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 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. 
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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.”
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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? 
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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.

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. ​

Recently, our experts led a webinar outlining everything you need to know to get your Los Angeles cannabis business license. If you missed it, you can listen to the full webinar on-demand. We covered many topics, including Los Angeles’ cannabis social equity program.

Los Angeles’ cannabis social equity program is a part of the city’s commercial cannabis licensing system. The goal is to give a boost to past victims of cannabis criminalization by offering assistance and benefits to any communities that were unfairly punished by the drug war. Read on for more information on how this program works and how your cannabis business might be able to participate in the program.

What is Los Angeles’ Cannabis Social Equity Program?

LA’s social equity program has the stated goal of promoting “equitable ownership and employment opportunities in the cannabis industry in order to decrease disparities in life outcomes for marginalized communities and to address the disproportionate impacts of the war on drugs in those communities.”

The program intends to offer assistance in the form of funding, physical space, and a separate licensing timeline to any commercial cannabis licensees who meet the program criteria. Some of the program benefits as of July 2018 include:

• Verification of the program qualification without premises verification (e.g., a candidate may be approved without a site evaluation);
• Priority processing (more on that in a minute);
• Business, licensing, and compliance assistance (TBD by the city);
• Training via an incubator (TBD by the city);
• Fee waiver (TBD by the city);
• Access to an industry investment fund (if established in the future)

As you can tell from some of the notes next to the listed benefits, the city is still developing the specific benefits of the cannabis social equity program.

Who qualifies for Los Angeles’ Cannabis Social Equity Program?

There are three tiers qualifications under which a prospective cannabis business owner might qualify for the social equity program.

• Tier 1:  the candidate is considered “low income” with earnings of less than $41,230 annually, as well as EITHER (a) a cannabis conviction prior to November 8, 2016 (the date when Prop 64 was enacted) that now would be prosecuted as a misdemeanor or citation OR (b) 5 years cumulative residency in a qualifying zip code.  
  • Qualifying zip codes include:  90057, 90037, 90062, 90003, 90061, 90059, 90061, 90001, 90011, 90008, 90016, 90013, 90059, 90002, 90014, 90021, 90044, 90043, 90037, 90058, 90008, 90027, 90033.

 

• Tier 2: the candidate is considered “low income” with five years cumulative residency in a qualifying zip code OR has ten years cumulative residency in a qualifying zip code.  

 

• Tier 3: the candidate is a landlord entering into a Social Equity Agreement with the city to provide capital and/or leased space, as well as business, licensing and compliance assistance to Tier 1 and Tier 2 applicants. The landlord agrees to provide access to real estate property for Tier 1 applicants rent-free and with prorated utilities for a minimum of two years, provided that the property meet certain requirements.

Please note that to be eligible for the benefits of the social equity program, you must own at least one third (and for Tier 1, 51%) of the business applying for the license.  

Even if you do not fall under one of the three tiers, you can qualify for the social equity program. To do so, you can either pay a fee to the city fund or agreeing to provide a small portion of your physical space to help the beneficiaries of the program.  

How can I apply for Los Angeles’ Cannabis Social Equity Program?

If you recall from our webinar, Los Angeles is issuing cannabis business licenses in three phases. Phase 2 of the cannabis licensing program started on August 1 and will remain open for 30 days. During this phase, applicants must qualify under the social equity program.

You can currently apply for a Phase 2 license on the Los Angeles City cannabis page. Read this primer for instructions on how to log in to your account and submit an application. Our experts are standing by to help out if you have any questions.

For more information on getting your cannabis business license in Los Angeles, check out our webinar or read our three-part guide on cannabis in Los Angeles:

• Part 1: Los Angeles Rules and Regulations for Cannabis Businesses
• Part 2: Los Angeles Zoning for Cannabis Businesses
• Part 3: Los Angeles Requirements for Cannabis Licenses

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If you have specific questions related to your business, please get in touch with our experts today.

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The most common question our experts get isn’t always tax related. In fact, it’s a bit more complicated. Everyone wants to know: “what do I need to do to start a cannabis company?”

What seems like a straightforward question usually has a much more complicated response. In this post, we’ll cover the three high-level steps you need to take to get started in California’s $3.7 billion cannabis industry. Our experts have helped dozens of companies launch in cities across California, and without these three factors, getting a license is difficult, if not virtually impossible. Here’s what you need to start a California cannabis company.

Step 1A: Find Real Estate

As we outlined in a previous post, finding properly zoned real estate is the biggest and most important element of starting your business. If you don’t have a lease or purchased property, your cannabis license application will not be approved.

Finding real estate is made especially difficult by a city’s zoning restrictions. Often, a city will release their zoning ordinance just before announcing the opening of cannabis business applications. Commercial real estate is limited to green zone properties; and these properties are fiercely competitive among potential licensees. Our experts frequently see only ten properties available in compliant zones. Narrow those ten properties down to landlords willing to host cannabis businesses, and you’re looking at two or three spaces available to every prospective cannabis business in the city.

Secondly, a landlord willing to lease to a cannabis business is likely going to charge a premium (because they can). Budget ahead of time for a largely inflated lease price, and keep in mind that some landlords will ask for a large deposit to account for the chance that your cannabis license application might not be approved.

Step 1B: Select your Jurisdiction

We’re calling these step 1A and step 1B because these two items are really concurrent processes. Selecting a jurisdiction has as much to do with the available real estate in a district or city as other factors: tax rates, the cost of doing business, and application fees.

To reiterate: without real estate, you will not be able to operate as a cannabis business. However, there are other planning aspects that should play a role in getting your business off the ground. Select your jurisdiction carefully! Not every city allows for every type of cannabis business. Read the regulations (and check out blog for updates as new cities come online) to see how many cannabis licenses will be available and what the selection criteria will be. Check tax rates, crime statistics, and other city-wide regulations to see how easy your life will be once you get approved.

Pro-tip: try to narrow it down to 2-3 jurisdictions before looking for real estate. This will make your life easier!

Step 3: Complete and Submit the Cannabis Business Application

This step sounds pretty straightforward, but our experts say submitting a strong cannabis business application is a full-time task. Give yourself three to four weeks of effort to put together the best application possible. To help you, we’ve compiled our best tips from helping dozens of businesses through the process. Read our advice on how to submit a strong cannabis permit application in California before you get started.

Remember: cities update their ordinances roughly once a year. As this is the first year that cities are releasing cannabis regulations, 2018 can be considered something of a test run. If you have feedback for your respective city, be sure to submit a public comment. When these ordinances and regulations are revisited next year, these comments will be taken into account.

Questions? Get in touch with our experts to learn more about starting a cannabis business in California.

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As spring warms up and nicer weather starts bringing customers out of hibernation, you may be wondering how to increase your sales this season. As a cannabis retailer or manufacturer, one tactic is to offer free cannabis samples to customers to encourage them to try – and buy more of – your product. Is that legal, and what are the tax repercussions of giving away free cannabis? We discuss below.

Can I give away free samples of my cannabis product?

First, check to make sure that you can offer free samples legally in your area. You can ask your local officials or ask for guidance guidance from the Bureau of Cannabis Control and the California Department of Public Health.

Second, know that these details only apply to licensed manufacturers, not dispensaries.

Use Tax and Free Cannabis Samples

So, assuming you can legally offer free samples of cannabis, do you have to pay use tax? Remember, use tax is charged on all items that you use or consume and purchased without paying tax. The rate for use tax is the same rate as sales tax.

The short answer: yes, you do have to pay use tax when you give away free samples of cannabis.

Here’s a more detailed explanation. The use tax comes into play when a product is, literally, “used.” As long as cannabis is part of your inventory being held for sale in the regular course of business, it’s not being used, and therefore you do not pay tax on that supply. When you offer your cannabis product for use – i.e., for a customer to try for free – the use tax will kick in.

The tax due on that sample is based on the purchase price by the manufacturer. If you want further details on how this works, read Regulation 1669, Demonstration, Display and Use of Property Held For Resale-General, subdivision (a) as well as Regulation 1670, Gifts, Marketing Aids, Premiums and Prizes.

What if I’m offering free samples to employees?

Ok, so maybe you’re not so tempted to give away free samples to customers. But what about to your employees? It can be helpful in making a sale to have knowledgeable employees who can personally attest to the quality of your product. So, do you need to pay use tax on cannabis being used for internal promotional purposes?

Unfortunately, yes, you still need to pay use tax on free samples given to employees. This still falls under the realm of “use,” as in you are using tangible personal property for any purpose other than demonstration and display. Use tax is measured by the cost of the cannabis product purchase price.

Does the use tax rate ever vary?

Use tax can vary not by who you are selling cannabis to, or why you are giving it away (e.g. free sample versus normal sale), but by where you sell or give away the cannabis product. The tax rate depends on where the manufacturer gives the sample away. For example, if you give a sample to an employee, the tax applies where the sample was dispensed from (not where the recipient then used the sample). If the sample is given to an employee for personal use, the rate of tax that applies is that of where you made the gift to the employee.

Summary and Conclusion

While it may be tempting to give away samples of your product for free, note that you will still have to pay use tax on the transition of those samples. The use tax rate that you will pay depends on where the sample was gifted, not where the sample is consumed. Likewise, it doesn’t matter whether you’re offering a sample to an employee or customer; use tax still applies. You may still decide it’s a worthwhile marketing tool to offer a sample, but make sure you are legally allowed to do so before continuing your marketing effort.

If you still have questions, check out additional resources in the CDTFA’s Tax Guide for Cannabis Businesses or consult with one of the experts at California Cannabis CPA. ​

Effective for years beginning after 12/31/17, the 70% DRD will be reduced to 50% and the 80% DRD will change to 65%.

The Fine Print

There are a few key limitations to know, including the taxable income limitation and the timeline for owning shares limitation.

• Taxable income limitation: this rule applies to companies with less than 80% ownership. Generally, you cannot take the DRD if it will create a net loss for your company.
• Timeline: to receive the dividend and claim your DRD, a company must have owned shares in the company paying the dividend for at least 45 days prior to dividend payment.
• The DRD is only available to C corporations. Entities including LLCs, S corporations, or individuals cannot claim the DRD.

What this means for Cannabis Companies

It’s not uncommon for our experts to see a cannabis holding company (the company which a main investor will agree to fund) operate with a subsidiary (e.g., a real estate company, operating company, or management company). Creating a structure that allows you to maximize your DRD will decrease your overall effective tax rate and increase your cash flows to re-invest in your companies. Be aware of the latest changes in the tax code if you want your company to survive in the new highly taxed marketplace.

Specific questions? Get in touch with our experts today to make sure you’re claiming your full deductions on this year’s tax return and mitigate the possibility of overpaying your taxes.

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Last week, we covered how to find an investor for your cannabis business. It can be hard to find a cash infusion in this industry – many banks won’t issue loans due to federal regulations against the legal sale of cannabis. Instead, look for private equity firms, crowdfunding, or non-specific business or personal loans you can use to get your business off to a running start.

Hopefully, this will lead many cannabis companies to connect with angel investors, private equity firms, or venture capitalists. If you fall into that category, how can you be prepared for the future influx of opportunities from cannabis companies?

There are a few things to seek when evaluating cannabis companies from an investor standpoint. Cannabis companies come with a lot of inherent risk: the industry is new, regulations are still evolving, and there is a lot of cash involved. Bad record-keeping, poor cash control, and outright fraud are just a few of the things many investors worry about. Ask these questions to determine if a cannabis enterprise is worthy of investment.

Does the company use a cloud-based accounting system?

What’s wrong with a traditional accounting system, like keeping track of your sales and purchases in an Excel spreadsheet? A few things:

• The system is limited to one computer (and duplicates can be inaccurate or out-of-date)
• Only one person has user access at one time
• It’s complicated (and costly!) to keep backups
• Customer support can be expensive or non-existent
• It’s not secure or reliable.

Cloud-based systems are more secure, mobile-friendly, and easily auditable. Keep tabs on your investment with a cloud tool that lets you quickly review invoices and receipts. Cloud software is more secure: if a laptop is stolen, the data stays safe. A cannabis business can limit the actions an employee can take by deploying different user roles, and make sure that only certain people can enter cash flow transactions. Ask for transparency from a cannabis business to ensure that your money is being used as it should be.

Does the producer or extractor use a robust system of measurements?

Cannabis producers or extractors work with lots of raw material. The end product is like liquid gold: so throughout the process, it’s important to have controls in place to minimize waste. Ask to see evidence that the ratio of final product to raw material makes sense. Can the cannabis extractor/producer demonstrate tight production controls? Can they show the use of standardized measurements at multiple points throughout the process? Can they show that they have taken steps to safeguard against fraud? These are all things you can look for when at an onsite visit to a cannabis operation.

Have they done their due diligence on third-party vendors?

Make sure anyone you’re entering into a partnership with has cleared their third-party vendors. Cannabis businesses have lots of secondary partners  – from suppliers to distributors, it’s important to make sure these vendors are fully licensed and aboveboard. Ask a cannabis company for copies of their partners’ California cannabis permits, records of vendors’ physical addresses, contact names and numbers, and any mutual business references that can be checked. See that the cannabis company keeps vendor agreements with every partner on file.

Does the canna-business use a system of checks and balances?

Checks and balances can be as simple as separating staff roles for different accounting functions. Fraud is easy when one person handles all the bookkeeping functions: things such as processing customer payments, managing petty cash, keeping accounting records, or paying invoices. The cannabis business should have at least two people to manage these functions, and keep their accounting and cash handling separated. It’s also recommended that they also keep separate systems for inventory and manufacturing accounting.

Some companies might find it helpful to use a tool like Clover or Xero to keep an eye on their employees. Tools like Clover Payments Plus can give you as the investor better insight into things like cash in and cash out, sales, employee management and scheduling, and inventory tracking, and more.

Do they have up-to-date records?
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Keeping up-to-date records show that that the cannabis business is the real deal. Here are just a few things to ask for:

• Monthly trial balances
• Monthly profit/loss records
• Breakdown of sales and cost of goods sold per month
• A rationale/standardization for accounting cost of goods sold
• Sales returns and any price adjustments after sales
• Product warranties
• Invoices on sales orders (and accordingly, shipping documents)
• Insurance agreements, licenses, and permits
• Employee and vendor agreements

Depending on the unique cannabis operation, get specific on what other permits, records, and local licenses you need to see. Do they have municipal permits? Do they use a system of dual signatures to control cash flow? Does the cannabis company have the right insurance?
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If you have any questions, we’re here to help. Don’t hesitate to reach out to California Cannabis CPAs!

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Continuing our series from last week, today we’re covering the key tax policy that cannabis distributors in California are responsible for now that proposition 64 has been approved.  If you’re a retailer looking for detailed tax information, check out this for California cannabis retailers.

Distributors are also responsible for collecting and submitting a variety of taxes, including cannabis cultivation, sales, excise, and use taxes. Distributors are also responsible for filing the cannabis taxes after collecting cultivation and excise tax from the retailers and cultivators, and for keeping resale certificates on file from retailers. Here’s how to file your taxes, how much to collect from your cannabis partners, and how to handle sales tax.

Please consider that we are not a law firm, and this advice should not substitute any proper legal advice.

Are you a cannabis distributor?
You are cannabis distributor if you procure, sell and/or transport cannabis between licensed cannabis businesses such as cultivators, manufacturers or retailers. Distributors must meet also meet the following requirements:

• Register with the CDTFA (California Department of Tax and Fee Administration) for a cannabis tax permit.  This permit will be completely separate from any other permit you may have with the CDTFA.
• Collect the cultivation and excise tax.

• Electronically file your cannabis tax return and pay the amount owed to the CDTFA.
• Keep clear and precise records of all commercial cannabis activities.
• Have the appropriate business licenses.  They can be obtained from the Bureau of Cannabis Control.   Local governments licensing requirements may vary so we recommend checking with local city and county government offices to ensure you are compliant.

If you are also making sales, and not just transporting product, you are responsible for registering with the CDTFA to get a separate seller’s permit.  This will also require filing Sales and Use Tax Returns.
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Are you a microbusiness? This complicates things a little. Microbusinesses may operate as a distributor, but in that case they are only required to hold one license that authorizes the microbusiness as a distributor.  A microbusiness may operate as a cultivator, distributor, manufacturer and/or retailer.  Microbusinesses are responsible for all of the same requirements as distributor requirements listed above.

Distributor Cannabis Tax Requirements
CULTIVATION TAX
As a refresher, The cultivation tax is imposed imposed on all of the harvested cannabis that enters the commercial market.  Cultivators are responsible for paying the cultivation tax to the distributor. In some cases, the cultivator is responsible for paying the tax to the manufacturer if the cannabis is transferred or sold to a manufacturer first.  Either way, as a distributor, you are responsible for remitting the cultivation tax to the CDTFA. Cultivation tax rates are:

• $9.25 per dry-weight ounce of cannabis flowers
• $2.75 per dry-weight ounce of cannabis leaves
• A proposed $1.29 per ounce of fresh cannabis plant fee

To qualify for the third point, the cannabis plant must be weighed in an unprocessed state within 2 hours of harvesting. If you have immediate questions, please get in touch with our experts.

When you collect the cultivation tax, you will need to provide a receipt to the cultivators and manufacturers that lists the amount of the tax collected and relieves your cannabis partners from liability.

CANNABIS EXCISE TAX
Excise tax is a bit complicated: put most simply, excise tax is an added 15% of the average market price to the listed retail price of the cannabis product. It’s also contingent on the type of transaction between the customer and retailer. Read more about the cannabis excise tax under our post for retailers.

FILING YOUR CANNABIS TAX RETURN
The process for filing your cannabis tax return is slightly different from filing your income tax return and sales and use tax return. File your return on the CDTFA.gov site according to the quarterly schedule (so, your first return is due April 30). On this return, you are responsible for reporting the both the excise and cultivation taxes due for any cannabis and cannabis products that entered the commercial market during the reporting period. For example, on your April 30 return, you will report excise and cultivation taxes for January 1 – March 30, 2018. When reporting the excise tax, you must include reports for any product that has been transferred to a retailer (whether or not the product has already been sold).

Keep copies of your returns for future reference, and speak to one of our experts if you have any help.

Distributor Excise Tax Requirements
CANNABIS EXCISE TAX
As a distributor, you are responsible for paying the cannabis excise tax to the CDTFA and collecting it from your retailers you supply. 

Sales tax does not apply to valid sales for resale. Unless you’re operating as a cannabis microbusiness, your sales as a cannabis distributor are likely to be all resale  – meaning you won’t be responsible for paying sales tax. Enter: resale certificates.

Resale certificates allow you to buy resale inventory without paying sales tax reimbursement to the seller. You must provide a timely resale certificate to your supplier, with your seller’s permit information at the time you are making your purchases. Use Form CDTFA-230 as your resale certificate. Don’t use a resale certificate for any personal property – you may be penalized. Also, when you sell products to retailers, those retailers will give you a resale certificate that you should keep for your records. If you have any questions about using the resale certificate, get in touch! We’re happy to help. ​

Retailer Sales Tax Requirements
CANNABIS SALES TAX
Retailers will collect the sales tax from their customers and remit it to the CDTFA. The sales tax rate is based on where your sale takes place. To find the correct tax rate, check the database on the CDTFA site.  

While we’re not a law firm and cannot provide legal advice, there are a few key tax laws that cannabis retailers in California are responsible for now that cannabis is legal. The goal of this article is to give you an overview of these taxes and make you aware of your responsibilities as a cannabis business owner in California. In subsequent posts, we’ll dig into the excise, sales, and use taxes to give you everything you need to know about these tax requirements – and make sure your business stays compliant. For now, here are the basics you need to know.

Are you a cannabis retailer?
You are a retailer if you sell cannabis and/or cannabis products directly to a consumer. Microbusinesses that are licensed as retailers also must abide by the same regulations as traditional retailers.

A cannabis microbusiness is type of license category (Type 12) that allows your company to engage in multiple cannabis activities at one location. For example, as a microbusiness you could cultivate up to 10,000 sq. ft. of cannabis canopy and distribute your product under one license. Because often you are selling your product to a consumer, these microbusinesses follow the same regulations as retailers (detailed here). If you’re not sure whether you’re a cannabis retailer, get in touch with California Cannabis CPAs.

First Steps to Becoming a Cannabis Retailer
Before we dive into the tax law basics, a quick refresh: to be a cannabis retailer in California, you must start by applying for a seller’s permit and also secure local and state cannabis permits. Click this link to register with the CDTFA for a seller's permit. For details on what you need to get a seller’s permit – including a checklist of the documents you need to submit in your application – check out this blog post. Please keep in mind that you may be responsible for getting additional permits and licenses from your local county or city government. More on that to come!

Next, if you are an existing cannabis retailer (i.e., not a new company) you are also required to report all your sales and pay sales tax due to the California Department of Tax and Fee Administration (CDTFA). The amount of tax you’ll pay is based on your gross receipts, meaning the tax rate is set based on where the sale takes place and when the sale is over the counter vs. when you deliver the item yourself. Finally, keep in mind that as you grow your business, you will be taxed on items you use that are purchased without tax – so hold onto your receipts and keep track of your inventory.

Retailer Tax Law Basics
There are a few key taxes that retailers are responsible for as of January 1, 2018. 

Cultivation Tax
Anyone who cultivates cannabis is responsible for paying a cultivation tax – including retailers who grow their own cannabis. Pay this tax to the distributor in a similar process to the excise tax collection. Current cultivation tax rates are $9.25 per dry-weight ounce of cannabis flowers, as well as a tax of $2.75 per dry-weight ounce of cannabis leaves. Exempt from the cultivation tax are businesses that cultivate cannabis for personal use or by a qualified patient or primary caregiver -- i.e., medical cannabis cultivators.

Cannabis Excise Tax
An excise tax is a fancy name for a tax paid when purchases are made on a specific good – like cannabis and cannabis related products. The excise tax is usually included in the price of the product, meaning you’ll collect this tax from your customers every time you make a sale. Charge excise tax on everything from cannabis to cannabis edibles, oils, lotions, and waxes.

How much should excise tax be? Add on an extra 15% of the average market price to the listed retail price of your product. The average market price is based on the type of transaction between the seller and you. We will dig into this in detail later on.

Note that you are not required to list the excise tax separately on your receipt – this makes it much easier for you to pay your sales tax, as you will see in the following section. You do need to have the phrase “The cannabis excise taxes are included in the total amount of this invoice” included on every receipt.

Sales Tax
There remains an exemption for sales and use tax for all medicinal cannabis products, but usually, as a retailer, you will need to pay sales tax. Sales tax applies to retail sales of “tangible personal property” in California – in plain terms, this means anything you can touch and feel, including cannabis, cannabis products, and cannabis accessories such as rolling papers, vape pens, or pipes.

When calculating the amount of sales tax due, you must include the amount of your excise tax in the receipts. Since the excise tax should be included in your total sales price, this shouldn’t require any additional effort from you in totally your gross sales tax. You are liable for sales tax even if you don’t collect sales tax reimbursement. This means you must pay the excise tax even if you don’t sell the product.

How much is your sales tax? That depends. The sales tax rate is based on where your sale takes place when it is over the counter, or when you deliver the product yourself. So, for example, if you sell cannabis at your store location in Los Angeles, you may have a different sales tax than if you make a delivery to a customer in San Diego. All tax rates are on the CDTFA website – and more on this tax to come.

Use Tax
Use tax is a tax on items you use or consume that you purchased without paying tax. An example of a use tax in everyday life might be a tax on getting a massage. The use tax rate is the same rate as your sales tax rate. Broadly, expect to pay use tax on items you purchased outside the state of California without paying California state sales or use tax. If this sounds confusing, it is. We’ll cover in greater detail what kinds of products you can expect to pay use tax on in future posts. In the meantime, if you have any questions, don’t hesitate to reach out to the experts at California Cannabis CPAs!

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So, you want to start a business in California’s booming cannabis industry. Now seems like the perfect time to get in on the ground floor: the market estimates that cannabis will bring an additional $5 billion to California each year. It would be nice to get a slice of that pie, no?
Before you dive in, take some time to learn about the different ways to structure your business in a way that will give you the biggest slice of the pie -- not the leftover sliver that’s all crust (unless crust is your thing). The way you setup your company can mean the difference between growth and success and burning out after a year in business. Ask these five tax questions when setting out to structure your canna-business!

1. What kind of legal entity do you want to be?
Historically, before California decided to have a fully regulated state system for medical marijuana, cannabis companies were set up as non-profits. Now, there are other options for structuring your business. Figuring out which model is right for you depends on many factors, including your role in the cannabis industry (i.e. grower, distributor, or partner); county and local regulations; and your projected growth. Here are some options available:

Nonprofit (allowed pre-2018):

• The California Cooperative Corporation: in this scenario, cooperatives will be able to operate both as for-profit and non-profit entities.

For profit (allowed in 2018):

• The B-Corporation: B-Corporations are now authorized at the state level in California. A B corporation is a benefit corporation, a for-profit with a certain score for social and environmental performance.
• ​​C-Corporation: a C-Corporation refers to a for-profit corporation that is taxed separately from its owners. In this scenario, your business will be taxed on its income at a corporate level, and then as the owner, you will be taxed on your personal return for any income received from your canna-business. If this double-taxation seems unfair, you’re not wrong; however, having C-Corporation status creates a firewall against any personal tax liability, lowering your personal risk.
• S-Corporation: an S-Corporation is another for-profit model, like the C-Corporation. The difference here is that the business doesn’t pay income taxes. Your canna-business’s income or loss is divided among your shareholders. Then, each shareholder must report the income or loss on their individual tax return. This puts the liability on each individual -- and can have big repercussions depending on how well your business succeeds.
  
  
  

There’s no one model fits all for your cannabusiness. Consult with a tax professional to learn about these options -- and others -- before incorporating.

2. What are your growth goals?
Do you plan to have multiple locations and holdings? Depending on how your business operates, you can structure to account for different levels of liability. If you have multiple corporate entities, for example, you can limit your liability within each one. Then if one of your locations is sued or forced to shut down, your other locations can continue to operate independently. Conversely, managing multiple corporate entities can be a logistical nightmare -- especially if you intend to grow big or go home. It is much more efficient to run all your branches under one corporate entity if you’re smart about handling your risk.

3. What are your investors looking for?
Investors will be interested in your company’s assets, inventory, cash receivables, and profit potential. They will want to see your business model in all its parts: trademarks, intellectual property, physical locations, and more. When you want to raise some serious capital -- going beyond your personal investment and a Kickstarter campaign -- the way you structure your company can impact an investor’s interest. For example, in a multi-entity structure with different locations and sub-companies, an investor can pick and choose which parts of your business they want to fund. Having a multi-entity structure can be very attractive if you’re shopping your canna-business around to people with low risk tolerance (and it widens your potential pool of funders). However, different ownership stakes can start to lead to conflicting interests for you as a manager. Having a seat at many tables with multiple influential voices can cause some real cross-company conflicts for you as a leader.

4. How should you structure compensation and benefits?
Cannabis tax regulations have two special rules. First: cannabis companies can deduct the cost of goods sold on their tax return. Second: cannabis companies cannot deduct any sales and marketing expenses. Ouch.
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What this means is that many traditional expenses can’t be claimed as decreed by tax law section 280E. Know the ins and outs of payroll tax, executive compensation, and healthcare benefits you’ll be accountable for as a business owner in the California cannabis industry. The best way to do that is to consult with a tax professional in your community.

5. What do you need to do to be compliant?
This is a big question -- and pretty broad at that. If you’ve made it this far, this step is the most crucial. Knowing what forms you need to fill out, what licenses you need, and how to best account for your expenses is what will make or break your business in the long run. California Cannabis CPA will be releasing more guides and checklists in the coming weeks to help you keep track of everything, but know that compliancy varies by district, county, and between the federal and state levels. If you’re going to have locations in different parts of California, do the research for each area you’re operating in. When in doubt -- pay your taxes! 

The local government of Cathedral City, CA has adopted several ordinances that define a set of regulations allowing certain Medical Cannabis Businesses to operate.  Anyone who would like to originate a Medical Cannabis Business within the City must obtain prior approval from the City before beginning operations.  Cathedral City issuing Conditional Use Permits for Dispensaries, Cultivation and Manufacturing.

Cathedral requires each Medical Cannabis Business to obtain a Medical Cannabis License and a Conditional Use Permit in addition to any other generally applicable permits, licenses or approvals that are required of businesses.  A separate Medical Cannabis License and Conditional Use Permit are required for each proposed location.  Prospective Medical Cannabis Businesses may submit applications for a Medical Cannabis License and a Conditional Use Permit at the same time, or may wait until after the Medical Cannabis License has issued to apply for a Conditional Use Permit.  A Conditional Use Permit cannot be issued until after the Medical Cannabis License has been approved.  A Medical Cannabis License must be renewed annually.

Follow these steps to obtain the required permits for a Medical Cannabis Business in Cathedral City, CA.

Step 1:  Determine an Acceptable Location for a Medical Cannabis Business

Step 2:  Complete the application process for a Medical Cannabis Business License in Cathedral City, CA.

Step 3:  Complete and Review the application process for a Medical Cannabis Business Conditional Use Permit (CUP) in Cathedral City, CA.

Step 4:  Complete Criminal History Check (Live Scan)

Prior to applying:

• Review the information and learn about the application process and which documents you will need. 
• Taking a good look at the entire application and ensure all the of required information is available. 

Step 1:  Determine an Acceptable Location for a Medical Cannabis Business
 
The application must include the address and a detailed description of the proposed Medical Cannabis Business location.  Dispensaries, Cultivation Sites and Manufacturing Sites are only being permitted in certain zones listed in Section 9.108.090 of the City Code.  Dispensaries may be located in the I-1, CBP-2, and PCC zones.  Cultivation Sites may be located in the I-1, CBP-2, PCC and OS zones.  Manufacturing Sites may be located in the I-1 zone.  Dispensaries, Cultivation Sites and Manufacturing Sites are subject to other locational restrictions, as stated in Section 9.108.090 of the City Code, including minimum distance requirements from schools, day-care centers and youth centers, residential zones, and East Palm Canyon Drive.  Any person who desires to open a Medical Cannabis Business in the City should ensure that the proposed location of the use satisfies the City’s locational restrictions in Section 9.108.090 prior to filing an application for either a Medical Cannabis License or a Conditional Use Permit.
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• Dispensaries are prohibited within 600 feet of a school, day care center, or youth center; or within 250 feet of East Palm Canyon Drive or a residential zone as defined by the City’s Zoning Ordinance and dispensaries are only allowed in the I-1 Light Industrial, CBP-2 Commercial Business Park District or the PCC Planned Community Commercial District zoning areas.
• Cultivation, transportation, distribution site facilities are prohibited 600 feet of a school, day care center or youth center, or within 250 feet of East Palm Canyon or 300 feet of a residential zone as defined by the City’s Zoning Ordinance and cultivation, transportation and distribution facilities are only allowed in the I-1 Light Industrial District, CBP-2 Commercial Business Park District, PCC Planned Community Commercial District or the OS Open Space zoning areas.
• Manufacturing Facilities are prohibited 600 feet of a school, day care center or youth center, or within 250 feet of East Palm Canyon or 300 feet of a residential zone as defined by the City’s Zoning Ordinance and are only allowed in the I-1 Light Industrial District, allowed in I-1 Light Industrial Zoning District and the CBP-2 Commercial Business Parks. 

City of Cathedral Zoning Map:  http://www.cathedralcity.gov/home/showdocument?id=5350

Step 2:  Complete and Review the Application Process for a Medical Cannabis Business License in Cathedral City, CA.

Medical Cannabis Business License Application

Completed applications need to be submitted in person at:

Cathedral City Community Development Department
68-700 Avenida Lalo Guerrero
Cathedral City, CA 92234

All applicants are required to complete the application form and submit two (2) copies.  A deposit in the amount of $7,500.00 is required along with the application and the following additional documentation: 

• Proof that the applicant is, or will be, entitled to the possession of the premises for which the application is submitted.  Acceptable evidence includes leases, rental agreements, recorded deeds evidencing ownership, and letters of intent.  If the Medical Cannabis Business is proposed to be located on real property that is not owned by the applicant, a notarized statement from the property owner that it agrees to a Medical Cannabis Business being operated on the property.  
• Documented ownership structure such as; articles of incorporation, by-laws, organizational minutes, articles of organization, and partnership agreements.  The City may accept other evidence as determined by the City Manager.
• A detailed description of the products and services to be provided by the Medical Cannabis Business.
• A floor plan, drawn to scale on no smaller than 8.5 x 11-inch paper providing, at a minimum, all interior dimensions of the premises and the layout of the proposed Medical Cannabis Business.  The floor plan must show which areas are limited access, all ingress and egress points, the principal uses of the floor area depicted, and the locations of security cameras.
• A security plan that addresses how the applicant intends to comply with and implement the requirements of Chapter 5.88.065 and other relevant provisions of the City Code and state law, including, but not limited to, a description of how the security measures are sufficient to ensure the safety of members and employees, protect he premises from diversion and theft, and ensure that buildings are secured sufficiently to prevent unauthorized entry.  The security plan shall include a diagram indicating all areas to be covered by 24-hour security cameras and the methods the Medical Cannabis Business will use to ensure medical cannabis is under secure control of its staff at all times.
• A employee list.  An updated employee list shall be provided to the City if there are any changes to the employee list at any time prior to the approval or denial of the Medical Cannabis License.
• If the application is for a Dispensary, an estimate of the size of the group of ID Card holders and/or Qualifying Patients who will be served by the Dispensary, and a statement as to whether delivery service will be provided.
• If delivery service will be provided, an explanation of the extent of such service and a detailed delivery plan explaining how the delivery service will comply with applicable Cathedral City ordinances and state law.
• If the application is for a Cultivation Site, a declaration that the applicant is an “agricultural employer,” as defined in the Alatorre-Zenovich-SunlapBerman Agricultural Labor Relations Act of 1975 (Labor Code section 1140.4(c)).  
• A map prepared and signed by a licensed land surveyor stating that the premises meets the distance requirements set forth in Section 9.108.090 of the City Code.  The distances shall be measured in the manner provided for in Section 9.108.090.  If the Business is proposed to be located within a multi-unit building, the measurements shall be taken from the nearest point of the suite in which the Business will be located, provided that the suite has been legally established and approved by the City prior to the submission of the application for the License.

The applicant will be notified in writing by the City Manager of the decision to approve or deny the Medical Cannabis License.  If approved the license will not be issued until the applicant posts a cash deposit or letter of credit in the amount of $5,000 as the security required by Section 5.88.040(I)(5) of the City Code.  The Medical Cannabis License will not be considered final, and no Conditional Use Permit may be issued, until this amount is posted.

Step 3:  Complete and Review the Application Process for a Medical Cannabis Business Conditional Use permit (CUP) City of Cathedral, CA.

Conditional Use Permit Application

Applicants may apply for the Conditional Use Permit CUP at the same time as the Medical Cannabis License or they can wait until the Medical Cannabis License is approved. The City will not schedule the Conditional Use Permit for a public hearing before the Planning Commission until a Medical Cannabis License has been approved by the City Manager and the appeal period has expired or all appeals have been exhausted.  The Conditional Use Permit application might require at least one site visit by City Planning staff and the potential need to revise submitted plans to ensure they comply with all applicable laws and regulations prior to scheduling of the hearing before the Planning Commission.

The CUP application form must be submitted to the City in person, along with the following documentation: 

• Proof that the applicant has received a Medical Cannabis License for the premises, or a statement the applicant has applied for a Medical Cannabis License concurrently with the Conditional Use Permit.
• Plans and specifications for the interior of the building as built and plans and specifications for any proposed alterations to the building, if the Medical Cannabis Business is proposed to occupy an existing building.
• A plot plan, detailed sketch of the interior of the premises, and an architect’s drawing of the building, if the Medical Cannabis Business is proposed to occupy new construction,
• For new construction, a site plan of the premises evidencing that the design of the premises conforms to City Code and design requirements. 
• For Cultivation Sites, verification of the source(s) of water for cultivation. 
• For Manufacturing Sites, A report from a Professional Engineer that details the type of equipment that will be used to extract cannabinoids from Medical Cannabis. If Flammable Gas, Flammable Liquefied Gas, Flammable and Combustible Liquids, or compressed carbon dioxide (CO2) are used for extraction, then the report must certify that only closed-loop extraction system(s), that are UL or ETL listed or have a sign off by a Professional Engineer, capable of recovering the solvent are utilized.
  • A separate diagram of any room where extraction occurs that details the location of the extraction equipment, areas of ingress and egress, emergency eye-wash station, any other fire suppression or emergency equipment required by Title 8 of the Cathedral City Municipal Code, City and California building codes, fire codes, electrical codes and all other applicable laws. 

Step 4:  Complete Criminal History Check (Live Scan)

Once an application has been submitted, applicants may contact the Police Department at (760) 770-0304 to schedule an appointment to start the LiveScan fingerprinting and the background check process.  The background check can begin after the application is submitted or after the City has completed the courtesy pre-screening or made a formal determination that the application is complete.  

At the time the application is submitted the City will provide the applicant with a Live Scan form for each person identified in the application as an owner, director, officer, or person who is managing or otherwise responsible for the activities of the proposed of the Medical Cannabis Business.  Live Scan forms will also be available on the City’s website.

Background checks consist of a two-step process:

Step 1:   Each individual associated with the application must be fingerprinted using Live Scan technology.  

• The individuals must personally appear at the Cathedral City Police Department and present a completed Request for Live Scan Service form and valid Driver’s License or Identification Card. 
• The City will not allow individuals to be Live Scanned at any location other than the Cathedral City Police Department. 
• A representative from the Cathedral City Police Department will scan the individual’s fingerprints and transmit them to the Department of Justice. 
• Individuals should schedule an appointment to be Live Scanned with the Cathedral City Police Department by calling (760) 770-0380.  The date and time stamped copy of the Medical Cannabis License application form returned to the applicant by the Planning Division must also be submitted to the Police Department. 

Step 2:  The background check shall generally consist of, but not be limited to:

• A review of each individual’s twenty (20) year residential history, a review of public records, a search to determine probation status, parole status, contacts with law enforcement; and
• An interview or interviews with the Background Investigator as appropriate. 

The Background Investigator will submit a full report to the Chief of Police upon completion of the background check.  The Background Investigator shall be tasked solely with providing factual information in his or her report in order to provide the Chief of Police with a sufficient factual basis to decide as to whether the application should be approved or denied.

Once the Chief of Police reviews the report from the Background Investigator they will make a recommendation as to whether the criminal history of one or more of the individuals indicates that Good Cause exists to deny the application. The Chief of Police’s recommendation shall be issued in writing within ten (10) calendar days of his receipt of the report from the Background Investigator and shall include an explanation as to the Chief of Police’s reasoning in making the recommendation, including the analysis bridging the facts to the ultimate conclusions.   

Currently, the City of Desert Hot Springs is accepting applications for temporary marijuana facilities.  These temporary options allow facilities in the City Desert Hot Springs to begin operation while the state develops the appropriate regulations for  Proposition 64 (Prop 64), the “Control, Regulate and Tax Adult Use of Marijuana Act”. 

Proposition 64 was designed to reshape the use and taxes of marijuana in the state including designating specific agencies to regulate and licenses of the marijuana industry in California.  As the state works to create licensing procedures that meet the new law by January 1, 2018, cities like Desert Hot Springs have decided to implement temporary processes to cover businesses in the interim. 

Anyone interested in submitting a temporary marijuana facility application must go through the process outlined below:

Step 1:  Select A Temporary Facility Option

Step 2:  Obtain Appropriate Permits

Step 3:  Submit Application to Initiate the Approval Process

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Step 1: Select A Temporary Facility Option

The City of Desert Hot Springs is offering three options for temporary marijuana facilities.  Marijuana businesses must determine the best temporary option based on business needs.  Below are three options outlined by the City:

• Option 1: Conditional Use Permit (CUP): This option works for marijuana businesses that do not have a facility. Under this option the City allows the marijuana business to submit an “Amendment (pursuant to the Desert Hot Springs Municipal Code) to an existing Conditional Use Permit” to add a “Temporary Interim Phase”.  This phase allows for the construction of “temporary medical marijuana facilities”.  During this phase approved businesses will be issued a Temporary Certificate of Occupancy and Temporary Regulatory Permit by the City. 

 

• Option 2: Minor Modification Permit: This option works for marijuana businesses who already have been approved for construction but need to make changes to the existing project.   Marijuana business can “construct a portion of the already approved project” under an existing CUP.  The marijuana business should submit an application for Minor Modification to the CUP.  This will allow the construction of a portion of an already approved project under the existing CUP.  If approved the City will issue a Temporary Certificate of Occupancy and Temporary Regulatory Permit.

 

• Option 3:  Temporary Permit for Approval: This option offers a place for cultivation and manufacturing while the rest of the project is under construction.  According to the City of Desert Hot Springs, the marijuana business “may submit an application for a Temporary Permit to the approved Conditional Use Permit (pursuant to the Desert Hot Springs Municipal Code Chapter 17.136) to allow 1 (One) Administrative Trailer and 1(One) Shipping Container that may be used for Temporary Indoor Cultivation, to allow the issuance of a Temporary Certificate of Occupancy and Temporary Regulatory Permit while the rest of the project is under construction.”

Step 2:  Obtain Appropriate Permits 

All marijuana businesses must complete the Marijuana Facility Regulatory Permit application.  Marijuana businesses who want to open prior to the state issuing permits will be required to complete a Conditional Use Permit application.  This permit covers each of the three options for temporary facilities outlined by the City.  Each option has its own requirements, process and fees for a temporary facility approval.

The City encourages that businesses seeking temporary facilities meet with the Community Development Director in advance of submitting an application.  To schedule an appointment, contact Daniel Porras at (760) 329-6411 or dporras@cityofdhs.org.  

Step 3:  Submit Application to Initiate the Approval Process

Each option has its own application process.  Since each permit is temporary, the City is requiring that progress is shown on the project once Temporary Certificate of Occupancy has been issued. This progress can be demonstrated by documentation from the developer to the Community Development Director at the City.  The Temporary Certificate of Occupancy will become void in 180 days if the project fails to show progress.

All fess must be paid in advance.  

Option 1:  Conditional Use Permit

To obtain a temporary permit under Option 1, a “noticed” hearing is required with the City’s Planning Commission.  The Planning Commission will decide on issuing the temporary permit and the following will be issued upon approval: 1) Temporary Interim Phase; 2) Temporary Certificate of Occupancy; and 3) Temporary Regulatory Permit. 

The following information should be included in the application:

• Approval from utility agencies for permanent and temporary services
• Easy access for the City of Desert Hot Springs Police and Fire Department (turnaround areas, etc.)
• A waste disposal plan
• Building ability to meet Police and Fire Department Codes for all site and structures
• Any temporary structures must meet all City Building and Safety (structural, HVAC, plumbing, etc.).
• Security plan (with fencing, cameras, security, etc.)

Application fee:  $3,725

Application Approval Timeline:  Contact City Staff

Option 2: Minor Modification Permit

Minor Modification permits require that the marijuana business have City Staff review and approve the permit prior to making the modifications.  Applications should include the following information:

• The information physical structure including: exact location, size, shape and color. 
• A plan for public improvements must be completed prior to issuance of the Temporary Certificate of Occupancy.
• Storm water and drainage plan
• The property must contain proper access for Police and Fire Department with proper access to site, entry, and turn-around areas.
• The temporary facility (proposed portion of construction) must meet all code requirements for occupancy (structural, HVAC, plumbing, etc.).
• A site security plan with fencing, cameras and guards

Application fee:  $245

Application Approval Timeline:  2-3 weeks

Option 3:  Temporary Permit to the Conditional Use Permit

Temporary Permit to the Conditional Use Permits will only be issued for cultivation and manufacturing. 

Under Option 3, marijuana businesses can a request an extension on temporary facilities.  They must make this request 30 days prior to their 180-day permit’s expiration and it must be in sent to the Community Development Director in writing.  If the permit expires, the business must remove the additional structures within 30 days.

The temporary structure must include the following outlined by the City:

• A minimum 4 Parking Spaces with 1 space designated as ADA Van accessible.
• All requirements for National Pollutant Discharge Elimination System (NPDES) and Storm Water On-site Retention apply to the temporary phase.
• All Building and Safety Codes must be met for Temporary Facilities Structures and for Temporary Certificate of Occupancy (structural, HVAC, plumbing, etc.) 1
• Corresponding utility agencies must approve the proposed temporary utility services for the Temporary Facilities Structures(s). • All corresponding permitting and associated fees for proposed temporary utilities must be completed.
• The Applicant/Developer/Contractor shall comply with section 8.08 Recycling and Diversion of Waste from Construction and Demolition of the Municipal Code and file a Plan with the City’s Building Department prior to the start of any construction
• Provide paved access for Police and Fire Department with property access to site, entry and turnaround areas. • All Police and Fire Department Codes must be met (1) for the site, and (2) for the Temporary Facilities Structure(s). • Site must be secured (with fencing, cameras, security, etc.) pursuant to all Conditional Use Permit approvals. • Adequate lighting must be provided for the entire temporary site.
•  Any proposed signs shall be reviewed under separate permit under the Sign Ordinance.
• A site plan showing all improvements proposed with the Temporary Use Permit shall be submitted with the application. 

The City requires additional plans required for this type of temporary permit.  Those requirements include: Grading Plan showing temporary improvements; Hydrology Report and Soils Report.  They also require the following plans:

• Storm Water Pollution Prevention

• Water Quality Management
• PM 10 Dust Mitigation
• Lighting
• Security Camera
• Landscape 

Application fee: $7,986 plus $40,000 cash deposit (returned up project completion or when site is returned to original condition)

Application Approval Timeline:  3-6 weeks

Obtaining a Cannabis license or permit can be an arduous process.  Often times, applicants experience difficulty navigating the complex licensing bodies and local requirements. While each jurisdiction is different, many share similar elements in their Cannabis business applications.  In general, communities want to see applications from businesses that stand out but complement their local culture. Here are best practices for a strong Cannabis business application:

1.Understand the Selection Process

2.Get Local

3.Know Your Business

4.Capital Needs

5.Follow Directions

 
1. Understand the Selection Process:

Cannabis businesses are awarded licenses or permits based on their applications.  Each municipality takes a different approach to their application process.  Some may have a cap on the number of permits issued, others may not.  Some cities use a scoring process to evaluate applicants, while other communities take a less traditional routes in their selection process. 
 
Scoring Process
Most communities use scoring for the selection process and list the requirements online.  Certain areas are weighted more heavily than others.  For example, the City of Hollister uses scoring for their applications.  The Security Plan and Proposed Development Agreement have the highest value on their application.  Since their values rank the highest in scoring, it is important to focus developing a strong plan in these areas of the application.  Engaging local security firms and real estate businesses may strengthen an application-as they may have knowledge of local requirements for Cannabis businesses. 
 
Diversity
Some Cannabis licensing bodies offer preferences to businesses led by certain groups.  Preference may be given to women, veterans and minorities to promote diversity in the industry. There have been concerns about the industry’s inclusion for these groups.  Cities like Sacramento are considering reserving up to 40% of the city’s Cannabis permits for minorities to address the disparities.   
 
Convicted felons and persons experiencing economic hardship may be able to apply for permits in some areas.  Communities like the City of Oakland have opened up the permit application process to include individuals convicted of drug related offenses.  Usually people with felony drug convictions are prohibited from participating in any aspect of a Cannabis business and/or application. Socio-economics have traditionally played a role in a person’s ability pay the application fee. Oakland’s Equity Program  offers application fee waivers to residents making less than 80% of the city’s medium adjusted income.    
 
2. Get Local:

A strong application is great when applying for a license, but relationships will help take the application to the next level.  Like any business moving into a new community, it is important that the business builds community rapport.  This is especially important with a Cannabis business which carries a lot of misconceptions.  Although the reputation of our businesses has improved over the years, it can still be very controversial for some communities. 
 
Safety and Economics
It is imperative that people understand the benefit having a Cannabis business in their community.  Emphasize how Cannabis businesses bring economic prosperity to many communities through taxes and employment opportunities for locals.  When possible, create business partnerships with well known local business to show the community your level of investment. 
Security can be an issue for many critics of Cannabis businesses in their communities. Share your plans to ensure a safe climate for your business and the surrounding community.  Ask for feedback as during the planning process.  Let the community know that safety is a priority of the business.
 
Community Image
It is a good practice to ensure that someone is identified as the face of the organization as the Cannabis business team is put together.  This person should be personable, possess great networking skills and an ability to represent the business well.  Having them join local advisory boards and attend municipal meetings is highly recommended.  They also need to identify the key players and decision makers involved with the application process and they should also find someone in the community to serve as an informal “advisor”.
 
3. Know Your Business: 

A strong business plan and leadership team will be a tremendous asset in the application process. 
 
Strong Business Plan
A strong business plan is an excellent roadmap for the application process.  A strong business plan possesses a healthy and realistic financial forecast as well as a SWOT (Strengths, Weakness, Opportunities, and Threats) analysis.  A business’s ability to plan for the future can help ensure sustainability.
 
Team – Human Capital
Hiring the best people in the field is ideal for the application process. The ability to article the team’s experience in their industry is important.  For example, a grower with experience and is known for specific strains in the industry leads credibility to your products.  As does a chief financial officer who has worked successfully with multiple Cannabis business.
 
4. Capital Needs: 

Having capital on hand is important in any business, especially in the Cannabis industry.  Some cities are requiring proof of liquid funds in excess of $500,000 to consider a license application.  Understanding your business’ capital needs and demonstrating your ability to cover those costs is critical to success in the licensing process.      

Compensation
Businesses should have a plan in place to offer competitive compensation for team members. Many startup companies may not have the capacity to pay top dollar, but business equity also can be an incentive for major talent depending on your business plan.

Cash Flow
Applications should show that the business has enough cash flow especially in the initial stages.  Cultivation and manufacturing can bring the greatest initial costs to the business and licensing bodies want to ensure that if a business comes to their community, the business will survive.

5. Follow Directions: 

​Government applications can be very convoluted.  Often times this is used as a qualifying process and other times it is simply a product of bureaucracy.  Whatever the reason, applicants must follow directions.  Some communities like the city of San Francisco require applicants to obtain referrals from the Fire Marshal, Planning Department and the Mayor’s Office as part of their application process.  Applicants may not understand the importance of these referrals; however, since the city requires them, it is important that applicant complete this process. Relationships with community stakeholders may shed some light on the application instructions. 

Remember that each community is different and will offer varying support in the application process.  Communities like Desert Hot Springs, encourages applicants to meet with a city official prior to submitting an application.  These meetings can offer insight on their application process and as well as clarity to confusing aspects of the application. 

There are communities that offer checklists like the City of Humboldt.  Checklists are a great way to keep track of the application requirements and activities.  In the event that a city does not provide an application checklist, applicants can create their own checklists based on the application and process outlined by the city.  Checklists are a way for businesses to ensure that they are following the directions.  They can also assist in creating a work plan to complete an application process.

​Currently the city of Coalinga, CA is accepting applications to obtain a permit for cultivation, processing, extraction, manufacturing, testing, and distribution activities with an approved Conditional Use Permit (CUP) and Regulatory Permit within areas of the City zoned Manufacturing and Business Light (MBL). 

Anyone interested in operating a Commercial Cannabis business within the City of Coalinga must obtain the following:

Step 1:  Attend Mandatory Pre-Application Meeting

Step 2:  Identify Property Zoned Location Suitable for Commercial Cannabis Activity

Step 3:  Submit Regulatory Permit Application Packet Requirements

Obtaining a Commercial Cannabis Permit is a dual submittal process. Application documents must be filed with both the Police Chief and Community Development Department.

Cannabis Permit Processing Matrix

Step 1:  Attend Mandatory Pre-Application Meeting

There is a prerequisite of scheduling a mandatory pre-application meeting prior to the submission of an official application package for a Commercial Cannabis Permit.  All prospective applicants must schedule a pre-application meeting with the City of Coalinga by contacting Amy Martinez, Community Development Secretary at 559-935-1533 x141. The purpose of the pre-application meeting is to provide a comprehensive review of the application process, the application content, and the expectations of the City as it relates to permitting requirements such as the security plan, floor plan, cannabis operational characteristics, employee permits, licensing fees and taxes, monitoring and compliance, legal documents, etc.

Step 2:  Identify Property Zoned Location Suitable for Commercial Cannabis Activity

According to the City of Coalinga’s Commercial Marijuana Operations Ordinance, all licensed Commercial Marijuana Operations are permitted within the Manufacturing and Business Light Zoning Designations (MBL). Also, in the ordinance is a restriction of 1,800 feet from any currently sited and future sited school (K-12). For more information regarding school siting you can view the attached map that identified locations in town outside that restriction.
​  
The following applications for land use will need to be submitted:

• Environmental Review Application
• Site Plan Review Application
• Conditional Use Permit Application

Additional information on fees and regulations can be found at the following links:
​

• MBL Regulations
• Additional Use and Development Regulations
• Planning and Development Fees
• SMO Design Guidelines
• Coalinga Zoning Map

Lands Zoned for Cannabis Operations:

​Step 3:  Submit Regulatory Permit Application Packet Requirements

It is of utmost important to the City of Coalinga City Council to regulate the commercial cannabis industry in a manner which takes into consideration the needs of patients and their caregivers while promoting the health, safety and welfare of residents and businesses. It is the responsibility of the Community Development Department and the Police Department to implement the City’s Commercial Cannabis Ordinance (No. 797) and the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which was signed into law on June 25, 2017 by the Governor which created a licensing and regulatory framework for both adult use and medicinal cannabis.

At this time, the City of Coalinga is accepting permit applications for commercial cannabis cultivation (indoor), manufacturing (volatile/non-volatile, testing, distribution and wholesale nurseries, in accordance with the standards of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) and the City’s adopted Commercial Marijuana Operations (CMO) Regulations (Ordinance No. 797). The City’s ordinance does not allow for the licensing of retailers at this time. 

There is an application fee of $2,000.00 and an employee fee(s) of $400.00 per employee that is due when submitting an official application.

The Police Chief will review the entire application package once a completed package along with receipt of paid application fees have been received.  The Police Chief will issue a recommendation to the City Council to approve/deny the regulatory permit in accordance with Section 95.128.
​​

• The Police Chief may request such information he or she deems necessary to seek verification of the information contained within the application including but not limited to background checks.
• The applicant shall certify under penalty of perjury that all of the information contained in the application is true and correct.
• If the applicant has completed the application improperly, or if the application is incomplete, the Police Chief shall, within thirty (30) days of receipt of the original application, notify the applicant of such fact. 
• The fact that an applicant possesses other types of State or City permits or licenses does not exempt the applicant from the requirement of completing the City of Coalinga’s Commercial Cannabis Regulatory Permit Application.  

There are several Regulatory Permit Application Requirements:   Application Checklist
​

• Cannabis Permit Application Form
• Employee Permit Application (New Facility)
• Employee permit Application (Existing Facility)
• Acknowledgement Form
• Indemnification Agreement
• Application Fees and Tax Overview
• Coalinga Business License Tax Worksheet
• Coalinga Business License Application
• Insurance Requirements
• Bond Form
• Live Scan Form (Example)
• Live Scan Form

Please contact Sean Brewer, Community Development Director with any questions at 559-935-1533 x 141 or sbrewer@coalinga.com.