When considering joining in on the much-discussed Green Rush in Massachusetts, potential investors and operators should enter the space with utmost thought and consideration as the risk is high and the downside can be catastrophic. Like most lucrative ventures, achieving success is far harder than outsiders would assume, and the complexity to starting a business in a strictly regulated industry only compounds the risk.
Medical Cannabis has been legal in Massachusetts for four years and we have approximately 35 dispensaries open. Roughly 400 licenses have been attempted but the majority fell off because they could not get their seed funding in a swift manner, and in alignment with state-issued timelines. Then there were the people who got some funding, but ran out of capital because they did not consider how expensive both dispensaries and cultivation sites are to build.
In an effort to increase the rate of success in the industry, here are 10 questions you’ll want to thoroughly investigate before committing yourself to years of striving to get your money back, and start generating a profit in the cannabis industry.
1. Do you have access to great real estate?
Outsiders peer into this industry and think: People have been using cannabis for millennia, it does not matter where you situate a dispensary, this is like winning the lottery! Wrong. Like any other retail business, you need people to come to your store. So, how many potential customers are nearby? One, five, and ten-mile radius population demographics are critical to projecting how successful your dispensary could be. Looking at a beach-town that appears to have tons of people around? What does that town look like in January? What’s the income level of the local population after vacationers have disappeared?
Before you even get to population counts, however, you must consider: Does this town allow my business at all? Chances are, if distribution licenses have not already been awarded in a particular town it’s not because you’re Christopher Columbus and you’ve discovered a population center no one has thought of. More likely, the town has not promulgated regulations yet or they have enacted a ban or moratorium on the distribution of cannabis.
So, then you must assess: How many other dispensaries are around, now or in the future? What’s my competition? If not in a population center, how many dispensaries might a customer pass by before arriving at mine (and how would I ever attract them)?
People, parking, price, seasonality, proximity to other non-legal states, competition, quality of building and retail space, accessibility, and visibility are all aspects that quantify a grading of a dispensary location when we scan the state for the next best home.
Eventually, dispensary owners must determine if their location is “Amazon Proof,” meaning home-delivery won’t put them out of business. Where home delivery is still illegal, we will wait for that evolution before delving in too far.
If you do not already have the real estate in-hand, get ready for a long, expensive process. Towns don’t want to speak with you until you have the real estate because there are dozens of sharks looking for letters of non-opposition. Landlords don’t want to talk to you until you have the support of the towns because they’ve been burnt waiting on Letters of Intent (LOIs) to turn into cash for them in the recent past. This is a chicken and egg situation that has exhausted most and turned them back to the industries they came from.
2. Do you know the local leadership of the town?
Each municipality is its own island when it comes to cannabis. Being communicative, if not close, with local leadership is critical to the launch of a dispensary. Your competition will be very steep in any population center or high traffic count area that has greenlit cannabis sales. Having trusted relationships with people who can legally guide you in the right direction to the top decision makers allows you to use your time wisely and focus on building a strong, lasting business. Just navigating the regulatory framework in each community is a full-time job, as many of them are ever-evolving. The evolutionary nature of the rules also creates a major risk in the industry because you are investing in locations in accordance to absolute economics (local population plus traffic, divided by the number of dispensaries in the area, times the percentage of adult users of cannabis). When a city evolves its rules out from under you, your business can be directly threatened. Communication, transparency and preparation are the three leading factors here.
Like everything in life, you MUST show up. Know that competitors want your seat at the table, letter of non-opposition, or physical storefront. They want it badly. You must imagine that they have unlimited energy to be at every town hearing if you want a chance at success. If you’re not in the right place at the right time with the right contacts, you’ll be eating the scraps of the groups who had the bandwidth and the luck to be on-location and in-the-know while you were not.
3. Do you understand the history of cannabis in the area you are targeting?
Each town has its own experience with drugs and understanding this will be critical in your successfully launching anything. Towns are made of people, and people have opinions that have been driven by experience. Towns with severe opioid problems can lean either way on the cannabis plant and its derivatives as the plant has proven to be an effective substitute for opioids. Alternatively, townspeople may castigate all products considered “drugs” and you will be pushing a boulder up a hill for a long time before achieving success. What has their experience been? How long did the process take to start a medicinal program, if they have? What are the rates of teen use in the local high school? There are dozens of questions you will want to answer before taking the microphone in front of parents, teachers, doctors, lawyers, and officials of the community.
4. Have you rehabilitated a retail space before?
Before considering the economics of real estate development, let’s get back to the absolute basics. People flirting with the cannabis industry far underestimate the effort and wide array of skill sets it takes - not just to be successful, but even to start an operation.
The outrageous expense to build is especially true for cultivation sites, costing tens of millions of dollars. However, the price of building out a dispensary is no small sum either. One must consider that for eons customers have been buying cannabis at an affordable price, and it has been conveniently delivered to their doorstep. Why is a customer going to come and visit your store of all places? The answer to that question rests in the quality of the design and feel of your space first, before you get to proper staffing, product selection, and merchandising.
Where a typical retail store may cost $50,000 - $100,000 to properly beautify, a cannabis dispensary can range from $200,000 - $1,500,000 depending on the size, quality, condition, and uniqueness of the vision. Compound that with the fact that a bank is not going to help you with any of those costs, and you end up paying cash of your own, or that of your networks to get the job done.
Have you ever been responsible for a Gantt chart, choosing the right GM, and signing off on each of the necessary tradespeople? Have you had success in staying on budget? Do you understand the depth of the security protocols necessary given the regulatory framework? Have you navigated conflicting federal versus state versus local municipality rules when it comes to construction oversight in this space? Have you dealt with local opposition with NIMBY (Not in My Backyard - a phrase you should know in this industry) attitudes – people who will do anything to stop your construction project?
The intricacies of building a cannabis dispensary are not to be trifled with. The ones who cut corners are the first to be made an example of when the state looks for bad actors to weed out when the industry hits bumps in the road.
5. Do you understand 280E?
280E is a critical aspect of the tax code you’re about to be beholden to. If you’ve not considered this major factor, you’ll want to stop in your tracks and consider if this profession is for you. Section 280E of the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.
This means that if you wholesale-in product for $50, spend $20 selling that product in SG&A (selling, general, and administrative costs), and the customer purchases it for $100, you are taxed on the gross sale. If you sold an item that costs you $70 for $100, and had to pay 30% in taxes, how much money are you making?
This has turned many people away who have wanted to create “The Starbucks of Cannabis”. Others who did not understand this should have been turned away from this profession because they were later hit by a tax bill that wiped out their company. (The largest tax bill I’ve seen in the industry by a company who had hoped 280E was going away was $32M. You don’t want to be in the boardroom when they seek a loan to help them pay it off to keep the doors open.)
There are legal work-arounds to this tax liability, but without vertical integration, if you’re operating by the letter of the law, 280E is going to prevent you from retirement with the winnings from this new industry for a long, long time.
6. Have you run a retail store before?
This is no layup either. Example of details that will crush you: My team diligently worked on regulatory-compliant point-of-sale systems for months during construction. We still got it wrong, twice. This is one tiny line item with dozens of competitors in the space, all trying to get up to speed with 30 different state regulatory systems that are constantly changing. It may seem to be a small pain point, but if your system does not create efficiencies and an opportunity for your “budtender” to meaningfully engage the customer, it’s back to the black market or another dispensary for that customer.
Do you remember when iTunes started selling songs for a dollar when Kazaa and Napster gave it away for free? Why were they successful? Apple provided trustworthy files, with consistent quality of experiences and labeling. Stated otherwise, Apple sold items customers could trust and the black market did not. The dollar charge per song was worth it. If you do not get your retail experience exactly right, you will stutter, and stumble, and the customer will pay, leave, tell their friends about their experience, and won’t return.
Alternatively, you can set up your retail experience to mirror your brand, reach your target demographic, and skyrocket. If you’re a real estate developer, however, hoping to get into this industry because you have some property and drywall hanging around, the intricacies of establishing and running a retail shop should give you pause while you consider how this is going to operate once construction is complete and it’s time to run.
7. Can you pass a background check?
Most states require background checks for operators and investors entering this space. Contact your local cannabis attorney to discuss this if it is a question. You don’t want to spend a year navigating this landscape only to learn you’re going to have to perjure yourself in order to participate.
8. Do you understand the breadth of products and science of cannabis?
Cannabis use is evolving in its sophistication at a breakneck speed. Where you used to max out your cannabis IP by rolling a tight and smooth burning joint of a mystery strain of cannabis, today you’ll have to get a PhD in the inner workings of the endocannabinoid system, how your CB1 and CB2 receptors receive these myriad compounds, and how the bioavailability of each product differs with each person according to the consumption method.
Still in its infancy, there are thousands of products and brands, tens of thousands of strains, hundreds of compounds, tens of terpenes, and dozens of ways to consume. Establishing yourself as knowledgeable in this industry is a complex process of investigating hundreds of rabbit holes and picking up wisdom over time. Luckily, schools are beginning to develop programming around cannabis, however, you likely want to start your dispensary now - not after a three-year program to get you up to speed on each aspect. The learning curve is steep, but ripe with fictitious claims that can get operators in big, big trouble. Understanding the realities of why the plant does what it does to each person is essential to even considering serving people who have achieved a level of sophistication over the years, as well as new entrants to the space.
9. Where are you going to source your product?
You get what you pay for in this industry – and everyone has “the best” – but most don’t even know how to test for the best, frankly. It’s quite simple to test for THC and CBD counts with a professional lab, but in more mature states (CO, WA, OR, CA), high THC and CBD counts are no longer the biggest driver of sales. Cannabis has cannabinoids and terpenes that create the sensation within users. The combination of those elements within each product, and an evenly distributed series of lines - both branded and white label - are critical to creating your brand and a dedicated customer following. Choosing your wholesale partners for quality, consistency, and diversity is paramount over price. Price will be mutually agreed upon because both parties need to stay in business in order to achieve the highest level of success together. It’s the first elements that matter the most.
10. Do you understand the economics of this business and do you have the money to achieve success?
If there is one thing everyone in the cannabis industry can agree upon it’s that the upstart of a cannabis company is vastly more expensive, and the timeline to profitability far longer than expected.
In today’s cannabis industry, professional groups are bouncing from state to state, replicating best practices while new entries to the space rapidly try to apply their knowledge from another industry to this one. The “Moms and Pops” are being wiped out quicker than ever because of the delta between those who have been to the dance before, and those who have not. It is up to the entrepreneur to go into this endeavor well-funded, more energetic, and with closer relationships to local officials and the real estate wherein the expect to succeed. This is the only way to outdo the good actors who have years of experience navigating these very complex waters.
Solution and path to success
There are so many endless questions and challenges. Now: How you can move forward? We believe we are in a unique position to leverage our success to aid others seeking entry into this complex new industry. Our team understands and appreciates the pitfalls and challenges that face entrepreneurs in starting a business in this space. It is through deliberate circumstance that we will be offering assistance to those looking to get involved. Revolutionary Clinics will have the largest grow facility in the state and will partner with other retail operators to provide products, services and space in an effort to spur ownership opportunities and reduce the high capital and cost barriers to entry into this industry.
It is our philosophy that our clients and patients do better when we encourage and support partnerships that allow all boats to rise. When one calculates the time value of partnerships creation instead of recreating the wheel, and then visits Revolutionary Farms, the future often becomes much clearer and closer than you think.