deal term and why it does or does not work for you.

Find workarounds
There may be ways that you can mitigate a bad contract without having to litigate or cause conflict. For example, if you’re in a bad real estate contract, consider subleasing. Usually, your lease will say whether or not you can sublease. If permitted, take the time to find a viable tenant to take over your space. If subleasing is not permitted, speak to with the lessor and see if they will remove you from the lease if you can help them find a new tenant.  

Real estate is one of the biggest expenses for a cannabis operator and therefore can cause some of the most complicated cash flow issues. In a scenario where you get a lease the intent of getting a cannabis business license, there’s the risk that you won’t get the license or won’t want to be stuck in the lease for the full term. See if you can sublease to new tenants or read what the provisions are to walk away from the lease. In some cases, it may even be less expensive to break the lease and walk away. Speak to one of our experts to weigh the financial costs and benefits. 

Claim impossibility of performance
Last, there’s a legal provision called “impossibility of performance” that you may be able to claim to get out of a contract. Impossibility of performance is “grounds for contract termination because circumstances beyond the control of the contractual party prevent performance. Death or incapacity of a key player involved in the contract can cause such an impossibility.” Natural disasters or other acts of God are considered eligible reasons for ending the contract due to circumstances beyond your control. 

Other ways to claim the impossibility of performance include: 

• Fraud: when a contract has been established based on fake documents or other deception 
• Mistake: a contract must be re-written if there’s an error in the contract term
• Misrepresentation: one party has not stated all the facts needed for both parties to enter the contract 
• Breach of contract:  the party that did not violate the contract is released from the agreement terms

If you’re caught in a bad contract, reach out to our team today and we can help you get in touch with a cannabis legal expert who can help you find a way out. 

The cannabis market in California is expected to reach $5.1 billion in market value.

As cannabis companies begin to grow and the industry becomes more mature, this sector looks more and more appealing, even to risk-averse investors. There are many investment opportunities still available; but how can investors evaluate which opportunities are winners and which are bad bets? 

Our experts have a clear line into what an investor must evaluate before working with a cannabis operator. As the cannabis market stabilizes, here are the three main areas and some other factors to consider when investing in a cannabis company: the team, financials and the product.

Some companies will be pre-operational, or in the startup phase. Others will have some financial results and market traction, which you can use to assess their proof of concept and revenue growth. 

The best way to assess the viability of either a pre-operational company or an existing cannabis operation is to perform due diligence into investment, its offerings, and the company behind the offering. Broadly, this means learning more about the team, the financial health of the company, and the product or service they’re offering.

​Here’s what to look for when investing in the cannabis market.

The employees, managers, and owners of the cannabis company can tell you a lot about thstrength of the operation. If the business is pre-operational, find out more about the team’s previous business experience. Have they had any major exits? What industry do their leaders come from, and how does that experience help them succeed in the cannabis industry? 

Look at their open roles and the roles they’ve already hired for. What key positions have been filled, and where are there skill gaps? Are those gaps absolutely necessary for success? Do the current team members have too many overlapping competencies?

The ideal cannabis business will have staff members who bring a range of skills and a depth of experience, both in managing a startup and in working in the cannabis industry.  

Next, get a sense of how the team works together. Do they have a good rapport? Are they a group of friends, or a team cobbled together from a networking event? Is there a clearly defined leader? Too many start-ups fail because there are no clear lines of leadership and too many cooks in the kitchen. The person in charge must be empowered to make decisions – and have the experience and skillset to help them make the right decisions in a business setting.

If the company has decided to split the leadership role, how have they divided equity? A potential red flag is when the leadership team divides ownership equally: it shows that not much effort was made to calculate the value each person truly brings to the company. If the equity is not split equally, take a closer look at how they decided to divide shares. 

If you’re seeking to merge two cannabis companies under one entity, it’s important to understand the people and work cultures that will be impacted by this process. Success in the cannabis industry depends largely on relationship building. Make sure you’re finding the right, well-connected leaders and experts in the field who can ensure your investment delivers the right ROI.

[Read more: Mergers & Acquisitions in the Cannabis Industry - Business Combination & Integration] 

There are other employee-related things to factor in for cannabis companies that have already been operational for some time. Meet with the team members individually to see how they talk about each other. How well do they know each other? Do they believe there’s room for improvement or skills missing? Are there gaps in the team that they don’t realize? Learn more about their hiring plan and success rate. Have there been any bad firings, and what went wrong?

If the team passes your initial overview, then move onto the financials. 

When a company is pre-operational, it’s difficult to discern if it’s financially viable. The cannabis operation may be seeking your investment for this very reason. In order to become operational, they may need a quick injection in cash. And, if you ever want to see that money again, do your due diligence to make sure they’re using your money for the right expenses. 

Look at the company’s Pro Formas and financial projections. How reasonable and detailed are they? Where did they base their estimates from? Ask the founders of the company to speak intelligently about their inputs, the resulting metrics, and how results may change if some inputs change due to evolving market conditions. What is their business model, and how much funding do they need? What will they do with that funding? 

[Read more: What ROI should investors expect in the cannabis market?]

For operational cannabis companies, you will get the chance to review some early financial results. Look at their revenue to see how much is recurring revenue v. one-time revenue. What are the growth rates, and how are those explained by the team? There are a number of factors that can impact growth rates, such as marketing campaigns, external factors (like the annual 4/20 holiday), and internal factors. 

Another major factor to question is the cannabis operation’s tax strategy. Taxes can stifle even the most enterprising cannabis operation. How is the business mitigating the impact of federal, local, and state taxes? 

Lastly, take a deep dive into the business’s cash flow. This goes hand-in-hand with how they will use your cannabis investment. What will the cannabis business use your funds to accomplish? Where have they used funding in the past? Are they cash flow positive?

Also, check their key metrics: 

• CAC - customer acquisition cost
• Contribution margin
• Gross margin overall
• Seasonality of sales

What’s their accounts receivable, and how aged are they? Is anything causing AR to age poorly?

[Read more: best practices for managing cash on hand

Last but not least, look at the cannabis business’s inventory turnover. Inventory management is important for staying compliant with cannabis regulations and can have a big impact on the business’s bottom line. How quickly is inventory turning over? Is the cannabis operator using track-and-trace properly, if required to do so? Do they have a plan for a worst-case scenario?

The last set of factors to evaluate when assessing an investment opportunity have to do with the actual product or service the cannabis company offers. The market is crowded – in California alone, there are nearly 6,000 operational cannabis licenses – and there are many opportunities out there for investors. 

If a company is pre-operational, learn more about what problem they are solving for their customers. Is the cannabis company addressing a true market need, or just trying to get a quick cash grab from this lucrative industry? If you determine they are solving a legitimate problem, does their solution actually work? Does the cannabis operator have a go-to-market strategy? Who is their target customer, and how detailed is this profile? Some cannabis companies think they will sell to everyone: this is a mistake. Savvy cannabis founders will have considered macro market trends and leveraged competitive research to narrow down their target audience to a specific customer. 

For existing, operational companies, learn more about how the product or service has changed since it launched. If they’ve pivoted, why? What’s their product mix? Do they offer different flavors, sizes, or types of product? What opportunities are there to upsell or cross-sell? Are any products over-indexing for success, and if so, why?

Every investment is a risk, but managing your risk could be the difference between making your money make money—or not. These few final factors to consider for each investment opportunity should not be discounted in comparison to the ones outlined above.

For pre-operational companies, evaluate their competitive landscape. What is their competitive advantage, and is it truly unique? Opening a cannabis business is not a novel idea, but their competitive advantage can make them stand out as a winning investment. Why are they joining the cannabis industry: for love of the product, or for cash?

For those companies already doing business, look at how well they execute their standard operating procedures. Are they compliant with local and state regulations? Do they have the necessary business and cannabis licenses? Finally, are they consistently passing lab tests? 

Should cannabis turn out to be too big a risk, there are other sectors related to cannabis that are seeing growth:

• Agricultural Technology
• Organic Farming
• Industrial Hemp
• Biotechnology
• Cultivation and Retail
• IT
• Ancillary products and services
• Consulting services
• Holding companies
• Cannabis products and extracts
• Branding and marketing

Another option is to look into opportunity zone credits as a way to invest in the cannabis market and also gain some tax benefits. You can also get started with a partnership opportunity to learn more about a specific investment opportunity at a lower risk profile.

Our cannabis tax experts are here to answer all of your investment questions: get in touch by clicking the "Get Started" button below.

Cannabis delivery is legal thanks to California’s new permanent regulations passed earlier this year. 

The state-wide legislation makes it possible for cannabis operators to deliver to a customer, even when they live in a municipality that prohibits cannabis. Non-storefront delivery companies are able to serve these “cannabis deserts,” adding a lucrative new revenue stream to their business. 

Adding delivery and online shopping can be a great way to reach new customers, increase your revenue, and build your business. But, it’s important to price your delivery service profitably – otherwise, your delivery service can easily drain your cash flow and make it difficult to sustain other parts of your business. 
​
Here’s what you need to know about cannabis delivery pricing. 

Delivery pricing comes down to a three-step approach. The first step is to look at the market and understand the current landscape. 

You need to answer these questions:

• At what price are competitors selling their products? 
• What is a customer’s willingness to pay? 
• How sensitive are customers to price increases?

We suggest that you do some competitive analysis to research the going rate in your area and put all of your research information into a spreadsheet. 

Things to track would be:

• Price range of the highest and lowest price points for different amounts of cannabis. 
  • What’s the lowest price operators are one gram selling for? 
  • What’s the highest price one gram is going for? 
• How many reviews does this service have on major ad platforms and what’s their aggregate rating?
• How many cannabis products do they sell?
• What payment methods do these retailers accept?

The second step is to figure out what your price floor is: this is the minimum amount you can charge to cover your costs. 

You can read more about pricing cannabis products in our guide, but the basic goal is to take into account the unit price, as well as the overhead and fixed costs per unit. 

Remember, product is just one of your expenses: you also have costs associated with gas, vehicle insurance, paying your team, and licensing fees. Factoring in these extra expenses gives you a breakeven point when your sales exactly cover your expenses. 

​Before we continue, let’s take a moment to understand what you’re learning about your company during this process.

As a business owner in a competitive industry, it’s likely that you’re familiar with gross profit margin. This is a calculation of (total sales revenue - total direct costs of goods sold)/total sales revenue. This number “establishes the relationship between production costs and total sales revenue.”
​
Contribution margin is calculated as (revenue from sales of an item - production costs for the item ) ÷ revenue from sales of the item. This number tells you “how profitable one item in a product line is in comparison with another.” It lets you critically assess how your different products are performing; what we’re essentially doing is breaking out delivery as its own separate product line to assess if it’s a worthwhile investment. 

Calculate your contribution margin by subtracting variable costs from your sales. Obviously, this point is important because the goal is not to break even on delivery but to make a profit. Include all your cost of goods sold, employee wages, and taxes. Taxes are part of your variable costs, and you must include them in this calculation. 

Then you will need to figure out how many units you will need to sell at a specific price point and contribution margin to breakeven and then be profitable. 

So what you’ll you need to consider is your capacity and working capital. 

First, ask yourself, how long will it take to get to the capacity to hit that target number of units?
Then consider, how much working capital do you need to last until getting to capacity? 
​
Once you understand those two numbers, you will know your working capital needs and then can begin testing your assumptions. 

The third and final step is testing.

A big advantage of delivery is that it’s easy to test your pricing scheme quickly. E-commerce has a quick feedback loop, meaning you can perform A/B testing on your website and with different customer segments to zero in on the right pricing scheme for your business. 

A/B testing is a way to compare two versions of a pricing model against each other to determine which one performs better. In the experiment, two variants are shown to user groups at random, and then statistical analysis is performed to show which option leads to better profit. 

To perform A/B testing, first separate your customers into new and existing customers. 

The “A” section of your test will be your control group: customers who exist with the same current margin. 

Your test group B will receive new pricing wherein you test different margins. Use a few different cohorts at different markups to see how your customers respond to the new pricing changes. 

For example, analyze each test group of customer’s purchase frequency and average spend per transaction to see if higher price points discourage shorter times between purchase. Compare to see where you can squeeze more margin without turning away your best customers. 

Here’s an example of how to host a pricing A/B test. Pretend your customers, on average, order every 14 days. For two months you run a delivery pricing test where for one group of existing customers, you bump your price margin by 2.5-5%. Will they visit less frequently? Will they spend less per visit? 

​In parallel, you run a test on your new customers. You are able to perform an A/B test using two landing pages or sets or products. The first landing page is your existing, standard e-commerce website with your normal pricing. The second page tests a higher price margin – similar to the margins being trialed on your existing customers. Which landing page or product has a higher conversion rate? 

How can you make sure to make the most of your pricing test? 

Amplify your reach with ads, using flyers, Weedmaps, and more to make sure to get the word out. 
Check out our guide on cannabis marketing to understand what you can and cannot do in your advertising campaigns. What’s great about delivery, though, is that a customer comes through your website, giving you full control over the check-out experience. 

You’re able to gain insight into how their payments play out: will a customer use cash, debit, or credit? 

Pro-tip: our experts recommend limiting how many credit cards you accept to lower your risk of money laundering issues.  

You also get solid metadata including: 

• What products will they browse before checking out? 
• Where do they abandon their cart? 
• How long did it take from first touch to checkout?

Testing and more can give you valuable insight that translates to the in-store experience as well. 

Learn more about profitable pricing by getting in touch with our experts at the button below.

As the cannabis industry attracts more entrepreneurs, those same people are looking to raise capital.

In this blog post, we will walk you through four main points on preparing yourself to speak and collaborate with investors.

These topics include:

• Cannabis Industry Context
• Raising Capital
• Pitching Your Business
• Negotiating Your Deal

Let’s get started!

Let’s discuss the mindset you need to have and understanding the landscape that you will be competing in as a cannabis entrepreneur.

First, it’s imperative that you know that it will take A LOT of money to create a successful cannabis business for a few reasons.

It’s a highly regulated industry, just like the liquor business or airlines.  That means a lot of compliance related issues that you will need to hire experienced professionals to manage for you such as lawyers to handle licensing and CPAs to handle your taxes.

Most businesses fail because they run out of cash...plain and simple.  Whether that’s cash for payroll, to solve marketing problems, or to solve legal issues; without it, you have no oxygen for your business.

Next, running a cannabis business, especially a dispensary is an incredibly hard daily operation.  You are running a public-facing pharmacy that is helping patients and legal adults learn and obtain their cannabis.  It takes a high-level of skill and tolerance to work with the public day in and day out. It could be 8, 12, maybe even 18 hours days to make sure your operation is running smoothly.

Another point that we need to stress is that you can’t do it all by yourself. You need to build a team to over all of the main functions of your business; especially the ones you don’t like to do.  

We suggest starting to look for people to cover:

• Human Resources (hiring/firing/compensation/etc…)
• Finance/Accounting
• Technology
• Legal
• Purchasing/QA
• Operations

You also need to surround yourself with smart, trusted advisors that can help make up your board of directors once you get that far.  Start now, because building a network and trust between people does not happen overnight.

Now let’s review and understand the Los Angeles and California cannabis market a bit deeper.

California is the BIGGEST legal cannabis market in the world, and Los Angeles is the epicenter for it all boasting 10 million potential patients and a very accepting cannabis culture.

But don’t forget, there is a huge black market right now and it’s not going anywhere.  Even five years into legal cannabis, Colorado is still dealing with a proliferating black market.  To build on that, the Bureau of Cannabis Control is way understaffed.  And one last point is that bad actors are slippery; getting busted is built into their business plan which makes it difficult to beat them.

Currently in Los Angeles, there are about 182 dispensary licenses, and about 900 in California overall and that number is increasing every month.  In LA, there will be about 400 dispensaries in the next 12-24 months.

So yes, a dispensary is relatively scarce now, but what about in 7 years?  What about when Rite Aid and CVS start to become licensed cannabis businesses?  How will that affect the valuations of cannabis businesses?

We believe there will be a huge run up in the amount of cannabis businesses, but then an inevitable collapse will happen similar to the late 90’s tech bubble.  This collapse will then lead to a consolidation of the licenses and businesses into the hands of smart operators who know how to survive in competitive landscapes. 

If you want to survive, you will have two things to lean on:

1. Brand 
2. Excellent Operations that creates an amazing customer experience

With brand, you want people to ask for your shop, product or service by name.

For example:

• TipTop cannabis shop, not just cannabis shop
• BigGreen vape pen, not just vapes
• ShortStop delivery service, not cannabis delivery

Once Alexa, Siri and Google Home start to dominate how we interact with the world of information, having a brand that people know will be one of the most valuable assets ANY business can have.  Or else you will be at the mercy of paying these platforms to own the word “dispensary” or “vape pen”...and it won’t be cheap.

Now that you have a bit of context around the cannabis industry and the California market, let’s dive into aspects of raising capital for your cannabis business.

Let’s start with a 30,000 foot look at the entire process.

It’s a long and tiring process to put on the capital raising roadshow, so be prepared to focus solely on this until it’s complete.  

And don’t clap for yourself too much once you actually do raise the money.  Raising capital is just one check box, one step in the entire scheme of building a business.  Yes, it’s a gate, but the execution of your plans, finding product market fit, and creating value is most important.  When you get the money, the clock starts ticking, so don’t let that time pass too fast.

When you take money from investors at any level, it’s like a marriage, but with tougher contracts and more strict controls on your actions.  You’re attached to these people for life, or until you sell your business, buy them out, or fail in your business.

But one thing to really understand is that investors are betting on the jockey and not the horse.  This means they are betting on you and your team to figure out the best way to execute your plans. They are investing in a relationship, because to be quite honest, opening a cannabis dispensary is not that novel of an idea.  

One piece of advice is to be honest with what you don’t know and ask for help from investors when you need it.  They are vested in your success and you already got the check, so no need to worry about scaring them off. Further, don’t let pride hold you back from success and be open to feedback...you may actually learn a thing or two.

It’s also important to know that institutional investors are guessing when placing their money.  Investors don’t know how everything will play out, but they are making bets...and many of them. They know that one homerun will pay off the 47 strikeouts that go to 0.

Lastly, don’t think that you’re their only option to get into the industry.  Investors have many options to get exposure to the cannabis industry including investing in companies like yours, into stocks of larger companies, or even contributing to larger funds that place bets for them.  Stay humble.

Knowing that there are many options, you should really take the time to consider what makes you special.  Ask yourself:

• What leverage do you have in the conversation with investors that makes your desirable?
  • Is it experience or education in the industry? 
  • How about traction on a small scale that’s ready to go big?
  • What about influence in your community where once you launch, you have a built in user base? 
  • Or maybe you are putting some of your own cash in, so there’s vested financial interest to not let this fail.​​

There are many ways to raise capital for your cannabis business and those are:

• Self-Funding: You can put your liquid cash into the business, borrow out of your 401k, borrow against your home value, or sell high-value assets
• Friends and Family: Taking cash or investments from your close friends or family.
• Angel Investors: These are usually $100-500k rounds that come from wealthy professionals such as doctors, lawyers, or even generational wealth families.
• Crowdfunding: Not very popular in cannabis, but a potential option if you can get around the legalities.
• Private Equity or Venture Capital: More common as time goes on, and this is where very high growth businesses need to look for capital.

Now let’s explore the stages of a typical investment journey.

It is highly recommended that you self-fund to start out, but if you can’t then it’s time to look elsewhere.

First is friends and family.  These are usually smaller and easier to close, and the terms should be simple and favorable for them to get in on the next round.

Then you have Series A which should hopefully be someone local who understands the context of your market.  These should be relatively easy as well, especially if you have some traction. At this stage, valuation is not everything...you also need to see what smart money you are aligning yourself with, and we will get to that later.

Then you have Series B which is usually some of the hardest money to raise, and it takes time and lots of patience.  It’s hard because investors will continue to ask, why are you not cash flow positive yet? It doesn’t take a hero to lose money every month, but it takes a savvy operator to take cash and turn it into long-term value.

Finally you have Series C and beyond.  This is all about traction and product market fit.  Usually you’re going out to raise this round because there is fierce competition between you and other brands, and the person with the biggest war chest (and great deployment of capital) will likely come out on top.  

Another potential capital raise is a Line of Credit (LOC) which is largely non-dilutive capital that is collateralized by your assets such as Accounts Receivable.  You may see these also called bridge loans.

Above is an illustration that shows how the capitalization table changes over the different parts of your fundraising journey.  

As you can see, at the beginning or formation of your business, it starts out with you owning everything.  Then as you build your team, you need to split things in some reasonable way.  

Now, as you start to take on capital, you need to break off equity for your outside investors if you’re not self-funding your business.  And with each successive round of raising capital or hiring new key team members, you continue to get diluted down and own less and less equity than when you started.  

It’s important to know that you won’t always own a huge chunk of your business (or maybe you will), but you give up equity in exchange for capital that helps you make your company more valuable.  While your percent ownership may go down, your total value could (and should) go up over time.

Before you take on capital you need to run the numbers to see if you really like the position you’re putting yourself in.  

You will need to do a financial analysis and produce Pro Forma financial statements which will help you quantify how much capital you ACTUALLY need and how you will use those funds.  It also helps you answer the question: Does this even make financial sense to take on capital? Some businesses raise too much money and end up giving away too big of a chunk of the business only to lose their motivation for growing the company. 

Once you know more about the financial nuts and bolts of the capital raise, you then need to look at your exit potential.  What can you really get?

In the dispensary market and cannabis as a whole industry, we are seeing multiple land everywhere from 2x to 12x, but more toward the 3x for dispensaries.  But note, more and more dispensaries are opening every month which will eventually drive these multiple down.  

The multiples are typically based on Net Income instead of gross because of the extreme tax burdens that cannabis companies have.  If you don’t have a good 280e mitigation strategy, then you will surely see a lower valuation compared to someone who has gone with an offensive tax strategy. 

Now once you know the total exit value, you need to factor in your percentage of that exit.  

Let’s look at an example.

Gross Revenue = $2.5MM
CoGS = $1.5MM
Gross Revenue/Margin = $1MM/40%

Additional Expenses and Taxes = $725,000

Net Income = $275,000

Multiple = 4x

Total Business Value = $1.1MM

Your ownership = 51%

You get $561,000 at sale of business​

You may have heard the term smart money or dumb money, but I want to explain it.

Smart money is someone who brings you more than just cash.  You need to ask yourself, if I take money from this person, WHAT ELSE can they offer or provide to me and my business?

Some examples include:

• Access to joint venture deals with their other portfolio companies
• Professional services
• Mentoring/coaching/wisdom
• Access to people, markets, and other important business components

Dumb money is simply someone who can write you a check, but provide little to nothing else...other than a headache when they keep asking you when they will be getting their return back on their investment.

But, dumb money can be smart money if you know exactly what to do to execute at a high level and they give you the space you need to grow your business. 

It’s a balance, but we suggest always going for smart money, especially in cannabis.  It’s quite a clicky industry and you need to have someone be your evangelist to get you into the inner circles.

Once you have a business plan, pro formas and pitch deck, now you need to find investors.  

You can start by researching prior deals in the cannabis space and reaching out to those investors.  Crunchbase is a great place to find many of the institutional deal details as well as contact information for the investors.

You can also go to meetups or get involved in the local cannabis community.  Another idea is going to alumni associations if you went to university or reach out to other existing networks; maybe even reaching out to your local church!

There are angel networks out there and you can even look at AngelList.com to find potential cannabis investors.  We’ve also seen a few investors on LeafWire.

You can start to prospect and make connections on LinkedIn, and then produce content around your capital raising journey.  Even reaching out to connections directly and asking if they want to see your abbreviated pitch deck is a potential way to engage investors.

Lastly, one type of deal we’ve been seeing more of is Joint Ventures.  This is where an existing dispensary owner, grower or manufacturer would invest into your new businesses because they see some synergies between the two operations.  This is quite creative because it can also give access to their licenses, operations knowledge, real estate and cash flow.

You just need to go hard and hit everyone and anyone up.  You never know where that first check will come from, and it may come from the most unlikely meeting at a happy hour, a wedding or even on the train back from your day job.

One thing you see often in this stage of the industry is predatory financing or investing where more sophisticated investors take advantage of desperate startup founders.  

While most of these tactics are not illegal, they can surely screw you over in the long-term so you need to keep your eyes open for these tactics.

• Big fees for negotiating of closing deals.  There are some people out there that want to take on huge fees for no logical reason, so make sure to quantify and put a cap to fees if you start to see them.
• Penalties for paying off debt early or selling your company before a certain time.  If you take on debt-financing, you should make sure that you have the freedom to pay it off early with no penalties. Also, make sure you are not subject to an egregious lockup period.
• Inflated Interest Rates.  Another aspect of debt financing is the interest rate.  If someone is loaning you cash at some crazy interest rate (practically loan-sharking), then turn around and run the other way.
• Steering/targeting.  If someone is trying to steer you into a deal or targeting you with options that don’t make financial sense for you or the business, then don’t work with that person.  Again, you become married to investors, and you don’t want to work with someone who doesn’t have your best interest as a consideration.
• Adjustable interest rates that explode. Look at your deal terms and see if there is anything around adjust interest rates, what triggers the adjustment and what level they go to. If it’s something crazy high, then negotiate them down or fully out of the deal.
• Personal Guarantees.  If someone is making you personally guarantee a loan with an asset like your house, they do this to protect yourself.  At this point you are making a huge bet with your life and all of your assets so make sure you’re confident you can pull this off. Because if you don’t you lose your business and your house.
• Mandatory arbitration clauses.  Don’t let someone take away your power to use the full extent of the legal system against them.  If someone is forcing arbitration on you with no ability to sue, then you will lose access to legal tools to protect your business and personal property.
• Hush side deals or side deals in general.  In the social equity space, you sometimes see investors paper a good deal for ‘looks’ to the DCR, but then insist you sign some other paperwork to manipulate the numbers. This is different than an amendment and could really hurt you financially if you don’t know what they’re making you sign.  Always consult your lawyer before making or signing any deals.

Once you find potential investors, your job now is to pitch them your business and the investment opportunity.

The fundraising process is quite long, but if you prepare it could be about 4-5 months from prep work to closing the entire round.  

Here are some basics of how to prepare for your pitch:

• Business: know what makes you unique in the cannabis industry
• Comparables: be able to speak to the competition and relevant exits for your vertical
• Industry: know the key factors to success in the industry and understand your target market in great detail.
• Numbers: be able to speak with confidence around the metrics of your business, the financials around the operation, and what cash burn you will have and what it will be used on.
• Strengths & Weaknesses: Know what makes your team competent, but also transparent about what you need help with.
• Strategy: think this one through in great detail and be able to articulate it with practical terms and specific strategies for execution.
• Audience: Know why you are pitching this person.  Are there synergies between their other investments or do you think this would be a smart way to expose them to the industry?
• Needs: Know exactly the amount of money you are asking for and how you will use it.  They WILL ask about this if they like your general idea.
• Practice: Spend lots of time practicing and tightening up your pitch over and over again.

Let’s also cover some miscellaneous tips around fundraising.

Again, BE PREPARED.  Practice your little heart out so that you could go into your pitch at a moments notice.

Time kills all deals, so create urgency when meeting with investors. You don’t want to keep them on ice and think it will keep the deal fresh.  They have options and want to feed off your excitement.

Get solid advisors who can introduce you to investors and guide you through the process.  It’s tough to do this alone, and having someone by your side will give you extra confidence in the room.

Search for investors locally first.  This makes it easier to meet with them in person because travel cost will be low, but also in cannabis, this is still a local endeavor...at minimum a state by state game until cannabis is rescheduled.

Go for the “No” as fast as you can.  Don’t let investors string you along saying maybe or that they need to take to more people.  Put pressure on them and show that you’re serious about your time and your business.

Rejection is part of the process.  Once you get the first “no”, don’t let it crush your confidence.  If you’re doing this right, you’re talking to 100-500 people and most of them will tell you no, so grow some thick skin and keep moving forward.

Try not to use an agent which is someone who takes a percent of the money you raise in lieu of making introductions for you.  This is different than an advisor and agents may pressure you to take deals that are not in your best interest just so that they can make a commission.

Lastly, get a lawyer to review and make sense of all the terms and deal language.  Your job is to get investors to the point of yes, and then you hand the deal off to the lawyers to hash out before you sign the dotted line.  If you sign a deal without fully understanding every clause, you may be shooting yourself in the foot before the race actually starts.

​When meeting with investors, you will need to create a business plan and pitch deck.  We don’t want to write too much about it here, so instead you should review the video below which will walk you through EVERY detail about what to include, how to make it interesting and what to avoid.

Shorter decks are better.  Don’t create an entire book about every detail!

The potential slides you will include in your pitch deck are:

1. Introductory Slide
   
2. What’s the Problem?
   
3. Your Team’s Solution
   
4. The Business Model
   
5. Market Overview
   
6. Marketing and Selling
   
7. Cost and Pricing Model
   
8. Competition
   
9. Team
   
10. Social Impact
    
11. Competitive Advantage or Secret Sauce
    
12. Conclusion
    
13. Appendix (if needed)
    

After you pitch an investor and they say yes, the next step is negotiating a deal for your company.

You should understand upfront that negotiating is an art, not a science.  It’s ok to adjust your style to best fit who you’re negotiating with. There is no one method that is best for every situation.

Let’s review a few of the items that are actually up for negotiation.

• Ownership equity/valuation
• Amount of money invested
• Revenue distribution
• Type of financing
  • Equity or Debt
• Voting rights
• Board seats
• Right of first refusal for next round
• Payback period
• Your job responsibilities or participation in the venture 
• Your claim to the real estate, if RE is included in deal

The purpose of any negotiation should be to create a win-win for all involved parties.  It’s okay to leave money on the table because your goal should be to create a long-term business relationship.  It’s important that as you negotiate certain terms that you are setting precedents for future deals so fully understand every aspect of the deal!

To prepare for your negotiation, you should know where you want to end up before you start.  That means knowing how much you want to raise, at what valuation and every other term in the list above.  If you’re doing a deal that you’re unfamiliar with, then research other deals in the space before you start negotiating.

If possible, learn something about the person with whom you’re negotiating so that you can build common ground with them.  People negotiate with other people...this is not a mechanical process, so don’t be scared to create that human connection.

Also, be prepared for the negotiation to be turned over to someone else once you reach a certain point such as getting your term sheet.  When you reach this point of the deal, it usually gets handed over to lawyers to make hash out the details and make the deal ready for each party to sign.

When engaging in a negotiation, you should start high, but be reasonable. This will give you room to ‘give up’ things and make the other party feel like they have won something.  It’s a bit of psychology, but if done correctly, you will land at or near your intended targets.

Next, understand the opposing party’s position so you can logically argue against it.  You need to ask yourself and find proper reasoning behind why you should get something they have potentially NEVER given to other deals.

Don’t be so stiff in negotiating.  It’s okay to use humor to break tense moments.  People want to work with people that make them feel good, and humor can be that emotional bridge that ties the two parties together.

Use shared language so that you seem similar to them.  People really want to work with others that are similar to them in as many aspects as possible, so take the time to learn the lingo of your industry and of financials so you can create even more common ground.

Don’t bluff because you will likely get your card pulled. This is simple.  If you bluff and they call you out, it will destroy your deal and potentially your credibility. To build on this, negotiate with a positive attitude and in good faith.  If the other party senses that you are trying to pull one over on them, it will sour negotiations and potentially kill your deal.

Ask questions during the negotiation to get as much color and context to what the other party is thinking and where they stand at on any deal points you haven’t agreed on yet.

Don’t negotiate for the other side.  Try to shoot your shot and see what happens.  Don’t just come in low on something to try and “make the deal a no-brainer” from the get go.  Make sure you actually negotiate and show that you are confident in your abilities.  

Lastly, have patience.  These deals can be emotionally intense.  Think about it...you’re asking someone to believe in your idea and give you a million dollars.  That’s a big sum of money and they aren’t going to just give it away freely.

We have walked you through four key aspects of becoming investor ready, and hopefully this has helped you gain the confidence necessary to secure funding for your cannabis business.

If you need help with preparing your business plan or pro forma financial statements, then please reach out to us today to get started.

In a previous article, we discussed some of the tax implications of offering free cannabis samples to your customers. As a cannabis dispensary operator, it’s tempting to stand out from the competition by letting your product speak for itself. Some dispensaries give out free cannabis by letting their customer “spin the wheel” to see what their prize is – in many cases a free joint or an edible. 

Giving away free cannabis as a buy-one get-one promotion or a fun marketing tactic works for diversifying your customer base and driving repeat business. But what are your tax responsibilities when you offer free samples of cannabis products? This post will take a deeper dive into your financial and compliance obligations from giving away free cannabis. 

There are two scenarios that have different tax implications for cannabis dispensary owners. 

In the first, let’s work with the example of a dispensary offering a free joint that a customer can win by spinning a wheel. Ultimately, the value of the cannabis you offer as a free sample will be calculated into your cost of goods sold (COGS). 

When calculating COGS, you will use this formula: Beginning Inventory + Purchases - Ending Inventory = COGS. 

In this scenario, let’s say you started out the period with $10k in product (beginning inventory). Then, you add in the purchases of products you made, including those free joints you gave away as samples. That results in $100k in purchases. 

At the end of the period, you calculate your ending inventory is $20k. 

According to the math: $10,000 + $100,000 - $20,000 = $90,000 COGS. In this instance, you have no additional tax obligations, since the samples are rolled into your COGS.

Alternately, in a second scenario, the cannabis dispensary owner offers a buy-one get-one deal for pre-roll joint packs. Instead of 2 joints for $20, the dispensary offers 4 for $20. This is considered a discount, in this case, a 50% discount. 

How does that impact your taxes? In this scenario, the promotion differs from the first example in that the dispensary is not offering a FREE joint, but a DISCOUNT. The full transaction amount goes into sales: meaning you will pay taxes on the full $40 value, even though the customer did not pay you $40 in cash. 

The issue with this second scenario is that if your deal becomes incredibly popular, you will be exposed to a much larger tax liability – with not enough income to offset your taxes. 

Here’s an extreme example of the BOGO deal and what can go wrong with your California state taxes. Imagine you are an LLC. In CA, you have a minimum tax payment of $800 even if you have no sales. Further, in California you may be liable for more franchise taxes if you have additional gross sales above $250k. As a dispensary, it’s highly likely you will meet this threshold. 

For this example, let’s say you had gross sales of $300k, $60k in BOGO discounts, and after all other expenses you ended the year with HUGE loss of $50k. For the sake of this exercise, we’ll disregard some of the complicated 280E calculations and consider this as pure gross profit and loss. 

With a loss of $50,000, the good news is that there will be no federal tax due. Neither will there be taxes due to the state of California. 

The bad news, however, is that you still need to file a form 568. This is the franchise tax return, and that’s where the $300k in gross sales will come back into play – and where those BOGO deals can negatively impact you. Check this table to see what your additional taxes would be. 

To calculate your Franchise Tax Return, you will have: 

• $800 minimum tax 
• + $900 additional (since your gross receipts was above $250k, but below $499,999) 
• for a total of $1700

That’s a pretty big tax burden for a cannabis company that operated at a loss this year!​

Samples are used to get business and are not a part of taxable gross revenue. However, buy-one get-one deals do have tax calculated, since they are considered discounted and included in gross revenue. 

So, if you were to have “given” $60,000 as free samples rather than discounts, you would not be liable for the additional $900 in taxes. 

Consider speaking with your operations manager to tweak your offerings and deals so that you can decrease your potential tax liability.

And, if you have additional questions, reach out to GreenGrowth CPAs so that they can help you plan out the most effective tax strategy while improving the customer experience at your dispensary.
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Click the "Get Started" button below to request a cannabis tax consultation.

As you know, cannabis operators have to pay many different taxes. 

From sales tax to excise tax, the system is quite complex; and once your cannabis company starts to thrive, the tax system becomes even more complicated. 

California’s sales tax is a great example of where successful cannabis entrepreneurs get tripped up with being compliant while maximizing their profit. 

California’s state sales tax for cannabis operators is 7.25% – 6% state tax, plus a 1.25% mandatory local tax. Depending on where your business is located, the local tax may be an additional 3% to well over 10%. 

For cannabis operators who are achieving a certain amount of sales each month, you will be required to pay the sales tax monthly, rather than quarterly. 

Here’s how the process works, and how our experts can help you manage your tax burden more effectively.

As the saying goes, there are two things certain in life: death and taxes. 

Taxes are the number one reason why most cannabis companies fail; the IRS is not shy about auditing cannabis operators, and the 280E is one of the primary tools the government uses to penalize cannabis ventures. 

This burdensome 280E regulation makes a lot of money for the IRS in the form of fees and fines; so much so that Colorado is able to fix roads that aren’t even broken because they have so much tax revenue. 

It’s important to protect you business as much as possible from the tax authorities; and the first step is to understanding cannabis sales tax and commit to paying your taxes monthly. 

As a side note: having a CPA prepare your taxes is best because they will use an accepted methodology for their calculations that can then be used as exhibits during a potential audit.

As previously mentioned, the state sales tax rate varies slightly depending on where you are. Most cannabis organizations can expect to pay 8% - 10% of sales. Sales tax is charged at the cannabis dispensary on top of the sales price and the cannabis business tax. Here is a breakdown of cannabis tax calculations for California.

Cannabis sales tax in California is paid to the CDTFA. When you apply for a sales tax permit, the Administration will ask you a series of questions to see what your payment schedule should be. 

Typically, most companies pay their taxes quarterly – meaning that taxes are due April 30, July 31, October 31, and January 31 for the periods Q1, Q2, Q3, and Q4 (respectively). If you have low sales volume (meaning less than $5,000 in sales), the CDTFA may put you on an annual payment schedule. 

For successful, high sales organizations, it’s likely that you will be asked to pay sales tax monthly to the city and state. Here’s what that process looks like and why it’s best to have an experienced CPA calculate your payments for you.

In our experience, some clients are asked to pre-pay sales tax every single month because they have such high cannabis sales. How does this work? 

In this instance, the cannabis operator must pay estimated payments for month one and month two of the quarter. Then, when the quarterly return is filed, the CPA firm squares up discrepancies from the first two months of the quarter into the third month’s payment. 

How do we estimate your month one and two sales? 

The GreenGrowth CPAs usually look at your POS software on the 20th day of the month to see your current run rate, and in addition compare that rate to the past year for the month we are evaluating. 

From there, we create an estimate of the monthly of ABC$$ to the CDTFA, thereby covering your state taxes.

The CDTFA will now let you know that you are subject to pre-payments or any changes to the frequency of your payments.

If you don’t make payments on time, then penalties and interest will be assessed. Note that these penalties are compounding – so if you are faced with a fine, pay it right away.

In addition to paying your state sales tax, cannabis operators must also pay city sales tax. This rate and due date varies depending on your location. 

For example, if you are based in the city of Vallejo, you are required to file a monthly return based on gross receipts, rather than sales. These are due by the 20th or 25th of the following month. Get in touch with our experts or the local tax authority to make sure you know the deadline and cannabis sales tax rate you are responsible for. 

There’s a lot of confusion and grey area when preparing for your tax payments to the city – mostly because cannabis is an all-cash industry, and most cities aren’t equipped to process monthly payments of cash. 

Most cities have self-reporting taxes with no audits required (yet). It’s likely, however, that California cities are missing out on major tax revenue, and as a result will insist on proper reporting and auditing in the future. It’s best to be rigorous about your tax payments to make sure there are no issues down the road. 

How can you make sure you’re paying the right amount? 

Make sure you’re instituting great cash-handling practices and create strong SOPs. Despite having little to no access to a bank account, manage your cash responsibly to make sure everything balances correctly. 

Plan ahead: if you're looking at your cash or bank account, start setting up an account or repository for taxes. Put money aside each week so that you’re not forced to come up with a large sum of cash all at once. 

To give yourself total peace of mind, engage an accountant with specific cannabis-industry experience who can give you monthly guidance and be by your side in the event that you get audited by the city, state or federal government. Click the button below to get started with one of our experts. ​

The recreational cannabis industry is considered a high-growth market, with the potential to grow to $66.3 billion by 2025.

However, despite the massive amount of cash pouring into the industry, operators are limited by the Cole Memorandum and federal regulations prohibiting banks from working with cannabis companies.

Lack of access to the banking system causes many problems for legal cannabis businesses – especially when it comes to paying taxes.

Federal regulations force cannabis operators to pay their taxes in cash (in most cases). There are a lot of cannabis taxes to be accounted for; the US government is estimated to have collected $4.7 billion in taxes from cannabis companies in 2017. That’s not to mention the state and local taxes cannabis operators are subject to – which can be at rates as high as 15% in some areas.

Cannabis operators want to pay their taxes, but the rules regarding how to submit payment make it a headache.

The transfer of cash is not only frustrating and difficult, but often risky. Handling that much cash presents a big personal safety risk for cannabis business owners and the agencies collecting the cash.

So the question remains, how can cannabis operators better navigate the tax return process given federal banking restrictions?
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Let's explore the process...

Generally speaking, ordinary corporations and C-Corps pay the IRS through EFTPS.

EFTPS is a secure website that is linked to the IRS.  It is a payment system through which business owners upload everything in a very secure way – and it’s a vast improvement on the previous system. Payments no longer get lost in the mail or counted incorrectly due to human error.

EFTPS is easy to set up a profile and link your bank account; plus, an added security measure allows business owners to set up a second authentication method through a PIN number sent through the mail.

Most traditional businesses use EFTPS for payroll tax deposits. Through EFTPS, the employer collects taxes and then sends them on the employee’s behalf, every pay period, which makes it easy for everyone involved.

Though, for cannabis operators, it is extremely difficult but not impossible to open a business bank account; therefore, EFTPS is not an option for cannabis companies. Cash can’t be transferred through EFTPS.
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So as a cannabis operator, how can you pay federal taxes?

Here’s how cannabis operators can pay their federal taxes in cash.

The first step is to find the location of your nearest IRS office. In California, there are IRS offices located across the state. Maybe 40% of the offices accept cash. We suggest that you call ahead to make an appointment and make sure that your nearest office accepts cash.

Give yourself plenty of lead time as there are few IRS offices and they have very few appointments available.  And they will not give you a 'break' just because you couldn't get an appointment in time for the deadline, so plan way far ahead.

Once you secure an appointment, pack your cash and travel to the office.

We recommend you share the appointment day, time, and place with as few people as possible to mitigate the security risk. You will be traveling with a large amount of cash, so don’t increase your chances of being a target.

When you go to the office and make a payment, know ahead of time that the IRS office may limit the amount you can pay per appointment. If you’re paying $250,000 in taxes (which is not that uncommon), you will likely need to make many appointments. The reason for this is security; the IRS doesn’t want to take the risk of having a huge amount of cash on the premises.

One other thing, make sure you get a receipt each time you pay an installment on your taxes, just in case there’s ever a question down the road.

​Alternately, some cannabis companies pay their taxes through the business owner’s personal account, and then have the cannabis company reimburse the business owner. This is a work-around that can save a lot of frustration, but also places a financial burden on one individual.

Some operators may just be getting started and not have a huge tax liability, so here's another method to pay your taxes in cash.

If there’s no IRS office near you that accepts cash, you can pay your taxes in cash at a participating retail store like 7-Eleven. The IRS has a program called PayNearMe that allows you to make a cash payment after being verified.

Note that payments are limited to up to $1,000 per day, and can take up to 5 to 7 business days to transmit. Verification also can take two to three business days.

Allow yourself plenty of time and review the limitations before committing to this option.

The steps for paying your state cannabis taxes in cash are similar to the process for paying your federal taxes.

​The agency is different – in California, you will make payments to the franchise tax board – but you will need to find a location near you and set up an appointment. Most offices in California accept cash, but some will even take cashiers checks. Make sure to phone ahead and know what the limitations are before you go.

Overall, paying your taxes in cash as a cannabis operators is a burdensome and frustrating process.

We can help you strategize and make the most of the limited tax deductions available to cannabis operators. Get in touch with our team by clicking the get started button below.

In Part 1 of our guide to starting a hemp farm in California, we outlined the process for registering as a hemp farmer with the CDFA, as well as the difference between seed breeders and cultivators. This second part of our hemp farm guidance series will provide detail about the importation and movement of industrial hemp; details on manufacturing, processing, and selling industrial hemp; and tips on how to get started in this new market. ​

Obviously, the first step in starting a hemp farm (after registering with the CDFA) is to procure hemp seeds. Remember, there are some conflicting laws at the federal level in regards to the legality of growing hemp. It’s not possible to import seeds from outside the US to California, per federal regulation from the USDA. However, California state law does not have any restrictions to the importation of industrial hemp seeds or plants from other states into California.

The CDFA requires all industrial hemp seeds and plants to pass plant pest quarantines, and may inspect your hemp seeds further at their discretion. Likewise, the California Food and Agriculture code requires that registered growers and seed breeders only grow hemp varieties from an approved list of seed cultivars. Of course, this regulation does not apply to seed breeders developing new seed cultivars.

Where can you sell the hemp you grow on your farm? It’s possible to sell hemp through the California Farmers’ Market (CFM) Program. You must first be certified as  producer through the CDFA's CFM Program. You may also be able to sell hemp in a licensed cannabis retail store; however, cannabis retailers are governed by the Bureau of Cannabis Control (not the CDFA). Therefore, you should get in touch with the BCC to be sure you meet the cannabis industry’s strict regulations before adding hemp to a cannabis dispensary.

By some estimates, more than 25,000 products can be made from hemp. Hemp is used in everything from the automotive industry to personal care products. California is a leader in the hemp market: California companies earn 77% of nationwide sales of hemp food and personal care products.

Hemp is a plant that thrives in California’s environment. It does well in warm weather, and grows best in well-drained, highly organic soil. Experts recommend planting hemp seeds directly in the ground, rather than starting the plants in a pot and transplanting them later on. You will need a lot of space: for hemp to be profitable,  you must plant at least 50 acres. Besides space, hemp has relatively few other needs. It’s resistant to pests and diseases, and grows fast and tall, minimizing the need for hand cultivation. Estimates from a recent Cornell University analysis found that hemp profits ranged from $130 to $730 per acre.
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A good way to get started in California’s hemp industry is to go to a workshop by the California Hemp Association to learn about the constantly changing forms, fees, and regulations and other information coming from the CDFA and the USDA.

​You should also speak to our experts about the registration process and to get your taxes in order before entering this new market. Click the button below to get started.

The CDFA recently released guidance concerning the industrial hemp market in California.

There has been a lot of confusion surrounding the regulations of this plant.

​In this two part series, we’ll break down the state’s policy regarding hemp, as well as give you some insider tips for entering this new market successfully.

To begin, it’s important to establish the key difference between cannabis and hemp.

Cannabis is a “family of plants with two classifications – Indica and Sativa.” Hemp is a member of the Cannabis Sativa family.

As a result, hemp contains a very low concentration of THC. Marijuana, which is considered a member of either the Indica or Sativa families, has concentrations of THC between 15% - 40%.

​The state of California has a very specific definition of what qualifies as hemp vs. cannabis.

According to the CDFA: 

​“Industrial hemp" means a crop that is limited to types of the plant Cannabis sativa L. having no more than three-tenths of 1 percent tetrahydrocannabinol (THC) contained in the dried flowering tops, whether growing or not; the seeds of the plant; the resin extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin produced therefrom.”

Unlike cannabis, which is still classified as a Federal Schedule I Controlled Substance (subject to the 280E regulation), hemp is not federally regulated. The Agricultural Improvement Act of 2018 went into effect at the beginning of this year, thereby removing hemp from the list of federally controlled substances. This is a new market that isn’t subject to the same strict financial and tax codes of the cannabis market.

Simultaneously, in September, 2018, Governor Jerry Brown signed and approved Senate Bill 1409 which permits the cultivation of industrial hemp by California growers. Before this bill was signed into law, only growers who qualified under the state’s pilot program and the Agricultural Act of 2014 could cultivate industrial hemp.

​The cannabis market is a tightly regulated, highly competitive space. Licensing limits and zoning restrictions make it expensive and difficult for new entrants to gain traction in this billion dollar market. Industrial hemp, however, presents an alternative opportunity for cultivators to participate in the cannabis market without the high barriers to entry.

California state law as it relates to hemp cultivation is a little hard to parse. The reason for this is the state regulations don’t align perfectly with the federal regulations that deregulate hemp as a controlled substance.

California may allow for commercial hemp cultivation, but conflicting articles in the 2018 and 2014 Farm Bill do not.

The previous 2014 Farm Bill does not permit the cultivation of hemp for “purely commercial” reasons. However, the 2018 Farm Bill deregulates commercial hemp provided that states submit “hemp production plans” to the USDA.

​So, in theory, California’s state plan must be reviewed and approved by the USDA – which would impact hemp cultivators down the road.

​In the meantime, California has begun the process of accepting hemp cultivation registration applications – here’s what you must fill out and confirm to begin planting hemp in California.

If you wish to become a grower of industrial hemp, the first step is to be approved by your county agricultural commissioner. You can find your county ag commissioner’s office on this map provided by the CDFA.

​Unlike the commercial cannabis market, there is no state registration required to grow industrial hemp. Prospective growers only need to complete a county registration to grow industrial hemp. Applications for both seed breeders and growers can be found on the CDFA Industrial Hemp Program website. The registration fee is $900 and registration is valid for one year.

Applications for commercial cultivation and seed breeding don’t vary dramatically. Generally speaking, you will be asked to provide basic information about the business owner, the cultivation site, your business plan, GPS coordinates, and other site information.

Some counties are not accepting hemp applications. These counties include: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbara, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba. ​

There are two potential ways to participate in California’s hemp market: as a hemp seed breeder or as a hemp cultivator.

​If you plan to cultivate hemp for commercial purposes, you should fill out the application for growers. If you plan to cultivate industrial hemp for seed development or production, you should complete the application for breeders. If you wish to do both, complete both applications.

In Part 2 of our Guide on How to Start a Hemp Farm in California, we’ll outline more detail about the importation and movement of industrial hemp; details on manufacturing, processing, and selling industrial hemp; and tips on how to establish your hemp business and get started in this market successfully.

​To speak to one of our experts with any questions regarding the hemp industry, click the button below to get started.

As we mentioned in this week’s cannabis update, today, April 8 is the first day Marina, California will be accepting cannabis license applications.

Here’s what you need to know about the process and how to submit a cannabis application in Marina.

Application Period and Submission Details

Marina’s City Council has a 60-day application period, from April 8 to June 3, 2019. The following number of licenses will be issued:

• 3 medical dispensary licenses
• 3 adult-use cannabis dispensary licenses

After this 60-day window, no new applications will be accepted–so make sure to get your application in on time! Following the deadline of June 3, the city’s review process will follow this timeline:

• Phase 1 Application Review: 2 weeks
• Phase 2 Application Review: 3-4 weeks
• Phase 3 Application Review: 3 weeks
• Conditional Use Permit Processing, Planning Commission and City Council Review: 10 weeks

Dispensary Application Details and Requirements

Prospective cannabis dispensary owners can find the application details and documents on the Marina city website. Only complete applications will be considered by the city; you must include the following documents:

• Commercial Cannabis Business Application
• Property Owner Consent (page 5 of the CCB Application)
• Application filing fee(s)
• Limitations on City’s Liability waiver
• Commercial Cannabis Business Application Financial Responsibility, Indemnity and Consent to Inspection
• Proof of comprehensive general liability insurance (minimum $1M per occurrence)
• Approved Zoning Verification Letter
• Live Scan/Background Check information for each Owner/Principal, including:
  • Proof of submittal of Live Scan application and payment of fee to Oxnard Police Department
  • Cannabis Permit Employee/Owner Background Application
  • Copy of Social Security card
  • Copy of Driver’s License or other valid government-issued photo identification
• Supplemental information to be evaluated in Phases 2 and 3 (see Appendix A of the Application Procedure Guidelines)

Dispensaries will be evaluated in four phases which includes the following criteria and fees.

Phase 1: Determination of Eligibility

Businesses in Phase 1 must pay a fee of $8,000 with their Dispensary Permit Application. These fees will go toward background checks and staff time, and any unused fees will be returned to candidates who don’t make it through all three phases.

When submitting your Phase 1 application, provide all materials in 2 (duplicate) three-ring binder and one flash drive, with everything in PDF format. Create a separate tab for each section of the application (e.g. Business Plan, Security Plan, etc.). Payment can be made in the form of personal check, certified check, cashiers check, or money order – no cash or credit cards.

Your application must include the following sections:

1. Business Plan (5 points): this outlines the business’s operational and financial plan. Include the names and resumes of key staff, operations plan, financial plan, sales projections and market study. Applicants are encouraged to provide a specific, written plan for how their operation will benefit the community. *The community benefits plan is worth 8 points.
   1. Here is our video about cannabis business plans.
2. Security Plan (20 points): this outlines how the business expects to address security issues at their location. The Chief of Police and the City Manager or their designee will review and approve all Security Plans.
3. Property Owner Approval: submit proof of approval of the owner of the real property where the proposed Non-Retail will be located if approved. Applicants are not required to have a signed lease, but a letter from the property owner indicating that:
   1. The property owner is aware of and approves the use being proposed. Commercial Cannabis Business Application Procedure Guidelines 3
   2. The property owner will lease the property to the cannabis related use upon approval of application.
   3. The property owner understands that licenses for cannabis related uses are for one year and can be revoked at the City's sole discretion with or without reason.

*Please note that “Neighborhood Compatibility” is worth 5 points in the selection criteria

1. Live Scan: All owners, operators, and employees of any cannabis related business must submit a request for a Live Scan. The Police Chief shall have the discretion to require additional information, including a Live Scan arranged by the Police Department, that he/she deems necessary to conduct any investigation related to the Live Scan background check of an applicant. A Live Scan arranged by the Police Department will fulfill the requirements for applicants to obtain their own Live Scan.
2. Documents are required for each principal employee’s background check:
   1. Commercial Cannabis Business Employee/Owner Background Application
   2. Two passport-quality photographs (2”x2”)
   3. Copy of Social Security card or ITIN
   4. Color copy of Driver’s License or other valid government-issued photo identification
   5. Proof of current address

Phase 2 and Phase 3

Phase 1 applicants must meet the eligibility criteria by demonstrating how they will operate in compliance with local laws and regulations. If you can show that you have read and understood the cannabis restrictions, then you will move to Phase 2. Phase 2 applicants are evaluated on their Live Scan results, completeness of their application, proposed location, and two key documents: 

• Signed and Notarized City of Marina Limitations on City’s Liability and Certifications, Assurances and Warranties.
• Signed City of Marina Commercial Cannabis Business Application Financial Responsibility, Indemnity and Consent to Inspection Terms

Those selected to move on to Phase 3 are then ranked based on the above points system. Read the application criteria carefully as it offers a detailed explanation of how each section will be scored.

Phase 4

Finally, Phase 4 is the Final Ranking and Issuance of Cannabis Dispensary Application Conditional Use Permits, and Cannabis Business Licenses. Operators who are through to this round must pay a second fee of $7000 and be able to apply for an Cannabis Dispensary Application Conditional Use Permit and license to engage in a commercial cannabis business. Qualified applicants from the initial ranking may amend and combine their applications to optimize their scores.

Non-Dispensary Application Details and Requirements

Non-dispensary commercial cannabis businesses are also eligible to apply for permits during this window. Like dispensaries, these businesses will be evaluated in four phases which includes the following criteria and fees.

Phase 1: Determination of Eligibility

Businesses in Phase 1 must pay a fee of $8,000 with their Non-Dispensary Permit Application. These fees will go toward background checks and staff time, and any unused fees will be returned to candidates who don’t make it through all three phases.

When submitting your Phase 1 application, provide all materials in 2 (duplicate) three-ring binder and one flash drive, with everything in PDF format. Create a separate tab for each section of the application (e.g. Business Plan, Security Plan, etc.). Payment can be made in the form of personal check, certified check, cashiers check, or money order – no cash or credit cards. 

Your application must include the following sections:

1. Business Plan (5 points): this outlines the business’s operational and financial plan. Include the names and resumes of key staff, operations plan, financial plan, sales projections and market study. Applicants are encouraged to provide a specific, written plan for how their operation will benefit the community. *The community benefits plan is worth 8 points.
2. Security Plan (20 points): this outlines how the business expects to address security issues at their location. The Chief of Police and the City Manager or their designee will review and approve all Security Plans.
3. Property Owner Approval: submit proof of approval of the owner of the real property where the proposed Non-Retail will be located if approved. Applicants are not required to have a signed lease, but a letter from the property owner indicating that:
   1. The property owner is aware of and approves the use being proposed. Commercial Cannabis Business Application Procedure Guidelines 3
   2. The property owner will lease the property to the cannabis related use upon approval of application.
   3. The property owner understands that licenses for cannabis related uses are for one year and can be revoked at the City's sole discretion with or without reason.

*Please note that “Neighborhood Compatibility” is worth 5 points in the selection criteria

1. Live Scan: All owners, operators, and employees of any cannabis related business must submit a request for a Live Scan. The Police Chief shall have the discretion to require additional information, including a Live Scan arranged by the Police Department, that he/she deems necessary to conduct any investigation related to the Live Scan background check of an applicant. A Live Scan arranged by the Police Department will fulfill the requirements for applicants to obtain their own Live Scan.
2. Documents are required for each principal employee’s background check:
   1. Commercial Cannabis Business Employee/Owner Background Application
   2. Two passport-quality photographs (2”x2”)
   3. Copy of Social Security card or ITIN
   4. Color copy of Driver’s License or other valid government-issued photo identification
   5. Proof of current address

Phase 2 and Phase 3

Phase 1 applicants must meet the eligibility criteria by demonstrating how they will operate in compliance with local laws and regulations. If you can show that you have read and understood the cannabis restrictions, then you will move to Phase 2.

Phase 2 applicants are evaluated on their Live Scan results, completeness of their application, proposed location, and two key documents: 

• Signed and Notarized City of Marina Limitations on City’s Liability and Certifications, Assurances and Warranties.
• Signed City of Marina Commercial Cannabis Business Application Financial Responsibility, Indemnity and Consent to Inspection Terms

Those selected to move on to Phase 3 are then ranked based on the above points system. While it’s not clear how many non-dispensary licenses will be issued, the application states that: “Up to twice as many qualified applicants as there are available licenses will be eligible for final ranking, as determined by the aggregate scores of the initial ranking.” Read the application criteria carefully as it offers a detailed explanation of how each section will be scored.

Phase 4

Finally, Phase 4 is the Final Ranking and Issuance of Cannabis Non-Retail Application Administrative Use Permits. Operators who are through to this round must pay a second fee of $3000 and be able to apply for an Administrative Use Permit. “The top applicants equal to the number of licenses available will be eligible for a Cannabis Non-Retail Application Administrative Use Permit and license to engage in a commercial cannabis business.”

Cannabis Zoning Verification Letter

Applicants must obtain an approved Cannabis Zoning Verification Letter (CZVL) from the Planning Division of the Community Development Department in City Hall located at 209 Cypress Avenue, Marina, CA 93933 prior to submitting a CCB application. This letter verifies that your proposed business location meets the city’s requirements. You must send a written request; CZVL’s will not be completed over the counter to allow time for research and review. 

Plan ahead to get the CZVL: Marina’s review process takes approximately 15 working days. A CZVL costs $200.00 and payment is due at the time a CZVL is requested.

Get Help Today

While three months seems like enough time to complete a cannabis application, time is of the essence.
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Get in touch with our experts by clicking the button below and we can assist you in putting together a strong application in Marina, California.

Last week, we covered some key findings for cultivators, distributors, and retailers released in the California Cannabis Advisory Committee 2018 Annual Report. The CAC provides recommendations o the California’s cannabis licensing authorities, and helps set forth priorities when it comes to the standards and regulations of the cannabis market.

Today, we’ll outline what the CAC recommended for Manufacturers, Licensing Applications, Microbusiness and Enforcement. It’s important to keep an eye on this committee, as they can have direct impact on the regulatory environment for your cannabis operation. Here’s what the committee accomplished last year.

CAC Subcommittee for Manufacturers

Last year, the Advisory Council’s Subcommittee on Manufacturers made a total of four recommendations. The licensing authorities moved forward to implement two of these recommendations, partially implemented a third, and declined to implement one.

1. Illustrative Guide: the Subcommittee for Manufacturers asked for an an illustrative guide for packaging and labeling to be  broken down into clear components. The CDPH developed and published three guides in June in response to this recommendation:
   1. Packaging Checklist
   2. Cannabis Products Labeling Checklist
   3. Cannabis Products (Small Containers) Checklist

Please note that the CDPH website has been updated to include more than 20 FAQs on packaging and labeling as well as some additional checklists to come. The CDPH intends to release a revised set of checklists, updated FAQs and an illustrative guide after adoption of the permanent regulations.

1. Clarification on Packaging: The Subcommittee asked the CDPH to clarify the concepts of primary packaging, secondary packaging, and child-resistant packaging (with respect to primary versus secondary) and labeling. As a result, the CDPH issued the Packaging Checklist (linked above) which outlines guidance for child-resistant packaging. They also cover this topic in the FAQs on their website.
2. Child-Resistant Packaging: The Subcommittee asked the CDPH to clarify how and where child-resistant packing should be used. When the CAC’s annual report was published, the questions and timeline surrounding child-resistant packaging was still unclear, but we recommend reviewing the guidance on this checklist as well as section 5303 of the Bureau’s regulations and section 40417 of CDPH’s proposed regulations.
3. Dosage Limits: the committee asked for an increase the limitation on dosage from 2,000 mg to 4,000 mg for any non-edible medical product that is not restricted by statute; and raise the dosage limitation from 1,000 mg to 2,000 mg for non-edible adult use products. This recommendation was not adopted by the CDPH.

CAC Subcommittee for Licensing Applications

This subcommittee specifically addressed the risk of large, consolidated cannabis operators dominating California’s nascent cannabis market. The Subcommittee for Licensing Applications was primarily concerned with adding transparency to the licensing process; offering financial relief and lowering barriers to entry for new applicants; encouraging marketing stability; and protecting the health and safety of workers in the cannabis industry. As a result, the Subcommittee had four recommendations which were adopted by the committee, of which two were implemented, one was partially implemented, and not implemented one.

1. Disclosure of Owners: The Subcommittee asked the licensing authorities to require any license applicant who lists a corporation or other entity as an owner to also disclose the names of the owner(s) of the corporation or other entity. This recommendation was adopted via regulatory language found in section 5002.
2. Annual Fees: under this recommendation,  the licensing authorities should evaluate the amount of annual fees, especially fees paid by people with disabilities, military veterans, locally licensed equity applicants, and nonprofit compassion programs. This recommendation has been partially adopted in the permanent regulations.
3. A and M Licenses and Transition Period: the Subcommittee asked to combine application and annual renewal fees for A and M licensees conducting the same business activities at the same licensed premises and to extend the grace period until January 1, 2020 under section 5029 subdivision (b)(1). This was adopted by the licensing authorities. All three licensing authorities included a provision that allows applicants to conduct both A and M activities at the same licensed premises as well as to conduct business across licensing types regardless of A or M designation.
4. Use of Preparers:  finally, the Subcommittee asked for applicants to be allowed to use preparers to assist in the preparation of an annual license application. This was not adopted by the licensing authorities; the owner must verify the accuracy, attest, and submit the application. However, owners are not prohibited from using or seeking the guidance and assistance from experts.

CAC Subcommittee for Microbusinesses

Cannabis microbusinesses are operators that meet a minimum of three out of four of these allowed commercial cannabis activities:

• The commercial cultivation of cannabis on an area less than 10,000 square feet.
• The ability to act as a licensed distributor.
• The ability to manufacture commercial cannabis as a Type 6 manufacturer.
• The ability to sell commercial cannabis as a retailer.

The Subcommittee for Microbusiness offered four recommendations, of which one was partially implemented and three were not implemented.

1. License Tiers, Incentives for Compassionate Use and Rural Operators, and
   Fee Schedule Cap: the Subcommittee asked to clarify the definition of a “microbusiness” to include tiers based on gross receipts and number of employees. Then, the fee schedule would be redefined to include a ceiling at which point the operation is no longer considered a microbusiness. This was not implemented by the Bureau.
2. Recommendation #1: the Subcommittee asked state regulators to provide a “sub-microbusiness” or “microbusiness A” license which would allow up to 10,000 square feet of cultivation including nurseries; three out of four activities to be fulfilled by allowing any type of non-volatile solvent manufacturing including shared space manufacturing; retail sales to happen at events in addition to storefront sale and delivery; and distribution to be fulfilled by full distribution or distribution transport only. This recommendation was partially implemented by the Bureau:
   1. The Bureau has stated that nursery licenses qualify as cultivation so long as the nursery does not exceed 10,000 square feet.
   2. The Bureau has also stated that microbusinesses authorized to engage in retail and / or distribution activities may conduct any activities allowable by the corresponding type of license.
   3. The Bureau has amended language to include licensed infusion as a license type option to fulfill the manufacturing activity  requirement.
3. Recommendation #2: the Subcommittee asked the Bureau and CDPH to create a document that to jointly clarify that local governments may further limit the types of activities that are permitted to occur under a microbusiness  license. This is because although the state allows multiple activities under this license type, local municipal regulations may restrict certain types of activities if they so choose. This recommendation was not implemented by the Bureau / CDPH.
4. Recommendation #3: finally, the Subcommittee asked the Bureau to remove the prohibition on activities allowed within the home, so long as the activities that the applicant is choosing to conduct are activities commonly allowed under cottage business. This provision was not implemented by the Bureau.

CAC Subcommittee on Enforcement

Last, but not least, the Subcommittee on Enforcement is dedicated to improving public safety and protecting the business interests of the cannabis operator. They strive to “ensure that there is a balance between allowing for the feasible operation of cannabis businesses while deterring illegal and criminal activities.”

The Subcommittee adopted five recommendations; in response, the licensing authorities implemented two, partially implemented one, and declined to implement two.

1. Enforcement Authority: the Subcommittee asked the Bureau to:
   1. clearly identify the enforcement authority regarding advertisement and placement;
   2. clearly communicate who the enforcement authority is and how to contact them with complaints;
   3. collect data on enforcement actions; and
   4. require all advertisements have information regarding the license holder placing the advertisement.

This request was not implemented by the Bureau as it was not deemed to be a “policy/regulatory change.” Meanwhile, the Bureau did provide additional clarification on advertising.

1. Clarify Difference Between Citations and Orders of Abatement and Clarify
   References: the Subcommittee asked the Bureau to clarify an order of abatement versus a citation. They also requested that the Bureau clean up language and clarify the process and procedural guidelines within the regulations, reference, and citation sections. This was implemented by the Bureau; see section 5802. Citations; Orders of Abatement; Administrative Fines for details.
2. Advertising: the Subcommittee asked the Bureau to clarify rules around the type and location of advertising permitted, as well as the collection of data on when and where advertising rules were violated. The first part of the recommendation was adopted via section 5040. Advertising Placement and section 5415.1. Deliveries Facilitated by Technology Platforms.
3. Public Records Act Requests: the Subcommittee asked the Bureau to include language related to sharing information between the Bureau and local government entities that acknowledge the information shared is in accordance with the Public Records Act and protects information that is not discoverable under the Public Records Act. This was not implemented by the Bureau.
4. Labor Standards: the Subcommittee asked that all licensing authorities be
   required to include violations of labor standards as part of the licensing process and enforcement, which shall include revocation of the license. This was implemented by the Bureau.

If you have any questions about the CAC or their policy recommendations, please get in touch with our experts. You can also read the full 2018 Annual Report, which covers every Subcommittee statement, to see more about how the regulations in California continue to evolve.

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California’s Cannabis Advisory Committee (CAC) released their 2018 Annual Report earlier this month. Within the annual report are recommendations and suggestions for policy related to the adult-use cannabis market.

The CAC provides recommendations and advice to the California state cannabis licensing authorities. The committee gives feedback which directly informs the standards and regulations for the state’s cannabis market. The stated goal of the CAC is to reduce and eliminate the cannabis black market, so this advisory group should be advising the state with your business interests in mind. It’s important to pay attention to what this group advises, given that they will have a direct impact on the growth of adult-use cannabis in California.

CAC has established 10 subcommittees related to specific parts of the cannabis market. The subcommittees include: Cultivators, Distributors, Enforcement, Equity, Licensing Application, Manufacturers, Microbusiness, Public Health and Youth, Retailers, and Testing Laboratories. In 2018, the subcommittees made 79 subcommittee recommendations, 47 of which were adopted by the CAC.
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We’ll cover the subcommittee recommendations which were adopted by CAC in a three-part series. This first part includes adopted recommendations by Cultivators, Distributors, and Retailers.

CAC Subcommittee for Cultivators

The Subcommittee for Cultivators made five recommendations this year, two of which were fully implemented by the California state cannabis authorities. One has been partially adopted. The recommendations included:

1. Generator Hour Meters: this recommendation asked the CDFA to allow after-market non-resettable hour meters to be installed where feasible. The CDFA implemented this regulation in section 8306 of their permanent regulations.
2. Outdoor Cultivation Definition: change the definition of outdoor cultivation to allow the use of light deprivation techniques, provided that, it does not allow for the increase in the number of crop cycles. This recommendation was not adopted by the CDFA.
3. Transfer Between A and M Licenses: the Subcommittee asked to recognize the burden of keeping adult-use and medicinal use licenses separate; they asked that the CDFA allow cultivated materials to be transferred between A and M license types until the point of sale. This recommendation was implemented by CDFA. Cultivators may sell cannabis to adult-use licensees and medical-use licenses without being required establish separate and distinct cultivation areas.
4. Compassionate Use Programs: the Subcommittee asked to create a cultivation-based tax incentive for products being set aside for compassionate use programs. This recommendation was not implemented by the CDFA – yet.
5. Self-Transport Distribution: this resolution was partially implemented by the CDFA. It asked to create a way for cultivators to self-transport their product to a centralized processing facility, manufacturing facility, distributor, or lab for pre-testing. See section 5315. Distributor Transport Only License (g) for details.

CAC Subcommittee for Distributors

The Subcommittee on Distributors had four adopted by the CAC committee at large. Of the adopted recommendations, the licensing authorities have implemented two. These were the recommendations the Subcommittee for Distributors made this year.

1. Selling Samples: the Subcommittee asked the Bureau of Cannabis Control to address how, if at all, licensees may provide cannabis samples for a nominal fee. This is something we’ve covered in the past as it relates to your cannabis taxes. The Bureau did not implement this suggestion, as they do not require cannabis goods to be sold at a specific price.
2. Additional Label: the Subcommittee asked for guidance related to packaging and labeling: is a distributor permitted to apply an additional label to the final product, if the final product’s test results are inconsistent with the existing printed results? This recommendation was implemented by the Bureau. Refer to section 5303, Packaging, Labeling, and Rolling, (a); section 5307. Quality-Assurance Review; and section 5307.1. Quality-Assurance Review for Labeling Cannabinoids and Terpenoids for details.
3. Storage Only Center License: this recommendation asked to create a subcategory license for storage-only centers that would only be used to hold inventory and transport product. This was not implemented by the Bureau.
4. Transition Period Extension: the Subcommittee asked to extend the transition period from six months to 12 months to allow transactions between A and M licenses. This was implemented by the Bureau. Applicants may conduct both A and M activities at the same licensed premises, and also conduct business across license types regardless of A or M designation.

CAC Subcommittee for Retailers

Last but not least, the Subcommittee on Retailers made a total of nine recommendations. Of these, one was adopted by the committee and has been partially implemented by California’s state licensing authorities.

That recommendation was related to methods of delivery. The Subcommittee asked to clarify and simplify methods of delivery, including:

• Increased flexibility regarding vehicles and hours;
• Increasing the value amounts that can be carried at one time;
• Clarifying the delivery receipt that eliminates the need for an address and instead uses the state license number;
• Increased flexibility in allowing local government to allow changes in hours of operation if they so choose.

This ask was only partially implemented by the Bureau.

• “Clarify and simplify methods of delivery…”—Implemented by the Bureau.
  See section 5415; Delivery Employees, section 5415.1; Deliveries Facilitated
  by Technology Platforms, section 5416; Delivery to a Physical Address and
  section 5421 Delivery Route.
• “Increase Flexibility regarding vehicle and hours”—Not implemented by
  the Bureau
• “…increasing the value amounts that can be carried”—Implemented by the
  Bureau. See section 5418. Cannabis Goods Carried During Delivery.

Overall, it’s important to know that the California Cannabis Advisory Committee has your business interests in mind when making policy recommendations to state regulators. They’ve made some significant changes to the original adult-use cannabis regulatory environment. If you have feedback for them, you can contact the CAC through the Bureau of Cannabis Control or talk to one of our experts by clicking to get started. Stay tuned for Part 2 of our coverage of the 2018 CAC Annual Report.  

Failed tests

If your cannabis and/or cannabis products fail to pass the required testing and cannot be remedied, then, according to State Regulations, the entire batch must be destroyed. This obviously has an impact on your bottom line: cutting losses means implementing industry best practices. We recommend you continually engage the services of testing laboratories at fundamentally significant steps in the cultivation and manufacturing process. This could potentially save your cannabis and cannabis products from failing tests and destruction.

Compliance Assistance

If you are a commercial cannabis operator and need assistance and/or guidance with compliance, contact a team member today. Part of every operator’s responsibility is to meet state regulations and incorporate best industry practices into your operations.

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California’s permanent cannabis regulations were reportedly finalized on Monday, December 3, although operators may not be privy to the new regulations until January 2019. State officials have decided not to make the rules public until the Office of Administrative Law (OAL) has finished conducting its review.

The news is frustrating, but it also makes it hard to prepare your business for the potential impact of the permanent cannabis regulations. Here’s what we know about the most recent draft of California’s permanent marijuana business regulations – and how you can prepare for 2019.

What are California’s permanent cannabis business regulations?

The permanent business regulations related to the cannabis industry are joint effort of California’s Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health. The regulations cover a variety of issues related to cannabis, including delivery, packaging, and events.

Experts who have studied the proposed regulations warn that these rules will hurt current operators. Here are a few of the key changes that may affect your business.

End to Contract Manufacturing
All licensed companies could be barred from doing business with a commercial cannabis company lacking a license.

Contract manufacturing, commonly known as white labeling or co-packaging, is a way for licensed manufacturers to produce and package products for those businesses that are still unlicensed. We see this partnership commonly with celebrity-endorsed brands or an established cannabis company that has a production facility located in a municipality which does not allow for commercial cannabis. This is simply the best way to do business for many operators who are hamstrung by the varied cannabis allowances from county to county. If this rule ends up as part of the final regulations, it could put many contract manufacturers out of business.

New Delivery Regulations
The proposed rules reduce the amount of cannabis product a single delivery vehicle can transport from $10,000 to $5,000.

The economics of this rule change could have big implications for licensed cannabis operators. Currently, the $10,000 limit allows for drivers to leave for their delivery window with one order for $100 and $9,900 in additional product to fulfill orders as they come in. However, the rule change forces drivers to leave with at least $2,000 in product designated for orders already placed. This leaves just $3,000 available for fulfilling orders while on the go.

Obviously, this severely restricts the sales opportunities for delivery operators and damages the customer experience. Slower service is bad for business, and the higher overhead of making more trips to and from the delivery hub could put some companies in the red.

New Disclosures for Business Owners
If you have a cannabis business license or own a financial stake in a cannabis venture in California, you will be reclassified as a “salesperson” or “consultant” under the proposed California cannabis business regulations. Why is this important?

The key to this rule is the part where any employee who has a say in what the business should sell, manufacture, or cultivate will be considered an owner. More individuals will therefore have to file state disclosure paperwork. Logistically, this becomes a bureaucratic nightmare. What’s even more concerning is this provision could amount to a ban on silent partners, with big implications for those ventures still seeking funding.

How to Prepare for California’s New Regulations

Until January, we won’t know which of these proposed regulatory changes made it into the permanent bill. However, it’s prudent to start preparing your business now. Talk to your silent investors to make sure they’re aware of the changes in disclosures. If you need to find a new investor for your cannabis business, it’s better to start now.

If you run a delivery service, take a look at your operating budget to see if you have space to hire extra vehicles and drivers. You can also prepare your customers by asking for minimum orders or changing up the checkout process in incremental changes. Minimize the disruption to the user experience by making small adjustments to your delivery service ahead of time.

Finally, if you’re working with a contract manufacturer, protect your business by seeking a plan B partner. Lock up relationships with other licensed operators now, as competition is only going to get steep.

For more on the proposed regulations, get in touch with our experts today. ​

At the polls earlier this month, voters across the US weighed in on a number of measures related to cannabis. For California voters, midterm results were overwhelmingly in favor of the new adult-use cannabis industry, a good sign for anyone hoping to grow their business venture.

There were about 50 tax measures across the California’s ballots, the majority of which were approved by voters. While more taxes may not necessarily seem like a positive thing to budding entrepreneurs, this is a sign that local governments intend to welcome the cannabis industry and help it grow. It’s to their benefit for businesses to do well, as a local municipality can benefit from the resulting tax revenue.

As we go into 2019, here are the new cannabis taxes that companies in California need to pay to stay compliant with state and local laws.

San Francisco: Proposition D

In San Francisco, voters approved Proposition D, the Marijuana Business Tax Increase. This measure will impose taxes on cannabis ventures that do business in the city, regardless of whether or not their physical site is located there. The tax rates are:

• Cannabis retailers: 2.5% of gross receipts up to $1 million and 5% of gross receipts over $1 million.
• Cannabis non-retail businesses: 1% of gross tax receipts up to $1 million, and 1.5% of gross tax receipts over $1 million.

These taxes go into effect in January, 2021 and do not apply to the first $500,000 of recreational cannabis gross receipts. Medical cannabis retail sales are also exempt from this tax. Revenue from this particular tax is expected to reach $5 - $12 million, money which will go into the city’s general use fund.

Emeryville: Measure S

Emeryville, California voters passed Measure S, a Marijuana Business Tax similar to the one in San Francisco. The business tax measure levies a cannabis business tax of up to 6% of gross receipts. The goal is to generate $2 million in revenue for unrestricted governmental use. This is quite a big leap for Emeryville, as previously cannabis companies paid 0.10% of annual gross receipts, or $25, whichever was greater. The ballot measure does not say when this increased tax rate will go into effect.

Oakland: Measure V

Oakland, California went in a bit of a different direction when it came to voting on cannabis taxes this November. Voters decided to lower their existing cannabis business tax – though the municipality previously had one of the highest tax rates in the state. Recreational cannabis was taxed at 10%, while medical cannabis companies had a 5% tax rate. Small operators were having a hard time competing in the market with cities nearby charging lower taxes.

Measure V was approved by voters to give the Oakland City Council the authority to lower cannabis tax rates through a forthcoming ordinance. The measure also allows cannabis companies to deduct the cost of raw materials from their gross receipts. On the federal level the 280E regulation prevents cannabis companies from doing this on their tax returns.

Lastly, this ballot measure allows local cannabis businesses to pay their taxes on a quarterly basis, instead of one annual payment at the beginning of the year. From a tax perspective, Oakland is looking more attractive than ever to entrepreneurs looking to enter the cannabis industry.

Lake County: Measure K

Lake County’s Measure K Marijuana Business Tax was approved by a majority vote this November. This measure goes into effect January 1, 2021 and changes the following taxes:

• Cultivators/nurseries: taxed at $1 per square foot (previously $1-$3 depending on the method of cultivation).
• Other cannabis businesses: taxed between 2.5% and 4% of their gross receipts

Read the full text of the measure to determine where you call in the two tax brackets.

Mountain View: Measure Q

Mountain View’s Measure Q applies to the maximum of four cannabis businesses allowed to operate in Mountain View, per their permitting regulations. This approved ballot measure imposes up to 9% tax on gross receipts of cannabis businesses. The money will go into a fund for “general city purposes,” estimated to grow to $1 million in annual revenue.

Lompoc: Measure D

2018 Lompoc, California voters approved Measure D2018 with the following tax rates to cannabis companies:

• $0.06 per $1 of non-medical retail sales proceeds;
• $0.01 per $1 of cultivation proceeds;
• $15,000 for net income less than $2 million of manufacturing/distribution proceeds;
• $30,000 for net income $2 million or more of manufacturing/distribution proceeds;
• a total aggregate tax of $0.06 per $1.00 of micro-business proceeds; and
• no tax on testing.

Riverbank: Measure B

Last but not least, Riverbank voters approved Measure B. This is an interesting step for a municipality that does not currently permit cannabis businesses to operate within their jurisdiction. But, by passing this ballot measure, voters have indicated they are open to allowing adult-use cannabis businesses to operate in the future. Measure B permits Riverbank’s City Council to issue a tax of up to 10% of gross receipts on cannabis businesses operating in the future. Built into the tax are incentives which give the city a cut of any illegal cannabis business earnings. Despite this relatively high tax rate, keep an eye on Riverbank in the future for indications that they may be open to permitting recreational cannabis businesses to operate.

If you have any questions about these tax related measures, get in touch with our experts.

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Updated December 6, 2018

Last September 30, 2018, Governor Jerry Brown signed and approved Senate Bill 1409 which permits the cultivation of industrial hemp by California growers. Prior to its approval, only growers that qualified in the Pilot Program, and the Agricultural Act of 2014, could cultivate Industrial Hemp.
 
With SB 1409, starting January 1, 2019, individuals interested to grow industrial hemp are able to do so under the following conditions:

1. Apply and Register with their County Agricultural Commissioner and pay registration and renewal fees, as specified by the County.
2. Grow Cultivars from the approved cultivar list, which has been certified by specific organizations, or produced by clonal propagation.
   • Member organization of the Association of Official Seed Certifying Agencies
   • Canadian Seed Growers Association
   • Individual Cultivars that have been certified by the Organization of Economic Cooperation and Development
   • CA Varieties that have been certified by a seed-certifying agency
3. Will require sampling and laboratory test reports issued by Department of Food and Agriculture approved laboratory, using Department approved method of testing.
4. Provide GPS Coordinates of planned cultivation site to County Agricultural Commissioner.

 
Research and development will be permitted in developing a new cultivar that must be certified by a seed certifying agency. The Department will require research and developers to outline and implement security and anti-diversion measures to prevent the unlawful use of industrial hemp or seed cultivars, as well as procedures for maintenance of records documenting the development of new seed cultivars.
 
Industrial hemp is used to produce more than 25,000 products. This means that it could be an alternative resource for products we use on a daily basis—that has a smaller impact on the environment.
 
If you want to know more about industrial hemp, its uses, and how to become a grower in California, contact a team member today!

Original Post:

Recently, California joined the growing list of states that have passed some level of pro-hemp legislation in the past few years. Bill SB 1409 was passed to open the doors to growing the state’s industrial hemp industry. Here’s what you need to know about the legislation – as well as three things to do now to start making money on hemp.

What is the Hemp Bill SB 1409?

California’s Hemp Bill, SB 1409, was signed into law by Governor Brown to go into effect on January 1, 2019. This bill adds an industrial hemp pilot program to the state’s legal cannabis industry. As it stands right now, the cultivation of hemp is regulated because of its classification as a “fiber or oilseed crop” under the California Uniform Controlled Substances Act that can only be grown by approved hemp seed cultivators. The list of approved cultivators hasn’t been added to since January 1, 2013. Every year, growers of industrial hemp register with a county agricultural commissioner and pay a renewal fee.

SB 1409 opens the possibility of becoming an industrial hemp seed cultivator to others who haven’t been certified before January 1, 2013. Industrial hemp is no longer going to be considered a fiber or oilseed crop. This doesn’t necessarily mean CBD food products can be sold; in fact, a recent release from the California Department of Public Health banned the sale of CBD food products. We’re still waiting to see how hemp will be regulated as we approach 2019.

Interestingly, SB 1409 also authorizes the California Department of Food and Agriculture to begin an “agricultural or academic research” pilot program for industrial hemp. Colorado and Oregon have carried out similar programs to help inform and structure their regulatory systems. Hemp remains illegal at the federal level, yet more than 30 states have passed some kind of pro-hemp legislation to date.

How to Make Money on Hemp

Obviously, there are still a lot of unknowns when it comes to California’s future regulation of industrial hemp. In addition, seed cultivator applicants won’t be permitted to submit a license request until January 2019. However, here are three things you can do now to get a first slice of California’s legal industrial hemp industry.

Find your niche.
Hemp has a wide range of uses: over 25,000 known uses, to be exact. It can be used in building materials, fabric and textiles, ink, skin lotion, and shoes, and the seeds are a great source of nutrition. If you want to make money off hemp products, the first course of action is to zero in on how you want to use hemp. Hemp-based consumer products, food/nutrition products, and pharmaceuticals are the most common industries, and probably the most accessible for new entrepreneurs. Hemp seeds are very nutritious: they contain a big  dose of omega-3 fatty acids and are a better source of good protein than chia seeds or flax seeds. Hemp seeds are also known to contain a good portion of vitamin E and minerals like potassium, magnesium, calcium, iron, and zinc.

Keep in mind that with food product, pharmaceuticals, or beauty products, you may have to comply with FDA or FTC regulations in addition to California state compliance laws. Do your consumer research now to see whether your hemp fortune lies in nutrition or nail polish.

Start creating distribution channels.
Just because you can’t start growing hemp in 2018 doesn’t mean you can’t start creating your own distribution channels. Start to recruit customers for your niche product by building a brand presence online. Pick a topic, make a website, and start promoting or endorsing hemp products that already (legally) exist on the market. Becoming an expert in all things hemp will serve you well both on the customer and supplier side. Customers want someone they can trust to help them navigate the new hemp market. Hemp farmers want help recruiting customers to their product. It’s a win win for you and your suppliers.

Look for land.
If you do intend to become an independent hemp farmer, you will need a lot of space. Though hemp is relatively easy to grow, it’s not easy to be profitable without planting at least 50 acres. Now is the time to start your search for the space you need in January; competition for land will only get tougher as the January 1 deadline approaches.

For more tips on getting started in the cannabis (and soon to be hemp) industry, get in touch with one of our experts.

One of the elements of a good business plan is performing market research to determine your target customers. Pricing, marketing, and product selection all depend on who your key consumer groups are – and what they’re interested in purchasing in the adult-use legal cannabis market.

In some ways, consumer data is extremely limited due to the government’s classification of cannabis as a Schedule I drug. Government research that is typical of other industries is simply not performed on the cannabis market. As a result, most data we have about cannabis consumers is limited to gender, residence, and spending amounts. This can be useful in valuing  your cannabis business for investors, but is less helpful for cannabis marketers hoping to build a customer persona.

While the demographics vary among cities and districts, some early trends have emerged that can help inform your cannabis business offering. Here’s what you need to know about the key cannabis consumer groups in 2018.

Who is the typical cannabis customer?

In a survey conducted by the Cannabis Consumers Coalition, the majority of respondents were between ages 21 - 35, which is not necessarily surprising. Interestingly, the second biggest group of cannabis consumers was 45 years or older, meaning cannabis consumers are likely to be professional adults. In fact, the study discovered that more than 58% of cannabis consumers are between the ages of 21 and 55. The perception that cannabis consumers are college age, unmotivated stoners is likely misguided. Cannabis customers are more likely to be working professionals, parents, and with some level of disposable income.

Aligned with the shift in age toward older cannabis consumers, the average household income of a cannabis customer has also risen. The Cannabis Consumers Coalition research indicates that cannabis consumption transcends economic class, with customers at all income levels partaking in cannabis consumption on some level. Inform your product pricing with the following data from their survey: the majority of cannabis customers have combined household incomes of $26,000 - $55,000.

What do we know about the gender of cannabis consumers? While movies like Dazed and Confused have widely popularized the impression that most cannabis consumers are male, this survey suggests the gender gap is much more narrow. Companies like Whoopi & Maya have popularized cannabis as an alternative therapy for women. Women hold nearly 30% of executive leadership positions in the cannabis industry – a significantly higher percentage than the nationwide average. When designing your marketing material, take into consideration that women make the majority of household purchasing decisions, and in the cannabis market, they will be a powerful consumer group.

Medical v. Adult-Use Cannabis Users

Though recreational cannabis is only legal in about half of the states, it’s an important trend to track for new cannabis entrepreneurs interested in entering the market. This statistic can help you understand the deeper motivation behind your customer: are they making a purchase because it’s a medical necessity, or for recreation? How frequently can you expect someone to make a repeat purchase? Diving into your customer behavior has implications for inventory management, loyalty programs, and pricing.

Data from the National Institute of Health reveals that the majority of customers partake in cannabis use for recreational reasons. Their national sample showed that among those consumers who lived in states with medical cannabis legislation, 17% used cannabis for medical reasons and 83% used it recreationally. However, those who do use cannabis medically do so with more frequency and regularity than those customers who purchase cannabis for recreational use. A good business practice would be to take medical consumers’ needs into your marketing plan, even if your primary target customer is a recreational user.

California’s Key Cannabis Consumer Groups

California has the potential to become the world’s largest cannabis market, making it a good bellwether for understanding developing consumer trends. Early studies by market research firm BDS Analytics indicates there are three key consumer groups across the state. Primary consumers in California are 39 years old and have used cannabis or cannabinoids in the past six months. A secondary group deemed “acceptors” by the study are 49 years old, and while they haven’t recently used cannabis, they would do so in the future. California’s “rejecter” group is an average of 56-years-old and are not likely to consider cannabis use.

It’s worthwhile to note that while rejecters and acceptors aren’t recent users of cannabis, that doesn’t correlate with disapproval of legal adult-use cannabis. The study showed that tolerance and acceptance of cannabis is becoming more common, and in fact, Californians are becoming more interested in the potential health benefits of cannabis use. This further reinforces the case for continuing to include medical-use customers as part of your business plan and marketing strategy.

For more insight into how to build your cannabis company, get in touch with one of the experts at GreenGrowth CPAs. ​